Bye Bye Bernanke (or Geithner)?

Losing Ted Kennedy’s Senate seat to a Republican may have doomed health-care reform, but it also may have revived chances for meaningful action on financial services. Earlier this week, the Obama Administration backed strong steps against big banks, proposals advocated by former Fed Chairman Paul Volcker which had been opposed by Treasury Secretary Tim Geithner and chief economic adviser Larry Summers.

Senators Barbara Boxer and Russ Feingold say they won’t support the reappointment of Ben Bernanke as Chairman of the Federal Reserve (Bernanke was orginally appointed by President Bush). While praising Bernanke for steps he’s taken since the financial crisis exploded, both senators joined a growing, bipartisan chorus that criticizes him for failing to use the Fed’s regulatory powers to head the crisis off in the first place — like supervising banks. Alan Greenspan was notorious for letting this Fed function wither, believing instead that financial innovation was always good and markets are always self-regulating. 

But thoughtful critics of the Fed have to be careful here, as some of the opposition to Bernanke is from the side of the Republican party that dislikes governing and government regulation, embodied by libertarian Ron Paul, who has convinced the House Financial Services Committee to endorse a measure auditing the Fed. While a simple audit is fine, Paul and other conservatives have a different and dangerous agenda — to remove the use of monetary policy altogether as an active tool of macroeconomic policy. David Stockman, Reagan’s OMB Director, goes after banks but his real message is to go after government. 

Make no mistake, without the quick, bold Fed actions in 2007 and 2008 we would now be in a depression, not a deep recession. The Fed has correctly held interest rates effectively at zero, and should do so for some time to come. When faced with a potential depression, we need active government tools to fight it.

But Bernanke may not be able to get another term as Fed chairman. So who might get in instead?  CFTC head Gary Gensler has major market experience. He seems to have learned from his mistakes in opposing derivatives regulation during the Clinton Administration, and now is a vigorous advocate of increased regulation. Or how about economist Janet Yellin, a supersmart macroeconomist who understands how to use policy instruments, and president of the San Francisco Fed?

But maybe — just maybe — we’ll get a “back to the future” moment, and the 82-year old Volcker will retake the chair.  He has clout and respect, and he is a very wily policy player, as shown by his progress on bank regulation. 

Volcker has said that he hasn’t seen “one shred of information” that financial innovation and bank risk taking helped the economy. Obama could make a lot of progress in his political repositioning with Main Street if he let Bernanke go, and nominated Volcker for either the Fed or Treasury.