More serious troubles loom ahead if Ben S. Bernanke is not reappointed Chairman of the Federal Reserve when his term expires.

      Noted economists are at loggerheads on this critical issue. Economist Paul Krugman, recipient of Nobel Prize award and respected economist Nouriel Roubini are very vocal for the need of Bernanke’s reappointment, while Joseph Stiglitz, another Nobel Prize honoree and Anna Schwartz, also a well-known economist, are against it.

      Krugman and Roubini believed Bernanke had done a good job.  His fiscal and monetary expertise in handling the problem pulled us over the financial crisis. But according to Schwartz and Stiglitz, the Fed Chairman lacked transparency, and his secrecy exacerbated the financial crisis, and for that reason he should leave the Fed to give way to a newcomer.

      The decision to let Bernanke stay or not, rests on the shoulder of President Obama.  The President said Bernanke was “doing a fine job” but cannot make up his mind whether or not to retain him as chairman of the Fed.  Obama is not in the mood to rush his decision on this matter to avoid a trap … that if he makes a premature announcement, people might not like it and his nice-looking reflection in the pool that he, like Narcissus, loves so much, might be tarnished.

       In this economic discipline, many times I have been talked down in so many debates inside and outside of the academe as a fish in the water to catch. In this case at bar, knowing the critical task ahead to be done and/or the Chairman of the Federal Reserve should do, and aware of Krugman’s analytical acumen in identifying the cause of the problem in times of economic crisis, and familiar with the philosophical posturing of his nemesis from the Austrian school of though that I have written a lot about in the past, I am inclined to take side with Krugman and Roubini for Bernanke’s retention or reappointment to the Fed chairmanship once his term office expires.

       For me to arrive at this endorsement in favor of the Chairman’s reappointment is not without cogent reasons:

      [a] Krugman and I know very well that so far Bernanke is the only man fit for the job in terms of qualification, time and priority. There is no time to experiment what the newcomer can or would do to the danger that stalks the economy like a ticking bomb. Bernanke has the required academic know-how, state-of-the-art training and expertise to disarm this bomb before it detonates to a catastrophic conclusion we might not be able to survive.

      [b] I have been trailing Bernanke’s responses to the financial crisis. I noted that he used his wisdom in applying the principles of fiscal and monetary magnitudes for economic recovery that could only be learned from the higher science of economic discipline. The strategy employed is aimed at controlling fear and panic … “to slay the dragon under our bed” … this financial meltdown that dangerously threatened to swallow the U.S. economy. 

      [c] When politically and ideologically motivated criticisms of Fed-bashers, ignorant leftists, left-leaning politicians, media mercenaries and street activists are dumped on him like a pile of garbage, he stays polite and clean in spite of these emotionally violent distractions, and remains focus.  Solid quality of professionalism of this kind is rare and hard to find.  Obama will not be able to find it within the critical timeframe required if he decides for a replacement instead of reappointment.

         How sure Krugman is on how capable Bernanke happens to be as head of the Fed, is not just that much but believably more than much. As Chairman of the prestigious economics department of Princeton University, Bernanke recruited Krugman in 2000 to join his department.

         Was friendship the reason for Krugman’s endorsement of Bernanke’s reappointment?  I don’t think so.  To think in that context is too parochial which pygmy minds tend to display.  It is hardly thinkable that a winner of Nobel Prize in economics is morally hidebound to stoop down to that level.  I surmise Krugman prefers Bernanke to stay because he knows too well what this man of the day can do.

          The opposition wants a new man in the Fed that would alter the central banking system in accordance with the dictates of the Austrian school of thought.  Maybe sometime in the future, there will be a need for tinkering the system or a need for such deviation from the norm, but not at this time when Bernanke has already engaged the problem and should continue to do so.

          Even staggering under tremendous pressure coming from the middle, the left and the right forces of the realm, this former head of the economics department of Princeton University did not allow the corporate pillars of the economy to fall. Instead, he rescued, among others,“Bear Stearns Cos. and American International Group Inc. last year while backing the creation of the $700 billion Troubled Asset Relief Program.”  It slowed down the downturn, and now it is reversing and recovery although still slow, is in sight.

          From what I wrote in the academe and in the Media, and out of knowledge and experience inside and outside of the United Nations for more than a decade, I am confident of what I have learned and lived for in macroeconomics as an economic discipline. Had Bernanke allowed big corporations to collapse in the middle of the financial crisis, it would have brought down the whole system with it.  But to achieve this, he has to absorb the blows, mostly biting criticisms that hit below the belt; he has to suffer the wounds caused by hammer and tong thrown at him, especially by pseudo-economists who wanted to abolish the Fed because they thought it is run by “thieves”.  Although delusional, this aggression is propelled by the philosophy of the Austrian school of thought with a placebo of self-confidence … they always compliment themselves with the belief that they knew better.

