Business Times - 02 Feb 2010
Bernanke faces curbs on Fed's independence
Confirmation for second term comes with political strings that may stymie policymaking
By LEON HADAR
WITH supporters like this, who needs detractors?
Take, for instance, Senate Majority Leader Harry Reid, a Democrat from Nevada, who said after announcing his intention to vote to approve the confirmation of Ben Bernanke as Fed chairman for a second term: 'I made it clear that to merit confirmation, Chairman Bernanke must redouble his effort to ensure families can access the credit they need to buy or keep their home, send their children to college and start business.'
Offering what sounded, at best, as a lukewarm endorsement of Mr Bernanke, Mr Reid added that Mr Bernanke 'assured me that he will soon outline plans for making that happen, and I eagerly await them'. Mr Reid, who had the task of mobilising the Senate votes to approve Mr Bernanke's re-nomination, seemed to be suggesting that his vote came with political conditions.
The confirmation process demonstrated that while Ben was Back, the head of the US central bank - once considered immune to political pressure from presidents and lawmakers - may have lost some of that independence and that when he makes his decisions on whether to raise or lower interest rates, he will have to take into consideration the sentiment not only in Wall Street but also in Capitol Hill.
The politicians in Washington have made it clear that from now on they are going to treat the Fed chairman less as a revered oracle and more like a compliant government employee.
Indeed, the 70-30 Senate vote giving Mr Bernanke a second term at the head of the US central bank - 23 senators sought to block a vote on the nomination itself - dramatised the unusual level of rage at Wall Street and its allies in Washington and around the country.
Mr Bernanke, who has led the effort to bail out the ailing financial institutions, has become a symbol - together with Treasury Secretary Tim Geithner - of what the members of the new populist insurgency perceive to be a corrupt Washington-Wall Street Axis.
No Fed chairman nominee has ever been rejected by the Senate. But the vote for Mr Bernanke was the closest ever. When Mr Bernanke was first nominated in 2005, he was confirmed with a voice vote in the Senate. The closest voting margin was 84-16 for Paul Volcker's second term as head of the US central bank in 1983. Like Mr Bernanke, Mr Volcker had served under both Republican and Democratic presidents and had pursued unpopular policies (controlling inflation by raising interest rates in the case of Mr Volcker).
His critics have argued that while serving under former Fed chairman Alan Greenspan, Mr Bernanke helped implement the loose monetary policies that played a part in the credit bubble and the ensuing meltdown. Interestingly enough, Mr Bernanke continues to reject that analysis and insists that it is not the role of the central bank to try to deflate asset price bubbles by raising interest rates.
Moreover, populists on both sides of the political spectrum - free-market proponents on the right and progressive liberals on the left - have accused Mr Bernanke of yielding to political pressure going along with the costly bailouts devised by the Bush and Obama administrations.
Mr Bernanke argues that he supported and even initiated these moves as part of a coherent strategy - based on his own economic research in academia - aimed at preventing the financial meltdown from creating the conditions for another 1930s-style Great Depression.
Hence the political spectacle on Capitol Hill when the only social democrat in the Senate, Bernie Sanders of Vermont, and hardcore conservative Republican Jim Bunning of Kentucky joined hands to torpedo Mr Bernanke's nomination. 'A vote for Ben Bernanke is a vote for bailouts,' Senator Bunning said. 'If you want to put an end to bailouts and send a message to Wall Street, this vote is your chance,' he stressed, echoing the same argument made by Senator Sanders.
And while conservative critics bash Mr Bernanke for allying himself with the Obama administration by continuing to promote loose monetary and fiscal policies that are producing huge deficits, Mr Bernanke's detractors on the left are blaming him for not doing enough to get the financial institutions to dispense more credit to Main Street.
They are also worried that in response to pressure from Wall Street and inflation hawks, the Fed will soon start raising interest rates, a move that could retard the economic recovery and certainly hurt middle-class and poor Americans.
But notwithstanding all the Bernanke bashing that has been going on in Washington in recent months and the speculation in the media that he might not be reconfirmed as chairman of the Federal Reserve, most of the political insiders discounted these dire predictions about Mr Bernanke's fate.
Ironically, it was the concern among Republicans that Mr Bernanke's re-nomination would not be approved by the Senate - and that President Barack Obama would end up nominating a more liberal and partisan figure for the job (Larry Summers, director of Mr Obama's National Economic Council, and Christina Romer, chair of the Council of Economic Advisers, were mentioned as possible candidates for the job - that may have led 22 Republicans (in addition to 48 Democrats) to vote for the embattled Fed chairman (12 Democrats and 18 Republicans voted against Mr Bernanke).
But last week's win leaves Mr Bernanke in a very difficult position. Investors at home and abroad are going to wonder whether the weakened Fed chairman facing pressure from the White House and the Democrats will have the power and will to slow down the monetary expansion while Republicans are going to press him to challenge the costly fiscal policies of Mr Obama.
And Mr Bernanke, who has called for providing the Fed with more regulatory authority over the financial industry, is going to face strong opposition from both Democratic and Republican lawmakers alike who want to reduce the autonomy of the central bank through regular audits of its monetary policy. Legislation along these lines has been gaining support in the House of Representatives.
Clearly, Mr Bernanke's main challenge in the near future is going to be defending the independence of the Fed and its monetary policymaking.
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