The case for reappointing Bernanke: John M. Berry

-- John M. Berry is a guest columnist, the views expressed are his own. He has covered the economy for four decades for the Washington Post and other publications and is widely regarded as the dean of Federal Reserve reporters. --

By John M. Berry

WASHINGTON (Reuters) - The reappointment of Ben Bernanke to another four-year term as chairman of the Federal Reserve should be a no-brainer for President Barack Obama.

Bernanke and his colleagues have courageously used every bit of authority available to them to limit the damage to the U.S. economy from the worst financial crisis since the Depression.

True, they weren't able to prevent a severe recession with unemployment close to 10 percent, but their extraordinary moves to unlock frozen credit markets and flood the system with money appear to be turning the economy around.

Obama and his principal economic advisers have praised Bernanke's actions. In turn, the Fed chairman strongly backed the administration's effort to get a reluctant Congress to pass a much needed stimulus package of tax cuts and spending increases.

A failure to reappoint Bernanke would only embolden the small-minded members of Congress who don't like what the Bernanke Fed has done, or the $700 billion TARP, or this year's stimulus bill.

Those critics, like Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, seem not to understand how much worse financial markets and the economy would be if all those actions hadn't been taken.

Or maybe they do understand but don't have the political courage to explain to their constituents that the point of the bailouts wasn't to save big banks and their employees' big bonuses. It was to save the financial system and the jobs of tens of millions of American workers.

As Bernanke put it this weekend, "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." And he stressed, "It wasn't to help the big firms that we intervened."

Clearly the Fed has taken some major risks, including with taxpayer money, but there was no way to respond effectively to the crisis without accepting those risks. Even if hundreds of billions of dollars were eventually lost -- and there's no sign that will be the case -- it would still be worth it.

Without a functioning credit market, the U.S. economy would have remained mired in recession or worse. Instead, there is growing evidence a recovery may be at hand, though it isn't clear how strong it will be.

One criticism of Bernanke is that he did not see the danger in the subprime mortgage market, though he had lots of company on that score.

But bursting the housing bubble would have required large, sustained interest rate increases just as the economy was finally growing strongly for the first time since the 2001 recession, something for which there would have been virtually no political support.

Were Obama not to reappoint Bernanke before his term as chairman ends January 31, he couldn't help but appear to be bowing to the chairman's critics and repudiating the Fed's policies -- which to a significant degree are his own as well. What explanation could he offer?

Surely not just that Bernanke is nominally a Republican. Former Fed Vice Chairman Alan Blinder, a liberal Democrat, said he had worked with Bernanke for years on the Princeton University economics faculty without realizing that Bernanke was a Republican.

Blinder is one of three people prominently mentioned as a possible replacement for Bernanke. Yet in newspaper columns and other statements Blinder generally has praised the Bernanke Fed's aggressive stance during the financial crisis and, if he were chairman, presumably would continue those policies as long as they are needed.

That's also true of the other two mentioned, former Treasury Secretary Lawrence Summers, who is now Obama's principal economic adviser in the White House, and Janet Yellen, president of the San Francisco Federal Reserve Bank and formerly a member of the Fed's Board in Washington.

All three are highly regarded economists and Blinder and Yellen have experience as top policymakers at the central bank. Any of them could do a credible, perhaps outstanding job as Fed chairman.

But what would Obama gain by naming one of them to replace Bernanke, who has earned the respect and confidence of just about everyone at the Fed with his collegial approach to policy setting and his even tempered demeanor even when under extreme pressure?

The president would gain nothing and possibly could lose a lot.

(Editing by Martin Langfield)