Calm in Crisis Won Fed Job

AUGUST 26, 2009

Calm in Crisis Won Fed Job
Obama Sticks With 'Bold, Persistent' Chief, but Next Term Could Be Tense
(http://online.wsj.com/article/SB125120274221856591.html)

By JON HILSENRATH, ELIZABETH WILLIAMSON and JONATHAN WEISMAN
President Barack Obama, standing in a sweaty elementary-school gym on Martha's Vineyard, nominated Ben Bernanke for a second term as Federal Reserve chairman, the culmination of several weeks of carefully orchestrated and closely guarded discussions among the president and a handful of top advisers.

The Unmoved and Unmoving Ben Bernanke
WALL STREET CRISIS


AFP/Getty Images

Bernanke in April 2008 testifies before Congress two weeks after the Fed stepped in to avert the collapse of Bear Stearns.
MORTGAGE CRISIS


Associated Press

Bernanke waits to speak to an FDIC forum in July 2008 as clouds gather over mortgage titans Fannie Mae and Freddie Mac.
RENOMINATION ELATION


AFP/Getty Images

Bernanke appears at a news conference Tuesday after President Obama named him to a second term.
"Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the-box thinking that has helped put the brakes on our economic free fall," Mr. Obama said, with the Fed chairman standing at his side. His "bold, persistent experimentation has brought our economy back from the brink."

The move to offer another four-year term to the man initially appointed by Republican President George W. Bush reflected a decision by Mr. Obama, Treasury Secretary Timothy Geithner and White House Chief of Staff Rahm Emanuel that the president's oft-cited commitment to "change" didn't apply to the Fed post.

Wall Street had been anticipating the news. The stock market rose modestly, but strong consumer-confidence and home-price numbers got most of the credit. Wall Street economists enthusiastically endorsed the decision. So did several, although not all, members of the U.S. Senate, who are expected to vote to confirm the renomination before Mr. Bernanke's term expires in January.

Since succeeding Alan Greenspan as Fed chief in February 2006, Mr. Bernanke, a 55-year-old Republican, has worked closely and harmoniously both with the Bush administration and the Obama administration to fight the worst recession since World War II. The next four years may be more tense. If the economy recovers as anticipated, Mr. Bernanke is expected to move -- probably not until next year -- to raise interest rates and tighten credit to avoid inflation. History suggests that moment will arrive sooner than many elected politicians and White House advisers prefer.

Some economists say Mr. Bernanke's reappointment could bolster the Fed's independence. If Mr. Obama had opted to replace Mr. Bernanke with a closer ally, it might have been seen in financial markets as an effort to assert more control over the central bank. Moreover, with another four-year term in hand, he may feel he has a freer hand to take actions the White House and Congress don't support.

Mr. Obama will have ample opportunities in the months ahead to shape Fed policy. He has already appointed one Fed governor, Daniel Tarullo, and has an opportunity to fill two more vacancies in the months ahead. The term of Fed Vice Chairman Donald Kohn, 66, expires in June 2010, possibly freeing up a senior position at the central bank.

Inside the White House, Messrs. Obama, Geithner and Emanuel began weighing the reappointment decision early in the summer. Lawrence Summers, the head of the president's National Economic Council and widely regarded as a rival to Mr. Bernanke, subsequently joined the conversations.

"The question was always continuity and stability and keeping us headed in what everyone believed was the best direction," said one administration official.

