Thank You, Senator, May I Please Have Another?

Fri, 04 Dec 2009 13:42:55 +0000

It's confirmation time for Ben Bernanke, and that means he needs to face the music in the Senate.  Neil Irwin provides a good description of Bernanke's hearing by the Banking Committee in today's Washington Post.  I was reminded in reading it of one of my earliest posts on CG&G, "If This Meltdown Were a Movie," in which I described the task facing Bernanke in March 2008 as a choice between two options, "Damned if He Does" and "Damned if He Doesn't."  I encourage you to read it, with this excerpt as the teaser:

When you provide insurance against outcomes that a financial institution cannot control, you distort incentives on the activities it can control. Specifically, they take on more risk. To address the immediate problem, Bernanke invites the next one. Snotty bloggers two or five or ten years from now may be hanging the next crisis--runaway inflation, a persistent liquidity trap, even more spectacular bubbles in financial markets--around Ben's neck.

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I think Bernanke has done just about everything possible to stave off immediate crisis, with mixed success.  The event where he did not was to allow Lehman Brothers to fail.  But I cannot claim that I would have done differently -- I was far more hopeful at the time that I wrote that post that he would have not intervened to bail out individual firms, forcing Bear Stearns and later AIG to file for bankruptcy protection.  For saying that, I have to accept the prospect that what happened in September 2008 would have happened, probably on a larger scale, in March of 2008.  But at least the precedent would have been set for cleaning up the excessive risk taking on Wall Street, and we wouldn't still be throwing good money after bad.

Some Senators will damn him for doing too much, others for doing too little.  But in the end, he will be reconfirmed.