Bernanke Reconfirmed

Official portrait of Federal Reserve Chairman ...
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Senate votes 70 to 30 to confirm Ben S. Bernanke to a second term as Federal Reserve chairman, the nation’s most powerful economic policymaker.

His nomination for four more years had become uncertain in the past week, as liberals and conservatives alike expressed new reservations about confirming a man who has presided over the worst economic downturn in generations.

Now that the Senate has confirmed him for a second term as chairman of the Federal Reserve, Ben Bernanke has, or ought to have, a very simple agenda: improve confidence. This isn’t his job alone, of course. President Obama and Treasury Secretary Timothy Geithner are hardly bit players. But what Bernanke does and says — how he projects himself and the Fed — matters a great deal, and he faces an exacting challenge.

There is a supposition among academic economists (the tribe from which Bernanke comes) that “economic policy” consists of making decisions about interest rates, taxes, government spending and regulations that translate, almost mechanically, into actions by firms and consumers to hire or fire, spend or save, invest or hoard. By now, Bernanke surely recognizes that this economic model is at best a half-truth.

The famous British economist John Maynard Keynes (1883-1946) coined the phrase “animal spirits.” Less elegantly, we say “emotions.” Whatever the vocabulary, the lesson is the same: Psychology matters. Booms proceed from overconfidence; busts inspire great fear. Recoveries require increasing optimism. Otherwise, despondent consumers confine buying to necessities, and businesses delay hiring and expansion.


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