Keeping Bernanke adds clarity to cloudy outlook

Wall Street sees Bernanke as a known entity who designed an aggressive financial rescue plan and is best suited to dismantle it when the time comes. While his crisis fighting methods may not have been perfect, they seem to have succeeded in averting a serious economic collapse.

Bernanke’s critics contend he should have recognized housing and credit bubbles earlier this decade and taken early steps to deflate them. When the financial upheaval began two years ago, he was slow to see that souring subprime mortgages could touch off a global credit crisis.

Eventually he earned the respect of financial markets by tackling the meltdown with every available central bank tool — and a number of new ones he crafted on the fly.

Obama will reappoint Bernanke for a second term as chairman of the Federal Reserve on Tuesday, a senior administration official said on Monday.

Poll after poll showed Wall Street economists overwhelmingly favored reappointing Bernanke. Indeed, had Obama chosen to replace him — particularly with White House economic adviser Lawrence Summers — the market reaction probably would have been decidedly negative.

“He’s viewed very positively: he saved us from depression and the economy is recovering,” said Jim Awad, managing director at Zephyr Management in New York.

Political Fallout

In Washington, however, Bernanke’s popularity is nowhere near as high, particularly on Capitol Hill where many lawmakers think the Fed under his leadership overstepped its authority and blurred the line between monetary and fiscal policy.

Bernanke was at the center of controversial decisions to put U.S. taxpayer money at risk in arranging the fire sale of failing investment bank Bear Stearns in March 2008, allowing Lehman Brothers to fall into bankruptcy in September 2008, and then committing tens of billions of dollars to prop up insurer AIG just days later.

These decisions rankled lawmakers in both political parties, and have put the Fed in an uncomfortable spot on Capitol Hill, where the U.S. Senate has the final word on whether or not he wins a second term.

While he is almost certain to win Senate backing for another term, the hearing the Senate Banking Committee will hold on his renomination will likely revive criticisms of his tenure.

Hundreds of lawmakers have signed their names to a bill that would subject the central bank to full auditing, which could include after-the-fact reviews of its decisions on whether to raise or lower interest rates.

Bernanke has objected strongly to that bill, saying it would restrict the Fed’s ability to do its job.

Policy Implications

Bernanke’s job won’t get any easier from here.

While the worst of the financial crisis appears to be past and most economists think the recession is ending, he still must finesse the tricky task of undoing all the emergency lending programs and returning interest rates to more normal levels without disrupting financial markets.

If the Fed reverses course too quickly, it could upend the economy just as it is beginning to recover. Move too slowly and all the emergency cash the Fed pumped into the economy could trigger a nasty bout of inflation.

Obama appears to have confidence in Bernanke’s ability to get it right. So do investors, for now.