Kudlow vs. Bernanke

http://tinyurl.com/yj6znpm History major Lawrence Kudlow has been writing criticisms of Ben Bernanke at the National Review dot com website for months now.  His recent column posted at Townhall.com is very critical of Bernanke and suggests that Bernanke should withdraw his name from consideration of a second term as Fed Chair based on popular opinion.

Kudlow writes that Bernanke "cut is academic teeth studying the Great Depression".  That's not true.  Bernanke was valedictorian of his high school, scored a 1590 out of 1600 on the SAT test, obtained an undergraduate degree in economics and went on to earn a PhD in economics.  He's been an educator, an adviser to a president and a member of the Board for years.  Kudlow is a history major, has no post-graduate degree and is known for hosting a talk show.

Kudlow's Townhall column starts by saying that Bernanke's credibility could be undermined if he doesn't obtain wide support from the U.S. Senate, which is made up of career politicians, lawyers and people with a sole objective of getting elected in the next election cycle.  Kudlow writes that Barnanke's main detractors are critical of him because of their desire to continue Reaganesque policies of low taxes and easy money.

Kudlow agrees with Bernanke's detractors.  Kudlow believes that Bernanke should continue the policies of his predecessor, the policies that created this mess: the strong dollar.  It is true that Bernanke had studies the Great Depression.  But he studied it from an academic point of view, not a political point of view.  For example, tax cut fanatics want to blame the Great Depression on high taxes; anti-immigration fanatics want to blame it on immigration.  Bernanke studied it from an objective point of view.  One effect that worsened the Great Depression and made recovery more difficult was the shrinking of the money supply, i.e. deflation.  When banks lend, it results in an increase in the money supply.  During the Great Depression, banks were reluctant to make loans thereby causing a decrease in the money supply.  The same thing is happening today.  Banks are reluctant to make loans in an atmosphere of uncertainty and a high rate of business failure.  Bernanke's policies seek to counter this effect.

Bernanke's policy is a response to desperate times, a severe economic decline with a threat of a long term depression.  Kudlow disagrees with this.  He thinks that the threat of deflation is passed.  Kudlow goes on to say that the majority of the public do not support Bernanke's reappointment and that therefore Bernanke will be "totally ineffective" as Fed Chair.  Without the support of the lawyers and politicians in the Senate and without the support of the general public (most of whom have absolutely no education at all with respect to macroeconomics or monetary policy), he should withdraw his name from consideration.

What should he do?  Should a well educated genius withdraw his name from consideration so someone more popular can be appointed?  Maybe Miley would be willing to serve.  It's ridiculous.  We are in a very dangerous point in our short-term economy.  Should decisions be made based on what is popular?

The fact is that the Fed has to make tough decision that might not always be popular.  That's the very reason why the Fed was designed as a non-political entity.  Yes, the Board is appointed by politicians, but the Fed is not elected and operates independently of the government and for good reason.  To suggest that the Fed governors be appointed based on popular opinion provide incentive for the Fed to base policy decisions based on popular opinion.  What Kudlow is proposing could lead to a catastrophe.