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Summers, Contender, to Stay Put Advice to Bernanke: Play to Your Strengths After Slow Start, Fed Chief Found His Groove Heard: Bernanke Risks Some Exit Wounds Fed Hearings to Focus on Regulatory Reform Deal Journal: Rating Bernanke the Deal Maker Noted: Bipartisan Tradition Is Alive Reactions: Economists | Lawmakers President Makes Safe Choice at Fed Econ: Move Is Early, Not Unprecedented See a timeline of Bernanke's Fed Career A look at previous Fed chairmen Journal Community
Vote: Did Obama make the right decision to reappoint Bernanke as Fed chairman? Discuss: How do you rate Bernanke's performance? Looking Back at Paul Volcker's Departure
Journal articles on former Fed Chief Paul Volcker's departure from the job in 1987:

Fed's Volcker Is Likely to Be Reappointed if He Wants, White House Aide Indicates (June 1, 1987)Volcker May Need an Appeal to Stay on Job (June 2, 1987)Nominee Greenspan Shares Volcker's Goals but Not Yet His Clout (June 3, 1987)Volcker's Decision to Quit Sealed at Reagan Meeting (June 3, 1987)Beefcake or Banking? The Choice Is Paul Volcker's on Leaving the Fed (July 13, 1987)Mr. Obama believed that Mr. Bernanke had restored some of the markets' lost confidence. Mr. Summers didn't object to the reappointment, which appeared increasingly likely as the economy healed. Mr. Geithner, who worked closely with Mr. Bernanke first as president of the New York Federal Reserve Bank and later as Treasury secretary, polled visiting chief executives about Mr. Bernanke, and heard mostly favorable comments.

Mr. Geithner asked Mr. Bernanke in late July if he would be interested in another term, without signaling that an offer would be made. Mr. Bernanke said he would.

About three weeks ago, Mr. Obama and his advisers reached a consensus that Mr. Bernanke should stay. They concluded there was no reason to delay the announcement. Getting the news out, they believed, would head off nervousness in financial markets. By announcing the renomination Tuesday, while he was on vacation, Mr. Obama overshadowed news of the growing dimensions of the deficit the federal government faces over the next 10 years, as well as continuing attacks on his attempts to restructure the health-care system.

Last Wednesday afternoon, Mr. Geithner invited Mr. Bernanke to the White House. He arrived at about 8 p.m. Mr. Obama praised the Fed chairman's handling of the financial crisis and asked him to serve another term, officials say. Mr. Bernanke accepted, and the two talked a little about the economy, although not in great depth. The conversation lasted about 10 or 15 minutes.

Mr. Bernanke then flew to the Federal Reserve Bank of Kansas City's annual summer conference in Jackson Hole, Wyo. On Friday, he mounted a defense of his policies and went horseback riding with Alan Blinder, an old friend and former Princeton colleague. Mr. Bernanke flew back Saturday to Washington, giving no hint of the news, and worked at his office Sunday, as he often does.

The White House alerted the media Monday night to the pending announcement. Early Tuesday morning, Mr. Bernanke flew from Andrews Air Force Base to Martha's Vineyard on a military Gulfstream 3 jet. The White House told Fed staff members that Mr. Obama would be wearing slacks and a blazer, but no tie. Mr. Bernanke dressed the same, but brought along a tie just in case. Mr. Bernanke promptly returned to Washington; Mr. Obama went to play golf.

From the moment Mr. Obama was elected, Mr. Bernanke's fate has been the subject of debate and uncertainty within the administration and in financial markets. All of the past four presidents have reappointed Fed chairmen named initially by their predecessors. In two cases -- Ronald Reagan's reappointment of Paul Volcker and Bill Clinton's reappointment of Alan Greenspan -- presidents reappointed chairmen from another party.

At first, the likelihood that Mr. Bernanke would be reappointed was diminished by the fragility of the economy and the presence in the White House of Mr. Summers, an accomplished economist and former Treasury secretary who also had a stormy tenure as president of Harvard University. Some of Mr. Bernanke's friends in academia bristled as rumors began circulating shortly after the election that Mr. Summers was considered Fed chairman in waiting.

But as the markets and economy stabilized in the spring, a reappointment of Mr. Bernanke began looking likelier, despite some congressional and public criticism of him for his role in an unpopular bailout of Wall Street. In recent appearances before congressional committees, Mr. Bernanke has met unusual hostility about the Fed-orchestrated rescue of American International Group Inc. and his role pushing Bank of America Corp. to complete its takeover of Merrill Lynch & Co.

