Regarding Bernanke's Reappointment

How the winds have changed in just a few short weeks!

I have, on my desk, a Wall Street Journal editorial from the weekend edition of 9-10 January by Judy Shelton. In it, she lampoons the Fed chairman for admitting in a recent speech only,

"the timing of the housing bubble does not rule out some contribution from monetary policy."

Apparently Bernanke still won't face up to the fact that government forces were responsible for the first steps leading to the recent financial sector turmoil. First Greenspan kept interest rates too low for too long. Coupled with that, Congress, through the CRA and misguided direction to Fannie Mae and Freddie Mac, encouraged, as well as demanded, that mortgage loans be made to unqualified home buyers.

Yes, with that stage set, commercial, investment and mortgage banks were too aggressive in their pursuit of profits through residential home financing. But they simply joined the party that the Fed and Congress had started.

Now that the voting public is angry at the federal government for having rescued banks which should have been allowed to fail, Bernanke's reappointment carries more risk than it did only a few months ago.

Personally, I believe that Bernanke responded incorrectly to the developing financial sector debacle as far back as the late summer of 2007. With post-1929 securities markets and banking reforms in place, including deposit insurance, bank insolvency is no longer something to be papered over. Furthermore, there was little sign that monetary liquidity had ever truly dried up in 2007 or 2008.

What worried federal officials was the solvency of Bear Stearns, Lehman, AIG, Morgan Stanley, Goldman Sachs and Citigroup, not the overall liquidity in the US.

Additionally, at a time of administration and Congressional overreach in several legislative areas, the Fed is now seen as having behaved in an unconstitutional manner in the AIG case. And its rush, with Treasury, to force-feed federal funding to large banks which could have safely been put into receivership to thin out the sector's overcapacity, is now seen as favoring large business and financial interests at the literal expense of taxpayers.

This has suddenly become very unpopular. Especially in the wake of the election to the US Senate of Republican Scott Brown last Tuesday.

For once, I'm with Larry Kudlow, of CNBC, in thinking that John Taylor would be a good replacement for helicopter Ben. Rather than avoid a depression, our recent challenges have been how to productively and effectively shed excess financial sector capacity without having monetary policy become either overly restrictive, or overly stimulative.

I personally think Bernanke is damaged goods now. He pulled the wrong levers during the recent financial crisis, helped things spin out of control, only to have to apply too much force to rein them back in, while apparently engaging in some illegal behavior by coercing BankofAmerica to close its purchase of Merrill Lynch.

Regardless of its effect on the equity markets, I am actually pleased to see that Bernanke's reconfirmation for Fed chairman is now a long shot.