Phoenix And Dragon Must Fight, It Is The Way Of All Things

Nouriel Roubini and Anna Schwartz go at it in the NY Times op-ed page today over whether Helicopter Ben should keep his job or not. Bloomberg runs down the play-by-play...but the sides aren't what you'd expect.

Roubini, the New York University professor who predicted the credit crisis, said Bernanke deserves another term for averting a “near depression.” Schwartz, co-author with Milton Friedman of a history of U.S. monetary policy, wrote that the Fed chairman should be replaced because of policy missteps and a failure to clearly articulate the central bank’s goals.

The 55-year-old chairman, whose term expires in January, defended the Fed’s unprecedented actions to restore financial stability in testimony last week before Congress and said the economy is showing “tentative signs of stabilization.” Bernanke has cut the benchmark lending rate almost to zero and flooded the economy with cash to counter the deepest recession since World War II.

“The Fed’s creative and aggressive actions have significantly reduced the risks of a near depression,” Roubini wrote in his opinion piece. “For this reason alone Mr. Bernanke deserves to be reappointed so that he can manage the Fed’s exit from its most radical economic intervention since its creation in 1913.”

He praised Bernanke for policies that were “not in the traditional toolbox of monetary policy,” including extending credit to investment banks, supporting the commercial paper market, participating in the rescues of Bear Stearns Cos. and American International Group Inc. and committing to the purchase of $1.7 trillion of Treasury bonds, agency debt and mortgage- backed securities.

On the other hand, Schwartz says Ben needs to turn in his copter keys.

Schwartz, 93, a research associate at the National Bureau of Economic Research and Friedman’s co-author on “A Monetary History of the United States, 1867-1960,” blamed the Fed under Bernanke for failing to warn investors of the dangers of investing in securities backed by pools of mortgages.

“Partly as a result of the Fed’s silence, investors who loaded up their balance sheets with these securities were ignorant of the great risks of trying to sell assets that are difficult to price,” she wrote.

She also said the Fed didn’t live up to its own rhetoric about the importance of transparency and “failed to articulate its own goals,” adding to volatility in financial markets.

In particular, she said Bernanke failed to explain why the Fed supported the rescue of Bear Stearns and not Lehman Brothers Holdings Inc., whose bankruptcy in September 2008 added to the severity of the credit crisis.

When credit markets seized up last year, Schwartz said, the Fed “persisted in believing that the market needed more liquidity” when “the real problem was that because of the mysterious new instruments that investors had acquired, no one knew which firms were solvent of what assets were worth.”

I personally think that it doesn't matter much, anyone that Obama would appoint at this juncture would almost certainly be another Ben Bernanke, the same way Bernanke was another Alan Greenspan, so in that respect, Roubini is correct. Better the devil you know...and Bernanke did at least come to the conclusion that deflation is the issue right now, not inflation.

Still, everything Schwartz says about Helicopter Ben is true. The Fed still hasn't explained why they let Lehman go under to any satisfaction, and turned a blind eye to the complex financial instruments that got us into this mess.

Should Bernanke keep his job? Not my call. He says he has a plan to get us out of this mess...but much of the reponsibility for the mess falls on his shoulders to begin with. It's a tough situation, same with Tim Geithner. Somebody has to run the Fed, somebody has to run Treasury. The list of other candidates that would do anything differently? Almost nil.