Krugman Says Bernanke Should Be Reappointed to Fed

By Shamim Adam and Liza Lin

Aug. 10 (Bloomberg) -- Ben S. Bernanke deserves another term as Federal Reserve Chairman based on his success in battling the financial crisis, said Princeton University Economist Paul Krugman, a winner of the Nobel Prize.

“He’s earned the right to a second term,” Krugman, 56, said yesterday in an interview in Kuala Lumpur. “He turned the Fed into the financial intermediary of last resort. When the banking system failed to deliver capital where it was needed, he put the Fed into the markets.”

Debate over the fate of Bernanke, 55, is intensifying as he nears the end of his four-year term as chairman on Jan. 31. While Krugman and economist Nouriel Roubini have voiced support for the former Princeton economist, others including Anna Schwartz have said a lack of transparency exacerbated the financial crisis.

“I think Bernanke has done a really good job,” Krugman said. “He failed to see this coming and he was behind the curve in early phases. But he’s been really very good in the sense that it’s really very hard to see how anyone could have done more to stem this crisis.”

As his terms draws near an end, Bernanke has written in the Wall Street Journal and appeared on television to defend the unprecedented actions he took during the financial crisis.

“In a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,” Bernanke said last month at a town-hall-style meeting in Kansas City, Missouri, taped for broadcast on PBS television. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”

Zero Rates

Under Bernanke’s stewardship, the Fed cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year.

Joseph Stiglitz, another Nobel Prize-winning economist, said on Aug. 5 that he expects a “very slow recovery” and that a replacement for Bernanke should be considered.

“There are lots of potholes in the road,” Stiglitz, a Columbia University economics professor, said in an interview. “There are problems in commercial real estate. We know that there will be more foreclosures in the mortgage market” and “we know we don’t know the state of the banks.”

Squared Off

Economists Roubini and Schwartz squared off in the New York Times last month over Bernanke’s fate. Roubini, the New York University professor who predicted the credit crisis, voiced support for the central banker, while Schwartz, co-author with Milton Friedman of a history of U.S. monetary policy, wrote that the chairman should be replaced because of policy missteps and a failure to clearly articulate the bank’s goals.

The Fed also helped rescue Bear Stearns Cos. and American International Group Inc. last year while backing creation of the $700 billion Troubled Asset Relief Program.

Schwartz said Bernanke failed to explain why the Fed supported the rescue of Bear Stearns and not Lehman Brothers Holdings Inc., whose bankruptcy in September 2008 added to the severity of the credit crisis.

President Barack Obama said last month that Bernanke has done “a fine job” as Fed chairman while declining to comment on the possible reappointment of the former Princeton University economist, which is subject to Senate approval.

To contact the reporter on this story: Shamim Adam in Kuala Lumpur at sadam2@bloomberg.net; Liza Lin in Kuala Lumpur at llin15@bloomberg.net