With Bernanke, Obama seeks continuity in time of crisis

By Chris Cermak, DPA,

Washington : President Barack Obama made the safe choice in re-appointing Federal Reserve Chairman Ben Bernanke to a second term, preferring not to roil financial markets and keep his economic team in place as the US begins to pull out of recession.


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The announcement Tuesday was expected and welcomed by most economists.

Some lawmakers reacted with scepticism, but his nomination is nearly certain to be approved by the Senate before his current term ends Jan 31.

Bernanke, a Republican appointed by former president George W. Bush, will live and die by the current economic downturn, which is regarded as the worst since the Great Depression of the 1930s.

When he appears before the Senate for a confirmation hearing later this year, Bernanke will face tough questions about his handling of the run-up, arrival and aftermath of the financial and economic crisis that swept the country and the world.

Obama credited Bernanke with helping Wall Street avoid a complete collapse after investment giant Lehman Brothers imploded in September. With many other banks teetering on the brink, Bernanke drastically expanded the Fed’s money supply through a series of unprecedented lending programmes for financial firms.

The central bank quickly began cutting interest rates to revive bank lending. Its benchmark federal-funds rate has been at a record low of near zero percent since December.

The transition in January from Bush to Obama appeared relatively seamless. Bernanke had already worked closely with Obama’s Treasury Secretary Timothy Geithner, who previously headed the Fed’s regional bank in New York before joining the administration.

But Bernanke has also come under fire for presiding over a sharp expansion of the government’s role in the financial system. Many wonder how he will be able to extricate the Fed from its massive interventions and avoid a surge in inflation.

Some lawmakers have criticised the Fed for a focus on bailing out Wall Street rather than Main Street, as ordinary American consumers and small businesses have been dubbed. The central bank has had little role in stemming a record rate of home foreclosures or reducing unemployment, which the administration believes could top 10 percent this year.

Taking over in February 2006 after being appointed by Bush, Bernanke succeeded Alan Greenspan, the legendary 18-year Fed chief who served under president Ronald Reagan, George Bush, Bill Clinton and George W. Bush.

Some have questioned why Bernanke did not sound more alarm bells in his early years at the Fed’s helm. US housing prices began sliding in mid-2006, precipitating a crescendo of mortgage defaults that eventually pushed Wall Street firms to the brink.

Bernanke “argued for keeping interest rates low as the housing bubble developed”, said Simon Johnson, a former chief economist of the International Monetary Fund.

“Bernanke was part of the Greenspan Illusion — the Fed should ignore bubbles and ‘just clean up afterwards’,” Johnson said.

Christopher Dodd, the Democratic chairman of the Senate Banking Committee who will preside over confirmation hearings, offered only a lukewarm endorsement of Bernanke’s re-appointment.

“I think re-appointing Chairman Bernanke is probably the right choice,” Dodd said. “Bernanke was too slow to act during the early stages of the foreclosure crisis, but he ultimately demonstrated effective leadership, and his re-appointment sends the right signal to the markets.”

The Fed’s “exit strategy” is likely to dominate the start of Bernanke’s second term, as the US economy is likely to pull out of recession in the coming months.

Bernanke will be selling Obama’s plans for a major overhaul of financial regulation to prevent a similar crisis in future. The reforms could see the central bank get new powers to oversee the country’s top banks.

In keeping Bernanke, Obama maintained a tradition of bipartisanship for Fed appointees that is otherwise rare in Washington politics.

Greenspan was picked by George H.W. Bush and re-appointed by Democratic president Bill Clinton. Democrat Jimmy Carter’s choice to head the central bank, Paul Volcker, was reappointed by his Republican successor, Reagan.

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