Monday, January 25, 2010

Simon Johnson: Replace Bernanke with Krugman

From Baseline Scenario (ht Huffington Post):
The support for Bernanke in the Senate hangs by a thread – with Harry Reid providing a message of support, albeit lukewarm, after the markets close. The White House is telling people that if Bernanke is not reconfirmed there will be chaos in the markets and the economic recovery will be derailed. This is incorrect.

The danger here is uncertainty – the markets fear a prolonged policy vacuum. Fortunately, there is a way to address this. Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place.

Paul Krugman is an expert on monetary policy – he wrote the classic paper on balance of payments crises (and probably could have got the Nobel Prize just for that), his work on Japan in the 1990s shaped everyone’s thinking of how to handle potential deflation, and his assessment of the crisis and needed response in fall 2008 was right on the money.

Krugman is known to many academics as a trade theorist and as a pioneering modeler of growth with increasing returns. But just because Keynes wrote eloquently on Indian currency reform did not prevent him from also understanding what had gone wrong with the world economy – and how to substantially fix it.

Krugman also has exactly the paper trail that you would like to see from any potential Fed chair. He has written pointedly and with complete clarity about all the leading policy issues of the day.

There is no question where he stands, for example, on “too big to fail” financial institutions: he’s opposed and would push for fundamental financial reform and tough oversight.