Bernanke Pick Shows Confidence in Slow Recovery
In what appears to be a rare instance of bipartisan fortune for him on the economy, President Obama has made a major policy decision that is being greeted mostly with cheers from economists as well as investors. By announcing that he intends to nominate Federal Reserve Board Chairman Ben Bernanke for another four-year term, the president sets aside--for a short while at least--a catalogue of controversies over health care, the energy and climate change debate, the war in Afghanistan, the roles of the CIA and the FBI. The list won't go away, even as the president savors a positive day on the economic policy front.
Bernanke wasn't the only choice. Obama could have picked top economic adviser Lawrence Summers or any one of several others with top credentials. But, the economy remains fragile enough that changing Fed leadership at this time would be a risky gamble and would broadcast uncertainty about the efforts made by Washington to bring the economy back from the brink. And by making the decision now, even though Bernanke's term doesn't expire until January, Obama eliminates roiling the stock and bond markets if the Fed's future leadership were to remain unclear for much longer.
Bernanke helped his own cause through rare (for a Fed chief) public appearances: a town hall meeting in Kansas City that was televised on public television and an interview on the CBS's "60 Minutes." In the process, Bernanke explained what the Fed is trying to do, recasting the image of distance and inscrutability that has been common among his predecessors, including Alan Greenspan. A person who can speak clearly and directly about the economy as it lurches slowly toward recovery is an asset that Obama couldn't ignore.
Bernanke will continue to have his critics. They fault his role, for instance, in allowing the brokerage firm Lehman Brothers to go bankrupt a year ago while pouring money into AIG and arranging the merger of Merrill Lynch and Bank of America. Critics think Bernanke was inconsistent and perhaps got lucky as the recession began to ease.
But the recession has eased, and Bernanke gets to take credit for his role in averting another Great Depression in the U.S. and its likely domino effect through out the world. As bad as this recession has been, it could have been much worse. For a while last winter it did indeed look very bleak. A student of what worked and what failed during the 1930s, Bernanke used history as a guide and led an aggressive series of rate cuts that took the Fed's key benchmark interest rate to near zero. He then went several steps further to expand Federal Reserve support by pumping money into housing mortgages, securities backed by commercial paper, credit card debt, small business loans and commercial real estate mortgages. "Whatever it takes," became Bernanke's mantra.
But the story isn't finished. A big challenge looms. In fact, it's a high-wire act: Can the Fed slowly subtract the $1 trillion it has pumped into financial markets, reversing course and raising interest rates without choking off growth and without spurring serious inflation? Bernanke acknowledges it won't be easy. But he has convinced Obama that he has a plan for that, too, and a pretty good track record.
Bernanke's reappointment still must be confirmed by the Senate. He'll meet criticism from some, as he did from several lawmakers during a hearing in July. Not all endorse the expanded regulatory role for the Fed that is being pushed by the White House. More complaints will come when the Fed starts to tighten credit. But two things seem certain: Bernanke will be confirmed, and his path will remain bumpy, to say the least.