Bernanke's To-Do List

Thursday, August 27, 2009

Mohamed El-Erian - Bernanke’s 4-Point ‘To-Do’ List

Pimco’s chief executive comments on Ben Bernanke’s reappointment for a second term at Chairman of the Federal Reserve.

President Obama’s announcement reappointing Fed Chairman Bernanke for a second four-year term does, and should, command broad based support.

Bernanke has played a major role in designing and implementing policies that averted an even larger global destruction of jobs and living standards around the world. Indeed, crisis management has defined Bernanke’s first term. His second term promises to be equally challenging as it will be defined by four major issues.

First, Bernanke will have to navigate the ‘how’ and ‘when’ of exiting from an unprecedented set of unconventional Fed policies. As Nouriel Roubini detailed in Monday’s Financial Times, this is no easy task. Too early an exit would push the US back into recession; and the more likely outcome of overstaying in the current policy regime would risk inflation down the road and undermine the proper functioning of some markets.

Second, Bernanke will have to defend the institutional integrity of the Fed. Politicians have woken up to the fact that the institution has enormous power to conduct the analytical equivalent of fiscal policies that normally fall under the domain of the executive and legislative branches of governments. The natural political tendency today is to limit the future ability of the Fed to respond in this way. While understandable, ill-designed and politically-driven reactions could result in more harm than good.

Third, Bernanke will have to revamp the operational focus of the Fed in the context of a major regulatory reform effort. Up until now, the focus has been on whether, in the balkanized world of US regulators, the institution should be the chief regulator. Bernanke will have to also lead the Fed into an operational regime where asset prices are better incorporated in the design of the policy reaction function. Indeed, if the erosion of the US global standing continues, Bernanke may also have to worry more about the impact of exchange rate changes.

Fourth, Bernanke will have to play an important role in the multi-agency, and hopefully cross-border design of better crisis prevention measures. Together with other policy makers, he will have to strike the right balance between prudential steps that curtail systemic risk and steps that would excessively undermine the channelling of credit to productive activities.

None of these issues is easy to deal with on a standalone basis; and together they constitute a significant policy challenge. They will define Bernanke’s second term, requiring from him a tremendous degree of intellectual rigor, political savvy, steadfast commitment, and leadership. Based on the achievements of his first term, Bernanke is well placed to address yet another set of difficult challenges.
Mohamed A. El-Erian is chief executive and co-chief investment officer of PIMCO. His book ‘When Markets Collide’ won the 2008 FT/Goldman Sachs Business Book of the Year.


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