Bernanke’s 2nd term could be as tough as first

The Black Monday stock-market plunge that greeted Alan Greenspan in 1987 was a breeze compared with the hurricanes that confronted Ben S. Bernanke during his first term as Federal Reserve chairman.

In fact, if you added up all the crises that Mr. Greenspan faced during his 18 years as Fed chairman — Black Monday, the savings and loan blowout, the Mexican peso debacle, the Asian financial meltdown, the implosion of Long-Term Capital Management and the Sept. 11, 2001, terrorist attacks — it would still be tough to approach the challenges that Mr. Bernanke has been forced to address.

Amid the worst financial meltdown since the 1930s, more than a few sober-minded economists, including Mr. Bernanke himself, feared that the crisis could have led to “Great Depression 2.0.”

So far, economists say, the danger of a depression has been averted.

At his reconfirmation hearing last week, Mr. Bernanke pointed to the “central role” the Fed has played in avoiding an “outcome that could have been markedly worse.” Those actions, which included unpopular bailouts of Wall Street firms whose excessive risk-taking contributed to the crisis, “were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity,” Mr. Bernanke recently noted.

Nonetheless, the U.S. economy has suffered its deepest recession since the 1930s, and although an economic recovery appears to be emerging, “We still have some way to go before we can be assured the recovery is self-sustaining,” Mr. Bernanke told the Economic Club of Washington on Dec. 7.

The economy expanded at a 2.8 percent annual pace during the July-September period, and the unemployment rate declined from 10.2 percent to 10 percent last month. But economists, including those at the Fed, expect the jobless rate to remain at high levels through the end of 2010.

In the likely event that the Senate votes to confirm Mr. Bernanke for a second term, he and the Federal Reserve will continue to face huge challenges on the political front, as well as in the economic arena. Those challenges derive directly from the unprecedented actions Mr. Bernanke and the Fed have undertaken since the summer of 2007 to address the economic crisis.

“There are a number of major initiatives afoot in the Senate and the House that could potentially create major problems for Bernanke in the future,” said Brian Bethune, chief U.S. economist for IHS Global Insight.

Many in Congress blame the Fed for failing to exercise its regulatory and supervisory powers before the crisis erupted, especially in the mortgage markets.

Congress is now moving to remove the Fed’s powers over consumer protection and create an independent consumer agency. Congress may also drastically reduce the central bank’s role as a systemic regulator. Mr. Bernanke strongly opposes both actions.

Also on the political front, Rep. Ron Paul, Texas Republican, secured more than 300 co-sponsors for his bill to empower a congressionally approved agency to “audit” the Fed’s monetary policy decisions involving interest rates. Mr. Bernanke argues that such political pressure would compromise the Fed’s credibility and independence. But the House Financial Services Committee recently adopted Mr. Paul’s bill as an amendment to its regulatory-reform bill.

“Bernanke made a strong case against both a Senate proposal to strip the central bank of its authority to supervise banks and a House proposal to audit the central bank’s interest-rate decisions, contending such proposals would reduce the Fed’s ability to make monetary policy and ultimately harm the economy,” said Joseph Brusuelas of Moody’s Economy.com.

Mr. Bernanke was upbraided about the Fed’s performance before the crisis erupted.

“For many years I held the Federal Reserve in very high regard,” Sen. Richard C. Shelby, Alabama Republican and ranking member of the banking committee, said at the confirmation hearing. “I fear now, however, that our trust and confidence were misplaced.”

Story Continues →