By Neil Irwin
Washington Post Staff Writer
Wednesday, August 26, 2009
President Obama nominated Ben S. Bernanke for a second term as Federal Reserve chairman Tuesday, giving the nation's top economic policymaker the chance to finish what he started and shape his own legacy as one of the most consequential central bankers in U.S. history.
Having remade the Federal Reserve in his first four-year term, Bernanke will now also manage the aftermath of his actions, assuming he is confirmed by the Senate. In his first term, Bernanke launched a series of unprecedented interventions to combat the worst economic crisis since the Great Depression, actions that seem to be stabilizing the economy. In his second term, Bernanke would take charge of trying to unwind those actions in a manner that doesn't cause either a return to recession or unwelcome inflation. He would simultaneously try to fend off new attacks on the Fed's independence and authority.
Until recently, many Fed watchers had expected Obama to seek a replacement for Bernanke, who was appointed by President George W. Bush and failed to prevent a deep recession. But the economy is stabilizing, and private economists and Obama give Bernanke a large chunk of the credit. Appointing someone new, such as White House economic adviser Lawrence H. Summers, risked discombobulating financial markets and creating a potentially difficult confirmation process that could distract from other priorities.
Obama reached the decision to tap Bernanke after consulting with a small group of top advisers -- Treasury Secretary Timothy F. Geithner, Chief of Staff Rahm Emanuel and eventually Summers. Their recommendation was that Bernanke should get another four years. By the end, Obama's inner circle viewed him as the obvious choice.
Bernanke's current term does not expire until Jan. 31, and past nominations for the job have occurred closer to the end of a term. But having made their decision, Obama and his advisers decided it would be best not to have the issue lingering well into the fall.
There was a more immediate incentive to make the announcement Tuesday: It helped blunt the impact of an Office of Management and Budget report that the budget deficit will be higher than expected over the coming decade and that the unemployment rate will rise over the remainder of the year.A Bigger Fed
Much of Bernanke's second term would probably be spent dealing with the fallout of the first. Bernanke has more than doubled the size of the Fed's balance sheet, to about $2 trillion, essentially printing money to try to support the economy. It will be no easy task to remove that money from the economy without stifling a recovery or causing a renewed crisis in financial markets.
He would also have to navigate a hostile political environment for the central bank, created in part by angst over the bailouts and interventions he spearheaded. A House bill to expand oversight of the Fed's monetary policy, authored by longtime Fed basher Ron Paul (R-Tex.), now is co-sponsored by a majority of members of the chamber. Congressional Democrats seek to strip the Fed of its regulatory powers over consumer protection, and there are bipartisan reservations about giving the Fed new powers to oversee large financial firms, a key to the Obama administration's plans to overhaul financial regulation.Independence
Ultimately, the fact that Bernanke was a Bush appointee and a bit distant from the Obama White House may have worked in his favor, in that he is viewed in financial markets as independent from the administration. That helped assuage fears in financial markets that a chairman closer to Obama might boost the economy in the short-run at the expense of high inflation.
"The next big challenge will be maintaining the Fed's independence and credibility after everything Bernanke has done to support the economy," said Diane Swonk, chief economist at Mesirow Financial. "That credibility would be even more threatened if someone closer to the administration was put in."
There was no formal job interview, though Bernanke meets with Obama regularly. Bernanke was called in to an Oval Office meeting last Wednesday evening, where, Geithner at his side, Obama asked him to serve a second term. Bernanke was flown to Martha's Vineyard on a military Gulfstream III early Tuesday morning for a brief event in which Obama interrupted his vacation to announce the decision. Both men appeared without neckties.
Bernanke must be confirmed by the Senate, and while confirmation appears likely -- several prominent lawmakers of both parties endorsed Obama's decision Tuesday -- so does a vigorous debate.
"Chairman Bernanke was too slow to act during the early stages of the foreclosure crisis, but he ultimately demonstrated effective leadership and his reappointment sends the right signal to the markets," Sen. Christopher J. Dodd (D-Conn.) said in a statement.
"I expect many serious questions will be raised about the role of the Federal Reserve moving forward, and what authorities it should and should not have," added Dodd, chairman of the Senate Banking Committee.
Indeed, having confirmation hearings for Bernanke and a debate over legislation to overhaul financial regulation both occurring this fall could create complexities, in that the failures of the Fed in the run-up to the current crisis can be linked partly to Bernanke himself, who was a Fed governor from 2002 to 2005 and became chairman in early 2006.Delicate Work
In his second term, Bernanke would be likely to continue facing steep challenges -- though more foreseeable ones than those of his first term. The Fed has cut short-term interest rates nearly to zero, said it will buy up to $1.75 trillion of mortgage-related securities and long-term government bonds, and launched numerous special programs to support consumer and business lending.
The big questions now are over how and when to remove those programs and raise interest rates. If the Fed chairman moves too quickly, it could cause a return to recession. If he moves too slowly, the nation could have a bout of inflation.
The chairman's task will be made more complex by an uncertain outlook for fiscal policy. Though that is the province of Congress and the administration, not the Fed, the central bank's task of managing the economy will become more difficult if buyers of U.S. government bonds lose faith that the nation will reduce its budget deficit in the years ahead.Keeping a 'General'
Economists and financial market participants cheered Obama's decision, arguing that Bernanke is better qualified than other possible candidates. He has near-unanimous support from prominent mainstream economists.
"This thing's not over with yet," said Richard Yamarone, chief economist at Argus Research. "You don't take the general out in the middle of the battle. You've got his massive unwinding of massively accommodative policy, and you can't hand that over to an inexperienced newbie Fed chairman. You want this to be seamless."
Obama still has the opportunity to add new blood to the Fed in the near future, if he wants. Two of the seven Fed governor jobs are open. And Vice Chairman Donald L. Kohn's term expires in June.
Staff writer Michael D. Shear in Oak Bluffs, Mass., contributed to this report.