Master of the Economy
Why Obama May -- or May Not -- Reappoint Fed Chairman Bernanke

By Neil Irwin
Washington Post Staff Writer
Friday, August 21, 2009

JACKSON, Wyo. -- The world's top economists and central bankers have gathered here in the Grand Tetons, officially to talk about "Financial Stability and Macroeconomic Policy."

But in the hallways and hotel bar of this annual symposium, sponsored by the Federal Reserve Bank of Kansas City, another topic is being discussed: Whether Ben S. Bernanke will, or should, be appointed to a second four-year term as chairman of the Federal Reserve.

Bernanke's term expires on Jan. 31, and if President Obama follows tradition, he will announce his decision to reappoint Bernanke or name his replacement before Thanksgiving; possibly much sooner. That would soothe fears in the financial markets of a vacuum at the world's most powerful central bank and give the Senate time to confirm the nominee.

Leading economists and others who regularly deal with the Fed -- in other words, the kind of people who come to the Jackson Hole conference -- would generally prefer that Obama reappoint Bernanke. A Wall Street Journal survey earlier this month of 47 economists found near-unanimous support for a second term.

But privately, even the economists who favor sticking with Bernanke acknowledge that there are some solid reasons why Obama might choose to go another direction, perhaps naming top White House economic adviser Lawrence H. Summers. Dark horse possibilities include San Francisco Fed President Janet Yellen, former Fed vice-chair Roger W. Ferguson Jr. and Christina Romer, chairman of the Council of Economic Advisers.

Bernanke is scheduled to kick off the symposium Friday morning with a speech on how the financial crisis unfolded in the last year and its lessons for future policy. The speech could give some sense of what his priorities would be in a second term, if given one.

Here are several pros and cons of reappointing Bernanke, which summarize the consensus views of leading Fed watchers gleaned from several interviews:

Why Obama should reappoint Bernanke:

-- He helped pull the nation back from the abyss. Bernanke has remade the role of the Fed in the past 18 months, creating new lending programs, slashing interest rates to zero, and generally pulling out every tool imaginable (and even some that weren't) to save the U.S. economy from a Great Depression-caliber freefall. People will debate for decades how real that risk was, and how much credit Bernanke should get for averting it. What is unquestionable is that he took bold action and that the economy, while still weak, is in better shape than it was in the depths of the crisis.

-- Continuity. People in financial markets have developed an understanding of and respect for Bernanke. With the financial system still fragile, making a change could create dangers as a new Fed chairman got his or her sea legs.

-- No distractions. Obama has a crowded legislative agenda. Going with a new candidate creates the risk of distraction. Bernanke is highly regarded in the Senate, even among some senators who are critical of actions the Fed has taken under his leadership. And he is a Republican, helping assuage doubts about Fed independence.

-- No perfect alternatives. Other potential candidates each have their own flaws. Summers, director of the National Economic Council and a former Treasury secretary, has been a lightning rod for criticism throughout his career. San Francisco Fed president Yellen is viewed in financial markets as soft on inflation, potentially creating ripples in the bond market if she is named. Ferguson, as vice-chair of the Fed under Alan Greenspan, could be viewed as being too close to the mistakes of the Greenspan Fed that led to the current crisis. Romer, of the Council of Economic Advisers, has only seven months of experience in Washington.

Why Obama should replace Bernanke:

-- He failed to prevent the worst crisis and recession in generations. Bernanke didn't see the risks created by the housing and credit bubble earlier in the decade. In his first year as chairman, and in jobs before that in the Bush White House and as a Fed governor, he did little to raise alarm bells or draw attention to what we now know was an irrationally enormous housing bubble, deep fragility in the financial system and regulatory system that relied on self-policing markets. He dealt aggressively with the crisis once it arose, goes this argument, but did not foresee or prevent it.

-- The economy is still terrible. With the unemployment rate at 9.4 percent and climbing, it could create an appearance problem if Obama were to reappoint the Fed chairman.

-- He is part of the past. AIG. Bear Stearns. Lehman Brothers. Citigroup. Bank of America. Bernanke was along for the ride (and in some cases the key decision maker) in every step of the crisis. Thus, he is as tied to the mistakes of the past as he is to the successes. The furor over bonuses to AIG employees and Bernanke's controversial role in encouraging Bank of America not to withdraw from its acquisition of Merrill Lynch loom large. Obama may prefer a Fed chairman who does not have that record.

-- No more imperial Fed chairmen. With the benefit of hindsight, many Fed watchers wonder if the near-universal adoration of Greenspan in his later years was a factor in the mistakes that led to the crisis. If one wants to do away with the rock star Fed chairman, to depersonalize the job and make it more one of technocrat than swashbuckling master of the economy (as was Bernanke's goal when he took office), a first step would be to have more turnover in the job.

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