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Would We REALLY Be Better Off Without Bernanke?

There has been a lot of fuss in the media over the last week or so about whether Federal Reserve Chairman Ben Bernanke will be around for a second term.

The rumblings really began in earnest in late August, with Mitt Romney saying that he would find “someone who shared my economic views” to replace Bernanke. And in the weeks that followed, Big Ben himself has seemed eager for a change; the chairman hinted to close friends he wouldn’t stick it out as Fed chief even if Obama wins.

There are many big questions as we approach Election Day and the prospect of a political shakeup that will affect policies in 2013. But an equally important question is what will happen in 2014 if and when Bernanke is replaced?

Would we really be better off without Ben Bernanke leading the Federal Reserve?

This is by no means a comprehensive list, but here are some of the pros and cons. I encourage you to post your own comments below.

Pros

Popularity: Believe it or not, Bernanke remains very popular among many folks on Wall Street, where investors and traders have clearly benefitted from policies designed to punish savers and push money into capital markets. Corporations are also pleased with central bank policies that have allowed them to borrow at rock-bottom levels and stockpile cash — to a tally of about $2 trillion across blue-chip stocks. What’s not to like?

Stability: There’s a lot to be said for having stability in a time of crisis and a cohesive policy mission. Like it or not, there’s still a lot of uncertainty and overhang from the financial crisis, and a change of course could undo progress that has been made.

Creativity: Bernanke is widely credited for healing financial markets with creative efforts to pump money into credit channels, launching an alphabet-soup of programs that showed the central bank will do whatever it takes to keep things afloat. We can quibble with specific policies and their effectiveness, but you can’t criticize Bernanke for not trying to do something even when his options were painfully limited.

Inflation: Critics who have warned of runaway inflation have so far been flat-out wrong. The annual rate of inflation in 2010 was 1.4%. In 2011 it averaged 3.2%. And predictions show that inflation for 2012 will be in the low-2% range. So much for hyperinflation. Similarly, the specter of deflation — a horrible spiral of falling prices and falling consumption as a result — was avoided in 2009. The rate of inflation was negative for eight months during the Great Recession, but only averaged -0.4% for the calendar year 2009. The data seem to indicate Ben Bernanke and the Fed walked a fine line between deflation and hyperinflation during a very complicated period in our nation’s history.

History: Bernanke, a former economics professor and a student of the Great Depression, in many ways did the polar opposite of central bank actions 80 years ago. Many experts believe the Depression was made worse by policy missteps, and Ben Bernanke at the very least ensured that past mistakes weren’t repeated — even if some of his moves haven’t been as effective as hoped.

Cons

QE3: Immediately after QE3 was announced on Sept. 13, the market popped. But after that one-day jump the markets are off almost 3%. If this is a harbinger of ineffectiveness to come, why would we double down on Bernanke’s policies when each time they appear to have less and less impact on employment and capital markets?

Hubris: Along the same lines, David Einhorn said it best regarding the Fed’s recent history, drawing a connection to the difference between enjoying a single donut and gorging yourself on three dozen: “I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures.” In other words, sometimes more isn’t more — and Bernanke will never learn when to change course now that he’s this invested, even if his actions do more harm than good.

TARP: Lest we forget, the big-time bailout of financial stocks was urged by Bernanke and Treasury Secretary Henry Paulson. Thanks in part to their efforts, Congress approved an unpopular $700 billion bank rescue package that was initially sold to legislators and the public as a targeted way to deal with bad housing debts and derivatives. Unfortunately, in reality it became a gift with few strings attached. This allowed “too big to fail” banks like Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) to get even bigger with fire-sale acquisitions of troubled competitors, shore up their capital reserves … and never actually start lending again or dealing with bad mortgages. Great job, Bernanke.

Other Options: All the apologist articles about how steady and calm Ben Bernanke has been ignore the simple fact that a host of other highly qualified applicants exist. I’m not talking about Larry Summers here. What about Janet Yellen, the Fed’s current vice chair, if you want stability? Or what about shaking things up with a more conventional chairman in a Romney administration — say, Glenn Hubbard, who was rumored to be a close second to Bernanke in 2005 when George W. Bush replaced Alan Greenspan? Let’s not act like Big Ben is the only competent option out there. Some of them may actually be better in the long run.

Overreach: Bernanke himself has admitted many times that monetary policy has its limits — but he is forced to stretch the Fed to its limits since our legislators apparently can’t get their acts together and take concerted action on their own. In a best-case scenario, Ben Bernanke is no more effective than any other Fed chair would be since Congress holds more power over economic policies. And in a worst-case scenario, Bernanke’s overreach and unconventional policies set a very bad precedent for the power future Federal Reserve officials can wield. Congress admittedly is a bunch of liars and do-nothing losers … but that’s not a reason to lionize Bernanke or give his Fed administration carte blanche.

The Fed, Generally: For the record I believe in central banking, national currencies and responsible borrowing from the federal government. Most reputable economists agree. But it must be acknowledged that a small group of folks think the Fed by its very nature is a poor institution and that it should be abolished. And even if you agree with the spirit of central banking broadly, it’s hard to argue that our financial and political systems are run effectively or ethically in practice. So who cares about Bernanke? And more pointedly, should we be looking at reforming the Fed more than just replacing the figurehead?

What do you think about Bernanke, the Fed and the possibility of a new chairman or chairwoman in 2014? Leave your comments below.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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