As I have argued elsewhere, Bernanke’s record as both a Fed governor and Chair suggest we be better off with a new Fed Chair come January 2010, when Bernanke’s term as Chair expires. Outside of those who believe the bailouts have saved capitalism, two very reasonable arguments are put forth for keeping Bernanke at the helm: 1) in a time of crisis, the markets need certainty and dislike change; and 2) the alternatives, such as Larry Summers, would be worse. Both these points have real merit, however I believe in both cases the pros of change outweigh the cons of staying the course with Bernanke. I will save the “certainty” debate for another time, for now, let’s ask ourselves: Would Summers really be any worse than Bernanke?
Before I make the case for Summers, I do want to make clear, President Obama, and the country, would best be served by a “Carter picks Volcker” type moment. Go outside the Administration, go beyond the usual circle of easy-money, new Keynesians. The Fed lacks creditability in two (at least two) important areas: bailouts and inflation. And one doesn’t even need to go outside of the Federal Reserve System to find candidates. Topping my list would be Jeff Lacker (Richmond Fed), Gary Stern (Minn Fed) and Charles Plosser (Philly Fed). Any of these three know the workings of the Fed, have the respect of the Fed staff, and have taken strong positions on both “too big to fail” and easy money. In the case of Gary Stern, it would seem especially appropriate, as his early warnings (see his 2004 book on bank bailouts) were largely ignored and dismissed. If we want to reward and promote those who got it right, these guys are at the top of the list.
But let’s reasonably suppose that Obama wants someone close, someone he personally knows and will stick with tradition by picking a member of his own administration. Without going into any detail, picking Romer would offer little substantial difference with keeping Bernanke. The case for Summers is essentially that here is one instance where his enormous ego would be an asset. One easily gets the sense that when Summers sits next to President Obama, Summers is thinking to himself just how lucky the President is to be sitting next to Larry Summers. One can call Summers lots of things, starstruck is not one of them. Given what we now need most in a Fed Chair is true independence, from especially the Administration but also from Congress, Summers is the only qualified economist close to the President who displays even the slightest streak of independent thinking. Bernanke, in contrast, has endlessly pandered to the Administration and to Congressional Democrats. Summers has been willing on occasion to actually defend the sanctity of contract (remember the debates over the AIG bonuses), a rarity on the Left, and more than Bernanke was willing to say.
So forced to choose between Bernanke and Summers, the need for an independent Fed Chair willing to take on the Administration and Congress, when appropriate, makes Summers a far better choice. That said, here’s to encouraging Obama go outside his comfort zone and pick someone who has the will to remove excess liquidity from the system before the next bubble gets going.