Krugman on Bernanke

In todays commentary in The New York Times, Paul Krugman give his tentative approval to the nomination of Ben Bernanke to succeed Alan Greenspan. (Available at Truthout)

By Bush administration standards, the choice of Ben Bernanke to succeed Alan Greenspan as chairman of the Federal Reserve was just weird.

For one thing, Mr. Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses.

Beyond that, Mr. Bernanke's partisanship, if it exists, is so low-key that his co-author on a textbook didn't know he was a registered Republican. The academic work on which his professional reputation rests is apolitical. Moreover, that work is all about how the Fed can influence demand - there's not a hint in his work of support for the right-wing supply-side doctrine.

Nor is he a laissez-faire purist who believes that government governs best when it governs least. On the contrary, he's a policy activist who advocates aggressive government moves to jump-start stalled economies.

So it appears that a White House that places politics above everything has nominated a non-political person to head The Federal Reserve. So all is well, right? Well not exactly.

No, my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And while he is surely the best politically possible man for the job (all the other candidates I would have been happy with are independents or Democrats), coping with that day of reckoning without some nasty shocks may be beyond anyone's talents.

The fact is that the U.S. economy's growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

It's true that Mr. Bernanke has given speeches suggesting both that a "global savings glut" will continue to provide the United States with lots of capital inflows, and that housing prices don't reflect a bubble. Well, soothing words are expected from a Fed chairman. He must know that he may be wrong.

So what remains to be seen is if Bernanke will be able successfully be able to clean up the mess Greenspan has left him with.