Testifying before the Senate at his confirmation hearing yesterday, Fed Chairman Bernanke apologized that he did not anticipate a crisis of this magnitude.” I am cautiously in favor of Bernanke’s reappointment—though not necessarily of Bernanke himself.
It is a practical thing: given the president’s displayed and stated fiscal preferences, I doubt he would appoint someone of my liking that would begin tightening monetary policy sooner rather than later. Bernanke understands what the Fed has done better than anyone outside the Fed, and this is one area where changing commanders mid-battle has some wisdom.
But lets not downplay the ineptness the Fed has displayed over the past few years—particularly the failure to see the market confidence problem for what it was and instead diagnosing a pure liquidity problem, as economist John Taylor has frequently shown.
Furthermore, the “we got this, don’t worry” attitude of the Fed is disconcerting. It is natural to think after a crisis: okay, now we’ve figured this one out. And that has been the attitude of Bernanke: “In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”
The attitude has also been evident in various Fed governor congressional testimony over the past year. But it is categorically false. We learn a lot from this crisis, but that will not stop another crisis. The problems of the next crisis will be different from this one, and we’ll go through something similar to this again. Sure, assuming we actually have learned, we probably won’t make the same mistakes… we will make different ones.