The Week's Biggest Story: Bernanke Stays

The most important story this week was clearly President Obama’s decision to reappoint Ben Bernanke as chairman of the Federal Reserve.

Most investors and economists that I’ve spoken with believe he has done a good job under historically bad conditions.

Roger Altman, chairman of Evercore Partners and former deputy Treasury secretary under President Clinton, told me:

“It seems to me that, since the financial crisis erupted, the Federal Reserve, under Mr. Bernanke’s leadership, has acted boldly, creatively and effectively, and done really quite a heroic job in staving off the near meltdown and steering us towards safety, and now the prospects for recovery, both on the financial side and in the macro economy.”

Of course, not everyone agrees.

Noted economist Henry Kaufman, in his latest book, The Road to Financial Reformation, writes about what he calls Bernanke’s slowness, passivity and initial inaction responding to the looming financial crisis.

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“He is somebody who studied the Great Depression at great length,” Dr. Kaufman said of Bernanke, “but it took him quite a while before he recognized the extraordinary problem in the financial markets. He did not come and meet the problem head-on. He met it belatedly.”

Nonetheless many, including myself, believe taking Bernanke out at such a critical moment would have been a major mistake.

Though Bernanke still needs to be confirmed for his second term, President Obama’s announcement essentially ends debate and speculation about whether Bernanke will be reappointed, thus removing one layer of uncertainty. The market hates uncertainty, and it reacted favorably to the news. The less speculation the better, as far as it is concerned.

The Fed: Most Important Body in the World

It would be hard to overstate the Fed’s significance right now. In fact, it is arguably the most important institution for the global economy, which depends heavily on the U.S. economy. To replace the head of such a critical body at a time when the economic recovery remains very fragile would have been a risky move.

I think most observers would agree that the Bernanke has shown incredible discipline and calm in these extraordinary times. He is an academic who has studied markets and recessions and bubbles, but I doubt that he ever believed he would be the man central to the U.S.’ recovery from one of the worst financial crises in this country’s history.

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Bernanke had big shoes to fill when he was appointed chairman. His predecessor, Alan Greenspan, served for more than 18 years. Given the rare circumstances he’s had to deal with, Bernanke has been able to put his on stamp on the job in only a few short years.

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With economists expecting the recession to end this year, the questions now turn to the Fed’s “exit strategy” — how it will unwind all of the emergency measures and fiscal stimuli implemented during the crisis. We all hope that the worst is behind us, but clearly Ben Bernanke has plenty of challenges that await him in his second term.

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So stay close. As always, I’ll cover the latest market and economic events right here in my blog, as well as in my brand-new weekly e-letter, Investor Brief. We just announced my e-letter earlier this week, and I’m thrilled (and humbled) that so many of you want to receive it. The first issue will come out on Monday, so if you’ve not yet joined there’s still time. You can learn more here.

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