Bernanke Stays As Fed Chief, Obama Lie-In Cancelled

Ben Bernanke is getting four more years at the head of the Federal Reserve, the US equivalent of the Bank of England – Obama is going to announce the reappointment at 9am his time today from his summer retreat in Martha’s Vineyard. Getting up for 9am when you’re on holiday? Couldn’t he do this in between holes at the crazy golf course this afternoon, or maybe while looking blearily up from a sun-lounger before gesturing for Robert Gibbs to get him another mojito? 

Anyway, the move has been widely applauaded, but the Bernanke love has been building for a couple of months now. First Nouriel Roubini, he of “I told you this was going to happen” fame, voiced his support for the Fed chief: “Mr. Bernanke’s decision to keep interest rates low and encourage lending has, for now, averted the L-shaped near depression that seemed highly likely after the financial collapse last fall”. Then fellow beard idol Paul Krugman also made kissy sounds towards him: “I think Bernanke has done a really good job… it’s really very hard to see how anyone could have done more to stem this crisis.” Now loads more economists are queuing up to anoint Bernanke – “it’s good news for the Federal Reserve. It’s good news for the country. It’s a great choice”, says Richard Berner of Morgan Stanley; “Bernanke is a true prudent man who calls them as he sees them, and knows the ins and outs of policymaking… If he can pull off this recovery that still needs nurturing, he could well go down as one of the greatest Fed Chairmen in history”, said Christopher Rupkey of Bank of Tokyo.

So what’s he done right to earn all this? Well, he’s been very active in keeping the money machine churning around, pouring cash into the system to keep banks confident enough to keep lending and trading, and stimulating borrowing by lowering interest rates (as much as it can be stimulated by doing so amid a recession). He’s also acknowledged the dangers of inflation created by having too much money in the system and seeing it lose value, and has said that he’ll pull back Fed support once the economy picks up to a safe level.

There are some who are nevertheless still annoyed at the way Bernanke dropped the ball during the years when Alan Greenspan was Fed chief – Bernanke also failed to spot that having a housing and construction market going at far more than full tilt, with subprime mortgages the icing on that particular pain-cake, would need some careful monitoring and buffering against the inevitable bursting bubble. In the words of Edward Hadas in the Telegraph today, “Those who spread kerosene should not take too much credit for putting out fires”. Still, everyone realises that while he may not be the best forecaster or long-term strategist, he knows what to do right now, and so the calls for his firing have been very few.

Politically then, this is a very safe move by the Democrats. In making Bernanke stay, there’s an air of making him atone for his past sins, sorting out the mess that he helped make in the first place. It also gives the signal that the Democrats are steady and secure, are willing to overlook party differences in the name of America, and retrospectively condones the action they’ve already taken. Plus, if a Democrat chair came in and the recession continued to bite, there’d be easy points to win for the Republicans, regardless of quite how much the recession was tied to Fed activity.

So Bernanke continues to steer America through the recession slalom, and Obama can go back to bed and try to forget, for just one week, the vast healthcare shitstorm that’s looking like hanging over his entire first term and beyond. Good luck old chum.

Posted by Ben Beaumont-Thomas in Hot Money | August 25, 2009 12:27PM |