There is a growing belief that Federal Reserve Chairman Ben Bernanke, who was nominated to head the Central Bank for a second term by President Obama last August, will not receive the 60 senate votes required for re-appointment.
The increasing possibility of a “no” vote on Bernanke, a Republican appointed by President Bush in February 2006 to succeed Allan Greenspan, is likely send global equity markets deeper into the tailspin they’ve been in since President Obama announced his plan to reign in proprietary trading at the nation’s largest commercial banks. It also would likely cause the dollar to rise in a wave of risk aversion against the euro, pound, Australian and New Zealand dollars that would be accompanied by a move into Treasuries and away from commodities. It’s the type of Major Fundamental Event that will have the market moving in a herd mentality (negative) until further notice.
No time has been set aside for the vote as of yet, but Bernanke’s term as Chairman is due to expire on January 31. Bernanke has a separate term as a Fed Governor, which doesn’t expire until 2020.
From an economic perspective, Bernanke has several very important marks against him. As a member of the Federal Open Market Committee (FOMC), he participated in the Fed’s mistake of keeping interest rates too low for too long a period. The Fed didn’t begin raising interest rates from 1.00% until early 2004, over two years after the 2001 recession (which was mild), ended in November 2001. They raised rates too slowly (25 bps increments over 13 meetings through June 2006) once the tightening cycle was begun. The Fed failed to adequately supervise the banks as they went on a credit binge. But most damaging of all was Bernanke’s repeated assessment during 2007 that the sub-prime crisis would be contained.
The economic arguments, however, pale in comparison to what’s happening politically. The election last Tuesday of Republican Scott Brown in Massachusetts for a U.S. Senate seat the Democrats had held since former president John F. Kennedy was first elected to it in 1953 is being viewed by politicians up for mid-term elections as the beginning of a populist revolt against the government’s failed response to The Great Recession.
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Unemployment has remained painfully high as Wall Street bankers are once again earning record bonuses, and the perception is that the Government and Federal Reserve have come to the aid of Wall Street at the expense of everyday workers, whose tax dollars went a long way in preventing an economic collapse.
The facts are that while Government and Federal Reserve policies over many years did help to inflate the credit bubble, they also helped avert what would have been a complete collapse of the economic system and a second Great Depression. But proving a negative is difficult in the face of high unemployment and skyrocketing foreclosure rates while the rich get richer and working people continue to suffer.
The Republicans have a vested interest in seeing economic conditions remaining poor because it will be much easier for them to regain power if voters remain dissatisfied with the job that the Government, which currently is under rule by the Democrats, is doing.
But Democrats concerned about being caught up in the populist backlash are also coming out against Bernanke’s re-appointment in greater numbers. Senator Barbara Boxer (D-Ca.) affirmed her intention to vote against Mr. Bernanke. While saying she said she had “a lot of respect” for him and offering praise for what he’s cone toward preventing the economic crisis from getting even worse, she also said it was “time for a change,” and for “Main Street to have a champion at the Fed.”
“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.