Recovery might be at risk in Bernanke vote
Associated Press
Monday, January 25, 2010

WASHINGTON --- A defeat of Federal Reserve Chairman Ben Bernanke's quest for another four-year term could raise the risk of a "double dip" recession if political jousting over a successor were to drag on for months, economists warn.

But Bernanke's prospects appeared to brighten Sunday, with three more senators, including Republican leader Mitch McConnell of Kentucky, predicting he'll be confirmed. A vote is expected this week.

Still, the chance of Bernanke's defeat has unsettled Wall Street, contributing to last week's 4 percent loss by the Dow Jones industrial average, its worst performance in 10 months. If Bernanke were rejected, uncertainty over a successor would further roil global markets, at least in the short run.

Anxiety, along with sagging investments, could cause consumers and businesses to cut spending. Joblessness, already at 10 percent, could worsen. And the recovery might fail.

Economists who fear a double-dip recession -- in which the recovery would collapse into another recession -- regard it as a worst-case scenario. But they don't rule it out, either.

Lynn Reaser, the chief economist for the National Association for Business Economics, is among them. She sees the likelihood of a double-dip as less than 50 percent.

"It will become more acute if there are delays in confirming a successor," she says, noting that the economic recovery remains fragile, with spending still weak, credit tight and job creation scarce.

"All the political angst over the confirmation couldn't have come at a worse time for the economy," Reaser says.

A BERNANKE LOSS would heighten uncertainty about Fed policies on interest rates and stimulus measures. In part, that's because Bernanke devised the unconventional supports for the economy and likely knows how best to safely wind them down, notes Edward Yardeni, the chief investment strategist at Yardeni Research.

But even more worrisome for the markets and the economy would be if Bernanke's Senate foes are seen as having meddled with the Fed's independence for political reasons.

The dollar would likely fall. Higher interest rates and inflation fears would follow, stoked by uncertainty and shaken confidence. And all that would probably unsettle consumers and business, making them less likely to spend, hire or invest.

Bernanke's confirmation, which had seemed ensured, was suddenly thrown into doubt last week as resistance grew among some Senate Democrats. And some senators who had supported Bernanke said they were now undecided.

The Fed chief's term expires Jan. 31. If Bernanke isn't confirmed by then, Vice Chairman Donald Kohn is expected to run the central bank temporarily.

Bernanke is widely credited with helping to prevent the Great Recession from turning into a second Great Depression. But his support of Wall Street bailouts has angered Americans struggling with 10 percent unemployment and soaring home foreclosures.

BACKLASH FROM Democrats over Bernanke's role in the bailouts intensified after Democrats suffered a stunning upset in the Massachusetts Senate race. Democrats are eager to appear allied with ordinary Americans disgusted with Wall Street's excesses.

Higher interest rates that could follow a Bernanke defeat would make it costlier for the government to pay down its record-high debt. Right now, low rates are allowing the Treasury Department to manage its debts.

If investors think the White House and Congress will choose a successor who would keep the Fed pumping money into the economy and hold interest rates at record lows for too long, it would erode trust in the Fed's oversight of the economy.

Continued low rates would please many ordinary Americans. But it would risk creating new speculative bubbles and stoking inflation.

Some economists say that in long run, they most fear that global investors would see a rejection of Bernanke as setting a precedent for Congress to intrude on "monetary policy." That refers to the Fed's decisions on whether and when to adjust rates to influence economic activity, inflation and employment.

The Fed's independence in monetary policy is vital to public confidence in the central bank. If it's undermined, the Fed could lose its credibility on Wall Street, which would fan inflation pressures and send up interest rates, choking the economic rebound.

"Do we get to the point where instead of having an independent Fed chairman who keeps his hand on the wheel and does what is right for the economy, we have a Fed chairman spinning the wheel at the behest of Congress?" says Peter Morici, an economist at the University of Maryland.

Speaking on Sunday talk shows, Senate Republican leader McConnell and Sen. Dick Durbin of Illinois, the No. 2 Senate Democrat, predicted the Senate would approve Bernanke's confirmation. Over the weekend, President Obama phoned Senate allies and was told Bernanke's approval is likely.

The Fed chief's supporters need 60 votes to stop opponents from blocking confirmation, though the confirmation vote itself requires only 50 votes. Sen. Bernie Sanders, an independent liberal from Vermont, and Republican senators Jim Bunning of Kentucky, Jim DeMint of South Carolina and David Vitter of Louisiana are leading an effort to block confirmation. All told, about a dozen senators have indicated they'll vote against Bernanke.

CONFIRMATION PREDICTED

Senate Republican Leader Mitch McConnell said Sunday he expects Ben Bernanke to be confirmed, putting the second term of the Fed chief on more solid ground after rising speculation in recent days. "He's going to have bipartisan support and I would anticipate he will be confirmed," McConnell, R-Ky., said on the NBC show Meet the Press.

McConnell declined to say how he would vote, but the view from the GOP's highest-ranking member in the Democratic-controlled Senate could help restore Wall Street's confidence in steady leadership at the U.S.'s central bank.

Sen. John McCain, R-Ariz., said he's "leaning against" Bernanke's confirmation.

"He was in charge when we hit the iceberg and he should be held accountable," McCain said on the CBS show Face the Nation.

White House adviser David Axelrod said Sunday on CNN President Obama remains "confident" Bernanke will be confirmed.

On Saturday, Sen. Judd Gregg, R-N.H., and Sen. Christopher Dodd, D-Conn., predicted in a joint statement Bernanke would be reappointed.

No Fed chairman has been rejected by the Senate.

The most "no" votes cast against a Fed chairman was Paul Volcker in 1983. The count: 84-16.

-- Edited from wire reports

From the Monday, January 25, 2010 edition of the Augusta Chronicle
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