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Nervous? Take a Bernanke and Call Me in Four Years
Bernanke’s reappointment will reassure a nervous financial market.
So we have Ben Bernanke leading the Federal Reserve now for another four years at least.
The decision to reappoint Bernanke as Fed chairman takes one of the many to-do items off Barack Obamas plate hes still got health-insurance reform, the job market (probably a second stimulus package), the housing market (probably a second home-rescue plan, one that will force the banks to participate) and Afghanistan to think about.
Its hard to argue with the Bernanke reappointment. Sure, the chairman had gotten on peoples nerves for campaigning so openly for reappointment. Hes supposed to be an apolitical figure. And he still has to be confirmed by the Senate where there will be a skirmish, but it wont be much more than a skirmish. Obama said it best in announcing he was going to keep Bernanke in the job on account of his background, his temperament, his courage and his creativity.
Courage? Well, it does take chutzpah to want that job. And Bernanke is unmistakably level-headed. Hes also pulled a couple of rabbits out of the hat and his academic and historical depth are pretty good he isnt swimming in charisma, but his speeches are dazzling in their detail.
As many commentators noted yesterday on news of the reappointment, its sensible also because it makes no sense to change horses in midstream, especially while the rivers still raging. As Bernanke himself is quick to point out, we arent out of the woods yet: The rate of job loss remains high, and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.
Everybodys still nervous, so in the short term, the effect of this reappointment is calming.
Long-term, its also potentially calming, especially if your brain produces endorphins when you imagine a better-regulated financial market. Bernanke is fully on board with Obamas call to tighten the government reins on big banks, insurance companies, hedge funds and the like. What we can expect in a Bernanke second term is laid out pretty well in his testimony to Congress on July 21.
A couple of notable excerpts, this one on credit-default swaps: One important step would be to get the majority of them standardized and traded on a central counterparty or an exchange, which would eliminate the risk that the seller of the CDS would not be able to make good, which is what happened with AIG, for example.
And one regarding overpaid CEOs: The Federal Reserve is going to be proposing later this year guidance on executive compensation, which will attempt to clarify that compensation packages should be structured in such a way as to tie reward to performance and to be such that they dont create excessive amounts of risk for the firm.
Theres also this passage, which isnt very detailed but lets it be known that Bernanke and his many powerful allies in Washington will be up in your grill and not necessarily on your side going forward if youre a financier of any heft or influence. The mantra is that the new Washington is now interested in the financial system as a whole and not just the safety and soundness of individual institutions.
Translation: Rescues are passé. If youre a bank, lending institution or insurance company that gets into serious trouble, youre going to be thrown under the bus this time, absorbed for the greater good.