Bernanke's Next Challenge: Presiding Over the Recovery
For President Obama, confidence in Ben Bernanke probably translates into confidence about the economic recovery.
In nominating the Fed chairman for a second-term five months before his first one expires, the president is depriving himself of a fall guy if the recovery stumbles.
Few expected the president to commit to Bernanke this early, regardless of whether he is deserving of a second term—a clear majority say he is—and that may be the most telling statement of the decision.
“The actions we have taken to stabilize our financial system, repair our credit markets, restructure auto industry, and help the overall economy recover have all been steps of necessity, not choice,” the president said in a news conference with Bernanke at his side. “They have faced plenty of critics, some of whom argued that we should stay the course or do nothing at all. But taken together, all of these steps have brought our economy back from the brink. They are steps that are working.”
That suggests pragmatism, not politics, drove the president's decision, even though it was generally well received on Wall Street.
“Why take the chance of someone else?” said former White House economist and Fed governor Larry Lindsey. “The natural thing to do is reappoint him.”
In other words, the Fed’s role in crisis management was so extensive and intrinsic that changing leadership would be risky, if not foolish.
“Having a new chairman come in at this late date would put the Fed engineered solution to both the recovery and the exit strategy at risk,” said Bank of Tokyo-Mitsubishi economist Chris Rupkey, reflecting a common view on Wall Street.
"I suspect the administration somewhere deep down inside is very, very nervous about the recovery and its pace and wants to do everything to ensure stability and Bernanke at this moment represents stability," added Bill Frenzel, a ten-term Republican congressman now with the Brookings Institution.
At the same time, the president's statement on Bernanke placed as much emphasis on the team and the administration’s overall economic accomplishments and objectives as it did on the man’s individual attributes and efforts.
Political pundits are quick to point out that only president’s can take the credit of the team.
The president’s reference to criticism is also telling, because for all of the kudos Bernanke has earned for his handling of the financial crisis, there has also been plenty of second-guessing from supporters and critics alike. And that is almost certain to continue on the road to recovery.
Some of that will no doubt arise in the Senate’s confirmation hearing.
The central complaint about Bernanke is two-fold:
1) He did not see the tell-tale signs of the coming crisis and was slow to react to the first flare-ups in the second half of 2007.
2) He then over-reacted with a spate of policy measures that over-extended the Fed’s resources and endangered its independence.
“Bernanke has done the easy part,” said Ram Bhagavatula, managing director at the hedge fund Combinatorics Capital. “It's not very difficult to throw money at the problem. Of course, we will never know what would have happened if the Fed was not quite so reckless. But the real challenge comes over the next 12 months when they have to withdraw the excess monetary stimulus."
Wall Street is now concerned about Bernanke’s exit strategy and it is too soon for the Fed chairman to rest on his laurels.
Though there’s a growing sense that the recession is over, there’s raging debate about the strength and durability of the recovery—something the president doesn’t appear to agree with at this point.
“The next phase is almost as difficult as the first one he presided over in saving the economy from a deeper recession or worse,” said FAO chief economist Robert Brusca, who has been both critical and supportive of Bernanke in the past two years. “Now he must nurture and preside over recovery and protect against inflation.”
Bernanke has arguably done everything imaginable to lay the groundwork for a recovery—as dubious as the chances may be—but some say he has already done more than enough in setting the stage for a bout of nasty inflation if he doesn’t make all the right moves in his second term.