You and Ben
The election upset nearly two weeks ago has fueled a deepening partisanship in the nation’s capital. At least a subset of each party, hoping to seize upon independent-minded voters’ renewed vigor and influence, has succumbed to the temptations of rancorous debate. These public servants grasp that popular dissatisfaction with Washington is broadly targeted. As a result, it holds the potential to favor whomever proves most adept at channeling it.
This capriciousness of public opinion was fully manifest in Massachusetts, where the Democrats’ historic loss offered a referendum on the current health care reform package. At the outset of the national health care campaign, the idea of reform was received favorably. Execution on the idea has been punishing. As of last week, Rasmussen reported that 61 percent of Americans would prefer that the administration drop the issue, returning the focus to the economy and jobs.
If the current headlines offer any indication, the policy focus will shift away from health care and return to the economy well before Election Day. But in doing so, it also risks lapsing into less productive-oftentimes, less rational-attacks on individuals and institutions. Regrettably, these attacks will often run counter to our collective long-term objectives of employment and economic growth.
Caught up in the political maelstrom, Federal Reserve Chairman Ben Bernanke’s reconfirmation was thrown into doubt last week when Senators Barbara Boxer and Russ Feingold announced their intentions to vote against Mr. Bernanke. His current term ends next Sunday, Jan. 31.
Breaking with the administration, Senator Boxer was unequivocal in linking Mr. Bernanke to the financial crisis: “Our next Federal Reserve Chairman must represent a clean break from the failed policies of the past.” Senator Feingold offered similar sentiments: “Under Chairman Bernanke’s watch, predatory mortgage lending flourished, and ‘too big to fail’ financial giants were permitted to engage in activities that put our nation’s economy at risk.” Even the Senate majority leader, Harry Reid, was more reserved in his support than in recent months. In a statement released on Friday, Senator Reid offered qualified approval: “While I will vote for his confirmation, my support is not unconditional.”
While the backing for Chairman Bernanke has withered, Senator Chris Dodd, who has announced that he will not seek reelection this November, has voiced his support for Mr. Bernanke. In contrast with his more skeptical peers, Senator Dodd stated his belief that Mr. Bernanke will return to the Fed chairmanship and that any other outcome would “send the worst signal to the markets right now.” Senator Judd Gregg and Senator Dodd, both members of the Senate Banking Committee, posted a statement on Saturday reiterating their confidence in a successful reconfirmation. They may have succeeded in stanching Senate defections.
But if Massachusetts has reminded us of anything, it is that political fortunes can change quickly. Going into the final week of Mr. Bernanke’s chairmanship, the Senate vote looks more divided than at the last very contentious appointment. In 1983, 16 “no” votes were cast against Paul Volcker.
Whether a rejection of Dr. Bernanke’s reconfirmation will upset the economic recovery, as Senator Dodd has suggested, is unclear. That the political process has eroded the independence of monetary policy is more obvious. Senator Reid’s meeting with Chairman Bernanke concluded with an apparent quid pro quo: “Chairman Bernanke must redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college or start a small business. He has assured me he will soon outline plans for making that happen, and I eagerly await them.”
Senator Reid’s extraction of commitments for specific objectives-however worthwhile those objectives may be-is problematic. The Federal Reserve System’s Purposes and Functions statement enumerates four areas of responsibility for the nation’s central bank. As commonly understood, the Fed conducts monetary policy in support of maximum employment and price stability. In addition to this fundamental raison d’être, the Fed bears certain responsibilities for the supervision and regulation of banks in order to ensure the soundness and functioning of the banking system. The Fed also provides financial services to the government and depository institutions.
In seeking to secure a more specific policy alignment between the Fed and the objectives of the government-of-the-day, Senator Reid and others are politicizing the office of the Fed chairman. But we know from history that we need the kind of independence that Mr. Volcker brought to the Fed to fulfill the mandates that are consistent with long-term growth.
Senator Reid is wrong to suggest that Mr. Bernanke’s reconfirmation should depend upon explicit commitments of support for the majority party’s policy agenda. Rather, it is in the long-term best interests of the citizenry and economy that the Fed chairman should separate himself from the politics of the day.
To warrant a return to office, Mr. Bernanke should vigorously defend against an erosion of the Fed’s independence in setting monetary policy. But this poses a difficult problem. If Mr. Bernanke fails to be confirmed because he resists political pressures, the market’s confidence in the Fed’s ability to meet its dual mandate will be undercut. So will the market’s confidence in the administration’s ability to navigate the politics that might constrain growth. A double dip becomes a more relevant consideration, as does an uptick in inflationary pressure.
The stakes for multifamily and commercial real estate lenders and investors could hardly be higher. Of course, if Mr. Bernanke is confirmed but is perceived as having been too pliant, the outcome is scarcely better. In the end, the best outcome may be the least likely: We need our leadership to reiterate that the independence of the Fed is in the domestic and global economies’ best interests; and that a chairman who will defend the independence of the institution and who will seek to promote long-term growth and price stability-in spite of any short-term political pressures-is the best person for the job.
Sam Chandan, Ph.D., is president and chief economist of Real Estate Econometrics and an adjunct professor of real estate at Wharton.