"Consideration of Chairman Bernanke's nomination to serve a second term raises several important issues," Sen. Richard Shelby of Alabama, senior Republican on the Senate Banking Committee, said on Tuesday. "The Banking Committee should carefully examine the impact of the Fed's failures as a bank regulator, how such failures contributed to the financial crisis, and whether Chairman Bernanke's performance as the chief regulator merits his reconfirmation."

Bernanke's Challenges for the Next Four Years
1:24
President Barack Obama chose the safer path by reappointing Ben Bernanke as the head of the Federal Reserve. But WSJ's David Wessel says Mr. Bernanke has two big challenges ahead: proving his independence from the President and deciding when to tighten credit.
Bernanke Reappointment Politically Shrewd
2:04
As President Obama trumpets the turnaround in the economy, WSJ's Executive Washington Editor Gerald F. Seib says the reappointment of Federal Reserve chairman Ben Bernanke, therefore, is a politically shrewd move.
Mr. Bernanke may have helped his case for reappointment by launching an unusually high-profile public-relations campaign, ostensibly to explain and defend the Fed to the American public. He appeared on television's "60 Minutes" in March and at a town-hall meeting on public television in July.

In the two years since the onset of the global financial crisis, Mr. Bernanke's Fed has cut short-term interest rates nearly to zero, has initiated a slew of ways to bypass banks to keep credit flowing in the economy, and is on course to purchase up to $1.25 trillion in mortgage-backed securities and $300 billion in long-term U.S. Treasurys. Plotting a slow exit from these programs is among Mr. Bernanke's top priorities now. If he moves too soon, it could stall a nascent recovery; if he moves too late, he could spur inflation.

Economists believe the Fed will start to increase short-term interest rates by the middle of next year. Winding down the Fed's purchases of mortgage securities could cause mortgage rates to rise even sooner. Such rate increases could be unpopular, although the Obama administration has done nothing to suggest yet that it is unhappy with Mr. Bernanke's strategy.

Another priority of Mr. Bernanke is to keep the pressure on Congress to adopt changes to the financial-regulatory system to fix flaws revealed by the economic turmoil. Mr. Bernanke has become concerned in recent weeks that a healing economy could reduce the will of lawmakers to revamp the system. That worry came up repeatedly this past weekend at Jackson Hole in meetings among central bankers. "We may be relaxing too soon," said Stanley Fischer, governor of the Bank of Israel, who was Mr. Bernanke's thesis adviser at the Massachusetts Institute of Technology.

Journal Communitydiscuss“ Perhaps the commentary should not be why or why not Bernanke is the head of the Federal Reserve, but instead why is the Federal Reserve above our government? ”
—Ralph Morrone High on Mr. Bernanke's to-do list is developing rules to close big, failing financial institutions like Bear Stearns Cos. and Lehman Brothers Holdings Inc. outside of bankruptcy court. It has been nearly 18 months since the failure of Bear Stearns, and Congress hasn't passed legislation giving the Fed and Treasury the authority they are seeking to deal with institutions other than banks that they deem too big to fail.

Tensions over the regulatory proposals have emerged in recent weeks among the Fed, lawmakers and the White House. Mr. Bernanke has opposed a proposal by Mr. Geithner to strip the Fed of its power to oversee consumer-finance protections. Lawmakers, including Senate Banking Chairman Christopher Dodd of Connecticut, are wary of giving the Fed more power to oversee large financial institutions after some big banks, like Citigroup Inc., teetered under its oversight. Earlier this month, Mr. Geithner lashed out at other financial regulators in a private meeting for not taking a unified stance with the Treasury on overhauls.

—Deborah Solomon contributed to this article.
Write to Jon Hilsenrath at Jon.Hilsenrath@wsj.com, Elizabeth Williamson at Elizabeth.Williamson@wsj.com and Jonathan Weisman at Jonathan.Weisman@wsj.com

Printed in The Wall Street Journal, page A1