By Michael McKee and Alison Sider
Aug. 11 (Bloomberg) -- Ben S. Bernanke’s success in averting another U.S. depression means President Barack Obama will probably nominate him for a second term as Federal Reserve chairman, according to lawmakers, economists and investors.
The need for continuity in managing the economy and Wall Street’s desire for consistency in monetary policy may leave Obama little choice when Bernanke’s term as chairman expires Jan. 31. While White House National Economic Council Director Lawrence Summers has been a contender, there’s little sign of any move to install him at the Fed.
Bernanke’s “judgment, his advice, his competence, really made a significant difference,” said Jack Reed, the No. 3 Democrat on the Senate Banking Committee, which oversees the Fed. “Frankly, I haven’t heard any arguments” for putting Summers in the job, he said.
“I don’t want to say Bernanke’s Teflon at this point, but the market would be very, very disturbed if he weren’t reappointed,” said Dan Alpert, a managing director of New York- based investment bank Westwood Capital LLC and specialist in distressed debt who has provided expert testimony in U.S. bankruptcy-court cases. “Do you replace generals in the middle of a war? And the answer is no.”
Almost 75 percent of investors surveyed in the first Quarterly Bloomberg Global Poll had a favorable view of the chairman in July. By almost a three-to-one margin, they said Bernanke had earned another four-year term.
Bernanke’s Response
Renomination would be an endorsement of the unprecedented actions taken by Bernanke, 55, to combat the deepest recession since the Great Depression. He countered the crisis by cutting the benchmark lending rate to as low as zero and repeatedly invoking emergency powers to pump more than $1 trillion into the banking system and rescue Bear Stearns Cos. and American International Group Inc.
Bernanke and his four Federal Open Market Committee colleagues, gathering today and tomorrow in Washington, may acknowledge an improvement in the economic outlook while maintaining a pledge to buy as much as $1.75 trillion of bonds, economists said.
The clearest sign yet the economy is poised for recovery came Aug. 7, when a Labor Department report showed job losses were less than forecast in July and the unemployment rate unexpectedly fell. Analysts anticipate an annual growth rate of 2 percent or faster in the second half of 2009 after the biggest drop in gross domestic product in any recession since the 1930s.
Stock Rally
Anticipating just such a turnaround, the Standard & Poor’s 500 Stock Index is up about 51 percent since a recession low on March 9.
“He’s pretty darn likely to get a second term” with the “economy starting to head in the right direction,” said Democratic Senator Jon Tester of Montana, who is also a member of the banking committee.
Tester at the same time warned that an unanticipated downturn “would hinder him in a big way.” Obama, a Democrat, may in that case see a stronger argument to replace Bernanke, a Republican appointed by former President George W. Bush.
Obama on Aug. 7 signaled that a recovery may be imminent: “We are pointed in the right direction,” he said at the White House. “We’ve rescued our economy from catastrophe.”
“Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0,” Nouriel Roubini, the New York University economist, wrote July 25 in the New York Times.
‘Depression Buff’
Bernanke, a former chair of the Princeton University economics department, calls himself a “Great Depression buff” after his research on the subject.
Removing Bernanke could complicate any Fed efforts by early 2010 to shift towards removing its emergency credit measures. There are already two openings on the seven-member Board of Governors, with the possibility of others in coming months -- 66-year-old Donald Kohn’s term as vice chairman expires in June.
Putting someone new in charge risks leaving the Fed with just three experienced governors, none of whom is an economist.
“That scares the hell out of me,” said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. Investors can react “viciously” to personnel appointments, he said.
Paul Krugman, the winner of the Nobel Prize in economics and Princeton economist who has criticized the Obama and Bush administrations for insufficient fiscal-stimulus efforts, said in an Aug. 9 interview that Bernanke had “earned the right to a second term.”
Stiglitz’s Take
Krugman’s view isn’t universal. Joseph Stiglitz, another Nobel laureate in economics and a Columbia University professor, said in a Bloomberg Television interview Aug. 5 that a replacement is “something we ought to consider,” without suggesting alternative candidates.
Stiglitz suggested the case against Bernanke includes not foreseeing the crisis, which was triggered by mortgage defaults and has resulted in $1.5 trillion in losses and writedowns for the financial system so far.
The Fed chief has acknowledged that he was too slow to recognize the implications of the developing bubble in real estate, and said the Fed didn’t adequately regulate lending practices during the boom.
It’s not clear whether lawmakers’ concerns about the central bank’s regulatory lapses would lead them to block Bernanke’s renomination; the Senate must confirm Obama’s pick. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said that while he has issues with the record, “it’s the president’s call.”
‘Astounded and Shocked’
Senator Richard Shelby of Alabama, the committee’s ranking Republican, said he’s “astounded and shocked by certain regulatory malfeasance of the Federal Reserve.” At the same time, he said of Bernanke that “I like him personally.”
Some legislators, led by Republicans on the House Oversight Committee, have raised questions about Bernanke’s actions during Bank of America Corp.’s takeover of Merrill Lynch & Co. The panel grilled the chairman in June over whether the Fed bullied executives and stepped over other regulators to assure the takeover didn’t fail and endanger financial stability.
Bernanke is the overwhelming favorite on InTrade, a Web site that lets users trade futures contracts for political outcomes. The contracts indicate 80 percent odds Bernanke will be reappointed. Summers, a former Treasury secretary who was Harvard University president until being forced out in the aftermath of conflicts with faculty members, is priced at 10 percent.
Yellen, Romer
San Francisco Federal Reserve Bank President Janet Yellen, who would be the first woman to head the U.S. central bank, is the top replacement contender according to InTrade, at 20 percent odds.
Christina Romer, who did research on monetary economics at the University of California, Berkeley, heads the White House Council of Economic Advisers -- a job Bernanke held before he became Fed chairman. InTrade doesn’t have a contract for Romer.
Bernanke remains the clear favorite among investors, said Komal Sri-Kumar, chief global strategist at TCW Group Inc., which oversees about $118 billion. “It would require some massive change in market sentiment and a deterioration in the economy for that to change.”
To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Alison Sider in Washington at asider@bloomberg.net
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