Investor Agenda

Bernanke Debate Intensifies

Ben Bernanke

Whether you’re a Ben Bernanke supporter or not, you have to figure that last week was one he will remember for a long time.

The least surprising news was that Bernanke and the Fed left interest rates near 0%. They used a familiar phrase in saying once again that rates would remain low for an “extended period.” They also noted a few bright spots – such as the housing market and some moderate expansion in consumer spending – but said economic activity is “likely to remain weak.”

It was a couple of other stories involving Bernanke that sparked debate about the job he is doing and the role of the Federal Reserve.

First, he was named Person of the Year by Time magazine. “The recession was the story of the year,” said managing editor Richard Stengel. “Without Ben would have been a lot worse.”

Stengel went on to say, “We've rarely had such a perfect revision of the cliche that those who do not learn from history are doomed to repeat it. Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it.”

That’s a strong endorsement coming in the same week that Bernanke’s critics were also vocal as the Senate Banking Committee considered his nomination for a second term as Fed Chairman. The committee recommended his approval in a 16-7 vote, and he’s expected to be confirmed by the full Senate, probably in January.

Nonetheless, debate has intensified. One of the main jobs for the Fed is overseeing risk in investment banking, and clearly they dropped the ball in a major way leading up to the crisis. It’s hard to imagine how the Fed didn’t see the types of risk on the balance sheets of banks it was supposed to be overseeing, so I think that’s a legitimate question to ask.

Then, of course, there were unprecedented bailouts and government assistance to try to prevent the system from collapsing. Some of that is receiving greater scrutiny as well.

Going forward, I think the big question will be whether the Fed maintains its independence or, as some have proposed, Congress steps in and takes more of an oversight role. I think one of the great things about our country is that the Fed is independent, that it does not answer to Congress or the President and is as removed from politics as possible.

In the end, though, Bernanke has presided over the Fed during extraordinary times, and he will likely be confirmed for a second term. I suspect he will be under an even more watchful eye in his second term as he faces these challenges, including how to scale back the stimuli that have propped up the economy and financial system for the past year. Everyone knows it will have to be done at some point, but the devil will be in the details of how and when it happens.

That will almost certainly be one of the big stories of 2010, and it’s one we will watch closely here and in our Wall Street newsletter.



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