Cutting Off Your Nose

Failing to renominate Ben Bernanke as Fed Chairman is akin to cutting off your nose to spite your face. Until the global financial meltdown, the primary role of the Federal Reserve Chairman had been to oversee monetary policy, interact with other global central bankers, and to testify before Congress with sober, wise, and inscrutable remarks that kept the Fed Watcher industry at full employment. In this role, given that he understands economics is more complex than Ayn Rand, he is far superior to his predecessor, Alan Greenspan.

Unfortunately, the global financial meltdown required, perhaps for the first time since the 1981-82 recession, a different role and a different skill set. Getting a handle on the lax underwriting standards at banks required a Chairman who understood how the Fed's army of bank examiners worked and how they could have become a real asset in taking control of the culprit banks. Emerging problems in the securitization market from 2005 required a deep understanding of the manifold conflicts of interest among the players in the markets from the investment banks to the rating agencies. Bernanke failed miserably, notwithstanding any revisionist history about low interest rates having no impact in fomenting the crisis.

However, it would have been reasonable to assume that a Secretary of the Treasury would have been able to supply the capital markets expertise. Secretary Geithner, having come from the New York Fed was part of the problem. He was the CEO who fiddled while the credit crisis simmered among the New York money center banks. Recent documents and e-mails show that he appears to be deeply conflicted in his relationships with some of the key players in the crisis. As much as I hate to say it, this is all water under the bridge.

Talk of circumscribing the powers of the Fed, creating another institution to oversee monetary policy, and nominating Paul Krugman for Fed Chairman are all absurd notions, and they should be dismissed on their face. These measures would cause consternation among global central bankers and send the dollar down (except there's the question of what currency to hold, surely not the Euro?) These are all nothing more than political grandstanding by both parties. Bereft of ideas, and lacking in both insight and the ability to work across the aisle, they choose to appeal to the basest political instincts of some of their vocal constitutents.

Paul Volcker can still effectively fill the vacuum and help us out of this dilemma. As an outsider, he can speak freely and serve as a "heat shield" for Bernanke and Obama. About a year ago, he wrote a paper that decried the ability of money center banks to engage in proprietary trading, while shifting ultimate risks to the taxpayer. At the same time, they can compete for insured deposits. His ideas fell on deaf ears.

Reconstituting Glass-Steagall, the Cassandras said, would render our markets uncompetitive and trading would move elsewhere. Just where might that be? Wall Street traders wouldn't like the coffee in Beijing, the bars in Dubai, or the comedy clubs in Berlin. These are empty threats and posturing that are aimed at paralyzing meaningful reform.

Renominate Ben Bernanke--it's the only realistic and pragmatic choice and move away from looking in the rear view mirror.

Give Paul Volcker a real portfolio to get something done. Tell the chairman of both parties to call off their dogs. Let Volcker, Bernanke, Geithner and a few key leaders of both parties get in a room to agree on key principles for meaningful financial reform of the capital markets, securities regulation, investor protection, and corporate governance. As John Lennon said, "Imagine."