How Bernanke failed us?

While much or most of Wall Street seems to believe that Ben S. Bernanke deserves a second term as Federal Reserve chairman -- even if the reasoning is of the devil-you-know variety -- veteran economist Stephen Roach makes the case that Bernanke is responsible for much of the mess he’s now being paid to clean up.

"It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure," Roach, the chairman of Morgan Stanley Asia, wrote in the Financial Times after President Obama renominated Bernanke on Tuesday. "Maybe the patient needs a new doctor."

Roach lists three strikes against Bernanke, whose reappointment must be confirmed by the Senate:

--- While a Fed governor from 2002 to mid-2005, Bernanke was a cheerleader for Chairman Alan Greenspan's view that the central bank shouldn’t be in the business of fighting asset bubbles by, say, tightening credit to deflate them. "On this count, he stood with his predecessor -- serial bubble-blowing Greenspan -- who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage," Roach says.

Is there anyone left out there who believes that we're better off because the Fed allowed the housing bubble to inflate to such absurd proportions?

--- Bernanke supported the "global savings glut" defense of the 2001-2007 U.S. debt explosion. That defense held that America’s borrowing binge was in large part the logical result of the unprecedented wealth sloshing around the global financial system, much of which landed here. Roach argues that adherents of the glut defense in effect "exonerated the U.S. from its bubble-prone tendencies and pinned the blame on surplus savers in Asia."

--- Bernanke had little interest in fulfilling the Fed’s role as a regulator of banking-system excess. "The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr. Bernanke and Mr. Greenspan could have said no to," Roach says. "But they did not."

Overall, Roach asserts, Bernanke "lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialize in post-crisis damage control."

An editorial in the Wall Street Journal also takes Bernanke to task for America’s recent bubble trouble, but doesn’t argue against a second term.

The Journal, though, wonders how Bernanke will get policy right in the economy’s post-rescue phase, assuming the Fed's rescue works:

"Everyone loves a central banker when he's flooding the economy with money, at least while the mania lasts. But Mr. Bernanke will sooner or later have to say no to the political class. This is something he has never done, and already there are signs in China and the edges of the dollar bloc of new asset bubbles. Mr. Bernanke has also tended to be a domestic central banker, ignoring the Fed's larger role as steward of the world's reserve currency.

"His money-withdrawal task will only be harder because of the Fed's extraordinary forays into fiscal policy and credit allocation since the crisis began. Mr. Bernanke has taken the Fed deep into picking winners and losers by industry (mortgages, student loans) and even companies (GMAC). The Bernanke Fed has also become nearly an arm of the Treasury by endorsing a spendthrift stimulus and by directly buying federal debt for the first time in a half-century."

-- Tom Petruno