Why Not Withdraw Ben Bernanke's Nominantion?

I was talking to a colleague the other day about the lack of Federal Reserve attention given to unemployment, and noted that now more than ever, President Barack Obama's decision to nominate Federal Reserve Chair Ben Bernanke for another five-year term seems like a bad one. But all is not lost! Bernanke hasn't had confirmation hearings yet -- they will likely begin next week -- and he certainly hasn't passed a confirmation vote yet. All Obama has to do to change things is withdraw Bernanke's nomination and pick a new Fed chair who might be willing to set some inflation targets before the public loses faith in the Federal Reserve as an institution capable of doing its job.

Right now, unemployment is a much larger problem than inflation, and creating a specific inflation target would, as Paul Krugman puts it in his discussion of the Japanese case in the 1990s, allow "the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs." Negative real interest rates would be the step beyond the zero-interest rate policy that the Fed is following right now, which is not enough to provide a significant monetary expansion to allow for employment growth.

Bernanke could, conceivably, do something along these lines. But he hasn't yet. On the other hand, if you wanted someone who could credibly promise to be "irresponsible," at least from the view of monetary policy hawks, why not pick someone who Bond Vigilante-types already think is irresponsible (read, cares about unemployment), like San Francisco Federal Reserve President Janet Yellen? Some might claim that this would damage the Fed's "political independence," but actually making use of the main check that the government has over the Fed -- appointing the chairman -- should be seen as within the normal bounds of Fed-government relations.

There are definitely downsides, of course. Financial markets, and bonds in particular, would probably react unwisely (remember that Bernanke was initially reappointed specifically to calm those markets on the day the updated budget was released). But it would be very smart politics for President Obama -- in one fell swoop, he demonstrates his seriousness about fixing unemployment, sticks it to the bankers that many Americans think he has been coddling, and captures a news cycle. The danger is that explaining the intricacies of monetary policy is challenging and that deficit hawks on CNBC and Fox would lose their minds; that said, the current explanations aren't particularly compelling and deficit hawks on CNBC and Fox are already losing their minds, so might as well make something of it.

-- Tim Fernholz