         The public hardly knew that what Bernanke was doing was trying to avoid not just a recession but a dangerous depression. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”  Maybe one needs to have a diploma in the study of advance economics to decipher what Bernanke means.  

         Austrian theorists like Melton Friedman, a brilliant economist, present a big problem if they will be given the opportunity to repackage the whole credit and federal banking system by getting their protégée appointed to the Chair. The bottom line for their constant rejection to occupy positions of responsibility is the fact their philosophical economic theories have never been proven right. 

        Friedman won the Nobel Prize by pointing the flaws of Keynesian economics, but his other analysis of economic problems and their solutions never work because they are mostly irrelevant and contradictory.  British economist John Maynard Keynes’s free enterprise economic philosophy for economic development was adopted by successful and powerful western economies as the best in the world even communal economy or Communism cannot compete. Friedman’s attempt to replace Keynes failed.  In comparative economics, I once wrote a dissertation that Keynes theory can only be improved, but cannot be replaced.

      My position in defending Keynes classical economics from the likes of Friedman attacks can be read all over the Internet. “[A]ctive government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.”  The Federal Reserve of the United States is this necessary “government intervention” to ensure economic growth and stability.

     I expect that Austrian follower Ron Paul is aware that Friedman’s version in this issue is sterile of this most important regulatory intervention.  In his perception of free enterprise without the government’s regulatory participation, Friedman contradicts his own solution to leave competing enterprises among themselves in peace and quite … contradictory because if not regulated, greed among the competing enterprises creates chaos that would lead to the destruction of the system.

     I will give more -- a couple or so -- examples of Friedman’s contradictions.  Going back to the Gold Standard that he advocates does not guarantee the value of monetary circulation. What can guarantee the value of circulation “… which can be increased so much as to sustain further production … is the remaining value of the production itself.”

      Gold Standard does not and cannot protect us, when in an economic downturn there is this inflationary increase of the value of circulation necessary to sustain increased production … the Central Bank or the Government or the Fed has to intervene after determining that the effect of its excesses that destroy the gold reserve is deleterious.  Not just in theory but in practice, all of these critical Keynesian economic responses nullify Friedman’s position.

       Friedman’s take on inflation which oftentimes the Congressman from Texas mimics when he criticizes and puts Bernanke’s fiscal and monetary expertise in doubt is full of holes.  I am amused when listening to the videotaped argument.  Friedman thinks the Government wants to create inflation by printing and spending money without taxing it.

That’s too simplistic and too far from the truth of what he is thinking.

       First of all, the “evil” of printing money, is not a future malady that Friedman wants to prevent. The United States Government was created as a deficit government.  It has been printing money by a truckload, depending on how much use the Government needs to achieve its purpose, in war or in peace.  Friedman talks of the future when it is already happening since time immemorial! In this context, his vision becomes unreal, if not delusional.

        The real cause of the problem that “inflation” creates does not come from this direction. We suffer the consequences of our lack of control and discipline.  We allowed public and private debts to multiply to such a degree that we could no longer afford to service its run-away growth.

        In this connection, Friedman is wrong on two counts:

        First, this particular run off “inflation” we suffer is not caused by the Government printing paper money.  Printing paper money is the effect … a response to the cause.  The cause is the undisciplined multiplication of debts for chasing our rainbows, on top of what the Government wants to accomplish in war and in peace [needs money to fund a war and to spend for socio-economic-technological development that brought us beyond the edge of space].

        Second, Friedman is quite short in faulting rising prices as the linchpin of inflation.

The Government does not tax itself only the people. Contrary to the Austrian concept of taxation is when the Government tax spending to curb inflation.  This leads the likes of Friedman to conclude that in fact inflation is a form of taxation.  It is contrary to what deficit Governments need to do … relieve taxpayers of the financial burden that inflation creates during stagflation and at the same pump prime the depressed economy.  This is the reason why “Government deficits allow the population to live beyond their means [inflationary] by in fact avoiding taxation.” It is not entirely correct to say that inflation is a form of taxation, but in fact it is one way of avoiding taxation.

     What is wrong with restricting the money supply to the point where we exhibit our ignorance of credit expansion and the printing of paper money is that the level of the resultant contraction usually cannot sustain the level of commerce, development and progress we aspire and capable of doing.

     Many are not all strangers to what I am saying here, but I am sure that all of these are also in the mind of Bernanke who needs to stay as Chairman of the United States Federal Reserve. #

© Copyright Edwin A. Sumcad. Access FP.com, August 12, 2009.

The writer is an award-winning journalist.  Know more about the author by reading his published editorials and feature articles or you may e-mail your comment to ed.superx722@yahoo.com.sg.