By John Cassidy, contributor
FORTUNE -- In the summer and fall of 2009, President Obama faced a tricky decision: Should he reappoint Ben Bernanke, whose four-year term as chairman of the Fed was coming to an end? On the one hand, Bernanke had done a pretty good job of managing the financial crisis that followed the demise of Lehman Brothers. On the other hand, he was a Republican appointee, and one of Obama's closest aides, Lawrence Summers, the pugnacious Harvard economist, badly wanted the job.
Advised by Treasury Secretary Tim Geithner, who had worked closely with Bernanke, Obama ended up giving Bernanke another four years. With the markets and the economy still fragile, it seemed the sensible thing to do. In retrospect, it looks like a mistake. By putting Bernanke in charge for the run-up to the 2012 election, Obama jeopardized the recovery and put at risk his own reelection prospects. As the economy has sputtered badly over the past six months, the Fed chairman has failed to do anything about it. Even today he continues to equivocate. Looking back, Obama should have canned Bernanke when he had the chance.
I don't say this out of any animus toward Bernanke, who is an accomplished academic economist, a dedicated public servant, and an eminently decent man. In approving a series of innovative lending and liquidity programs during the crisis of 2008-09, which gave troubled banks access to the Fed's balance sheet, he helped prevent a wholesale collapse of the financial system. The "Person of the Year" moniker that Time bestowed upon him in 2009 was well earned.
But Bernanke's performance since 2009 has been less impressive, and this year it's been pretty awful. Rather than getting out ahead of events, which is essential given that there's always a lag between action and results, the Fed appears paralyzed. With the Fed's favored inflation measure at just 1.8% and the unemployment rate stuck above 8%, it is clearly failing to meet either its inflation target of 2% or its legal mandate to promote maximum employment. Yet Bernanke hasn't moved. At the start of August, he and his colleagues acknowledged that the economic outlook had worsened since their previous meeting, and, once again, they did nothing. At that point, my sympathy for Bernanke ran out.
It could be argued that with short-term interest rates already so low, there isn't anything he can do. But Bernanke denies that. He has repeatedly stated that by purchasing bonds and carrying out other unorthodox measures, central banks have the capacity to support a recovery even when interest rates are close to zero. Why, then, hasn't he pushed through another big round of quantitative easing?
The official explanation -- that he and other policymakers need to see more data -- is unconvincing. The unemployment rate is 8.3%; in the latest quarter GDP hardly grew at all. What more evidence is needed that the recovery has stalled? Another possibility is that Bernanke is playing politics. With an election just months away, Mitt Romney and other Republicans are inveighing against the prospect of QE3. Maybe the Fed chairman is simply trying to stay out of the firing line. Or perhaps he is trying to maintain a consensus inside the central bank. It's well known that several of the regional Reserve bank presidents are firmly opposed to QE3.
But that just strengthens the argument that back in 2010, Obama should have replaced Bernanke with a more assertive Fed chairman. From time to time during their long tenures, Paul Volcker and Alan Greenspan both faced internal opposition. That didn't prevent them from pushing through policy changes they deemed necessary. If Summers, brusque and confident to the point of arrogance, had been given the job, he would have done the same thing. So would others on Obama's list of candidates. I'd bet that right about now the President is wishing he'd made a different choice.
This story is from the September 3, 2012 issue of Fortune.
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