The nomination, widely expected and supported by Wall Street, was a shrewd political move by President Obama, not only to draw attention away from his problems concerning the healthcare reform bills in Congress and the worsening budget deficit forecasts, but also to avoid the risk of unsettling still uneasy financial markets by nominating someone else. Although Mr. Bernanke is expected to be confirmed by the Senate, the confirmation hearings will focus on the controversial performances of Mr. Bernanke and the Fed in their role in the onset and management of the global financial crisis.
The Fed has come under increasing scrutiny, first for its role in either causing or not preventing the crisis, and second for its role in managing the crisis. The debate on the role of the Fed not only in making monetary policy but also in regulating the financial sector has now become only more heated as the crisis has eased and the fear of another Great Depression has vanished. As for the outbreak of the crisis, the Fed is blamed for its loose monetary policies in fueling the housing bubble that led to the subprime mortgage meltdown, which in turn triggered the financial crisis. The Fed is also blamed for not puncturing the bubble once it started to develop. Finally, the Fed is blamed for its failure as a financial regulator. As for its role in managing the crisis, the Fed is blamed for its initial sluggishness in containing the crisis, by misdiagnosing the bank insolvency problem as a liquidity shortage problem, and the lack of transparency in the increasingly aggressive and unorthodox actions that it took once it realized the full magnitude of the crisis. These actions encompass both its monetary policies and its financial sector bailouts.
After lowering the federal funds rate to practically zero, the Fed resorted to quantitative easing -- buying a wide variety of potentially risky private financial assets in attempt to support their prices and to increase the money supply. This bloated its balance sheet to over $2 trillion. Quantitative easing is feared, especially by those on the right, for its potential to cause runaway inflation. The worry is that the Fed lacks either an exit strategy from its monetary profligacy or the will to timely execute that strategy. Its financial sector bailouts, such as the gunshot merger of Merrill Lynch with Bank of America, are criticized, especially by those on the left, for arbitrariness and secretiveness as well as for transferring wealth from taxpayers to equity and bond holders of troubled financial institutions. The Fed is also blamed for compromising its independence by working too closely with the US Treasury in the bailouts and trying to keep yields on government bonds low as the federal budget deficit explodes. The deficit, projected at $1.58 trillion, will reach 11.2 percent of gross domestic product (GDP) this fiscal year, the highest level since 1945. Last week, the White House forecast $9 trillion in additional debt over the next decade, which will double the national debt to GDP ratio to 82 percent by 2019.
The criticisms of the Fed are also directed at Mr. Bernanke since he was an influential member of the Fed's Board of Governors during 2002-2005, when the seeds of the crisis were sown, and has been its chairman since 2006. Those who subscribe to those criticisms have thus questioned the re-nomination of Mr. Bernanke as chairman. His re-nomination has been compared to “paying a plumber all over again for repairing pipes that he fitted after they have flooded your home” by The Economist. Also, as Stephen Roach wrote in the Financial Times, “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure.”
Mr. Bernanke, eager to redeem himself and clinch his re-nomination as chairman, unabashedly went on a publicity campaign in recent months. He hired a veteran public relations expert to brush up the image of the Fed. He appeared on TV, giving interviews on the CBS program “60 Minutes” and participating in a town-hall style forum on PBS. He wrote an op-ed piece in The Wall Street Journal. His self-congratulatory speech titled “Reflections on a Year of Crisis,” given on Aug. 21 at the Federal Reserve Bank of Kansas City's annual economic symposium in Jackson Hole, Wyoming, during a high-level international meeting of central bankers and economists, dwelled on the Fed's success at managing the crisis but did not accept any responsibility for it. (European Central Bank [ECB] President Jean-Claude Trichet, however, in his speech titled “Credible Alertness Revisited,” subtly criticized the Fed's policies prior to the onset of the crisis.)
Many in Congress oppose the financial regulatory reform proposals of the Obama administration that would enhance the power of the Fed (see my columns “The Obama Financial Regulatory Plan (1) and (2), June 22 and 23). The Fed, which is perceived to have bailed out Wall Street but not Main Street, is unpopular with the US public, which questions the Fed's institutional integrity. According to a recent Gallup poll, only 30 percent of the respondents praised the Fed for doing an excellent or good job, down from 53 percent in 2003. The Fed's rating was the lowest among the nine federal government agencies rated, even lower that the Internal Revenue Service (IRS). The book “End the Fed” by Ron Paul, a Republican member of the House of Representatives, due out next month already ranks 36th on Amazon.com's Top 100 Bestsellers book list. Mr. Paul has introduced a bill, the Federal Reserve Transparency Act of 2009, in the House to give the Government Accountability Office (GAO), the congressional watchdog, the power to audit the Fed. The bill, with strong bipartisan support, already has 283 co-sponsors in the House. A similar bill in the Senate has 23 backers. According to a recent Rasmussen Reports survey, 75 percent of respondents favored auditing the Fed and making the results public. In an interview last week with The Wall Street Journal, the top question proposed and voted online by 1,134 participants posed to Treasury Secretary Timothy Geithner was “Why has the Fed never been audited?”
In its critical editorial of the Fed and Mr. Bernanke, the day after his nomination for a second term, The Wall Street Journal wrote “Our hope for a second term is that perhaps he has learned enough on the job to avoid repeating the mistakes of the last decade.” Let's hope so. If I were President Obama, however, I would worry that as a more experienced and confident Fed chairman, Mr. Bernanke could decide to tighten the monetary spigot before the 2012 presidential election prior to the economy's full recovery.
Benzer Haberler 
