President Obama’s decision to reappoint Federal Reserve Chairman Ben Bernanke was met with almost universal ambivalence.  Anyone would think that the selection of the nation’s top economic manager in the midst of a recession isn’t such a big deal.  Why the overwhelming silence?

One explanation might be that Bernanke was first appointed by Republican President George W. Bush.  Republicans can hardly criticize and oppose their own man. 

Some Democrats might say this was a politically astute move by the President.  If the economy continues to worsen – as it surely will given the profligate spending of his Administration – it gives him someone on the other side to hold to account. 

"What we need are some new laws of economics..."

Pragmatists on Wall Street, meanwhile, value the continuity afforded by the President’s nomination.  Bernanke is a known quantity, which reassures financial markets, making his reappointment a stabilizing factor in difficult economic times. 

But while all this helps explain why the announcement caused barely a ripple, there is an underlying irony that should give cause for pause.  Neither Barack Obama or John McCain had any serious background in economic issues, so even before November’s election the United States was doomed to be led by a politician who would have few insights on how to navigate through a recession.  At least voters can judge presidential candidates that are former Governors on their ability to maintain fiscal responsibility and manage government budgets.  Legislators tend to be spenders. 

So this appointment was always going to be made by an economically challenged President.  Barack Obama’s rush to borrow money, take banks and car companies into public ownership and, soon, to increase taxes, can be criticized on numerous grounds.  But he is still the person who gets to nominate the Fed Chairman. 

Economic historians may look back at this moment with some surprise, if not bewilderment.  As a Fed Board member, Bernanke was closely associated with the easy money policies that fueled the damaging house price bubble.  Even now, Bernanke has not admitted this was a mistake – which may mean that he doesn’t believe it was. 

Macroeconomic factors did not justify his later decision as Chairman to maintain interest rates at record low levels for so long.  Given what we now know about their toxic assets, it seems certain that his objective was to provide troubled banks with a covert bail out.  The Fed reduced the cost of money, the banks failed to pass on most of the savings to borrowers and, as a result, the operating income of banks was artificially raised. 

The beauty of this approach was that it avoided a crisis of confidence in the financial sector.  And American consumers didn’t care or notice much because mortgage rates were still low compared to historic levels.   

But the problem was that it didn’t work.  It just delayed the day of reckoning. 

Bernanke’s gamble was that he could keep interest rates low enough, for long enough, for banks to improve their balance sheets.  Ultimately, a crisis was not avoided because Congress had mandated so much loose money through its consumer lending arms, Fannie Mae and Freddie Mac. 

Meanwhile, the reduced value of the dollar damaged American businesses and also hit consumers by raising the price of commodities such as oil.  So even before TARP, American consumers had subsidized the banks, at the Fed Chairman’s behest, without even knowing it.  Call it Bernanke’s “secret gas tax”. 

Add to all of this unemployment increasing to 9.4 per cent, a record federal budget deficit of nearly $2 trillion per year, 416 banks on the government’s endangered list, stagnating corporate revenues, a credit squeeze on small businesses and one has to wonder how bad things would have to be for Bernanke to lose his job. 

With his easy money and bail out pedigree, Ben Bernanke has shown himself to be pliable to interventionist politicians and Wall Street.  This may make him a good choice for a President who is taking over large parts of the economy but, in the longer term, this type of cozying up does not work to the advantage of the general public.  After meeting the President and being told he would be staying on, Bernanke suddenly discovered that the U.S. and global economy “appear to be leveling out.”  Hmm. 

With the President’s inflationary policies set to damage the economy, serious concerns remain about when he will act on interest rates.  Politics dictates that there will be no belt tightening before his Senate confirmation.  Even then, Bernanke will be expected to toe the Democrat line on economic issues, which means waiting until inflation really starts picking up before raising interest rates. 

At that point, it probably will be too late to avoid large, sudden and economically damaging increases in interest rates. 

With all the U.S. economy has been through, Ben Bernanke surely knows he is between a rock and a hard place.  It makes you wonder why he wanted the job at all.

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