Krugmans Indictment of Bernanke

Here is the short list of failures in Bernanke's performance put forward by Paul Krugman in his NY Times op-ed:

Consider two issues: financial reform and unemployment.

Back in July, Mr. Bernanke spoke out against a key reform proposal: the creation of a new consumer financial protection agency. He urged Congress to maintain the current situation, in which protection of consumers from unfair financial practices is the Fed’s responsibility.

But here’s the thing: During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing. In particular, it ignored warnings about subprime lending. So it was striking that in his testimony Mr. Bernanke didn’t acknowledge that failure, didn’t explain why it happened, and gave no reason to believe that the Fed would behave differently in the future. His message boiled down to “We know what we’re doing — trust us.”

As I said, the Fed has returned to a dangerous complacency.

And then there’s unemployment. The economy may not have collapsed, but it’s in terrible shape, with job-seekers outnumbering job openings six to one. Nor does Mr. Bernanke expect any quick improvement: last month, while predicting that unemployment will fall, he conceded that the rate of decline will be “slower than we would like.” So what does he propose doing to create jobs?

Nothing. Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster. Instead, he has responded to suggestions for further Fed action with boilerplate about “the anchoring of inflation expectations.” It’s harsh but true to say that he’s acting as if it’s Mission Accomplished now that the big banks have been rescued.

What happened here? My sense is that Mr. Bernanke, like so many people who work closely with the financial sector, has ended up seeing the world through bankers’ eyes. The same can be said about Timothy Geithner, the Treasury secretary, and Larry Summers, the Obama administration’s top economist.

Krugman ends up saying Bernanke must be re-appointed to avoid an even worse appointment. That is faint praise indeed. I would rather see some backbone on the part of politicians. They need to push back against the heavy thumb of the Wall Street banks that has tilted the scales in their favour. The mandate of the Federal Reserve was two-fold: one was to support a sound banking system and underlying currency (the joy of Wall Street bankers) and the other was a growing economy and full employment (which has long been lost by the worshippers of Mammon on Wall Street).

So, while Krugman gives a tepid endorsement of Bernanke, he lashes him with this accusation:

If Mr. Bernanke is reappointed, he and his colleagues need to realize that what they consider a policy success is actually a policy failure. We have avoided a second Great Depression, but we are facing mass unemployment — unemployment that will blight the lives of millions of Americans — for years to come. And it’s the Fed’s responsibility to do all it can to end that blight.