By Scott Lanman
Nov. 6 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's tack toward Democratic positions before the election may help ensure the government has a bigger role in the economy after Barack Obama becomes president.
The Fed chief offered political cover for a broader fiscal stimulus than even Democratic advocates first proposed, after pledging last month to help craft measures to increase credit. Bernanke's call last week for a permanent government presence in the home-loan market also reduced the likelihood of a full privatization of mortgage financiers Fannie Mae and Freddie Mac.
The shift by Bernanke, a Republican appointed by outgoing President George W. Bush, means he's unlikely to be at odds with Obama when he takes office in January. It may also aid his chances of reappointment when his term ends in January 2010.
``Bernanke has been commenting on and offering more support to several different initiatives,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who formerly worked as a congressional economist. ``That's a jumping-off point for Congress to say, OK, the chairman's on board, we don't have this big intellectual opposition to what we're doing.''
Democrats expanded their House and Senate majorities and Obama surged to victory Nov. 4 after voters demanded a change in direction in the aftermath of the worst financial crisis in seven decades.
Legislative Priorities
Democratic priorities include passing the second fiscal stimulus package this year and, next year, revamping the regulation of financial companies. Lawmakers plan to reconvene in less than two weeks for a so-called lame-duck session to consider measures to stimulate an economy that last quarter contracted the most since the 2001 recession.
Bernanke, 54, shunned recommendations on specific tax and spending policies during his first two years as chairman, telling congressional members it was up to them to decide on fiscal matters.
As the economic and financial turmoil worsened this year, the former Princeton University economist and Great Depression scholar advocated an increasing role for fiscal policy and used the Fed's balance sheet to play a larger role in financial markets.
``He's been a responsible Fed chairman, and I think it would be disruptive both in terms of message and substantively to replace him,'' House Financial Services Committee Chairman Barney Frank said in an interview yesterday.
`Happy' to Cooperate
Bernanke told the House Budget Committee in an Oct. 20 hearing that ``the Federal Reserve is more than happy to try and work with'' lawmakers on measures to stimulate lending. ``Congress might consider guarantees or partial guarantees, it might consider direct lending, it might consider tax credits,'' he said.
It was the Fed chief's second endorsement of a fiscal stimulus, after he backed what became a $168 billion package enacted in February. Bernanke also ``strongly'' endorsed the government's September seizure of Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans.
Last week, Bernanke said the market for mortgage-backed bonds will require some form of government support through either guarantees or insurance programs. He also said Fannie and Freddie should retain some form of federal support and oversight even if they are transformed to become private companies.
`True to His Word'
Meantime, Bernanke has set up more than $1 trillion of Fed loan programs to flood the financial system with cash. He also lowered the Fed's benchmark interest rate to 1 percent, matching a 50-year low. Senate Banking Committee Chairman Christopher Dodd praised Bernanke two weeks ago for being ``true to his word'' to ``use all of the tools at his disposal.''
``You can't fault the Fed for being asleep at the switch'' in recent months, said Tom Gallagher, head of policy research at International Strategy & Investment Group Inc. in Washington.
Dodd and Frank weren't always so positive toward Bernanke. Frank clashed in past years with the chairman over the central bank's tendency to play up inflation concerns, while both he and Dodd criticized the Fed in early 2007 for failing to tackle lax subprime lending practices.
``Some of the same people have raked him over the coals,'' said Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York and a former Fed researcher. He faults Bernanke for the economic forecasts published in July, which predicted a fourth-quarter U.S. jobless rate of 5.5 percent to 5.7 percent; it was 6.1 percent in September.
Much will depend on how the economy and the markets pan out next year. History is also on Bernanke's side. No first-term president has replaced a sitting Fed chairman in 30 years.
``Bernanke is held in credible regard,'' said Jim Leach, a former Republican chairman of Frank's committee who is now at Harvard University's Kennedy School of Government in Massachusetts. ``The professionalism of the Fed, not its liberalism or conservatism, is what Capitol Hill is looking to.''
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
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