Bernanke sees deflation and depression threats everywhere. That’s one of his biggest problems. He cut his academic teeth on studying the Depression, which seems to have blinded him from the modern use of sophisticated financial-market signals in our new, globalized, high-tech, rapid-information world.
The mostly free-market economy has made its adjustments for better business profitability and consumer-balance-sheet corrections. Because of that -- and along with close to $4 trillion in new capital gains from the massive stock market rally as well as the Fed’s ultra-easy free-money policy -- economic recovery is picking up steam. GDP growth will surprise on the upside in the quarters ahead.
But Bernanke’s zero-interest-rate policy and continued money creation through the expansion of the Fed’s balance sheet continues to fight an emergency that ended this past spring. Given the end of the emergency and the onset of recovery, a still easy 1 or 2 percent federal funds rate would be more appropriate than zero.
According to Rasmussen, the public doesn’t trust Bernanke anymore. Only 21 percent of Americans favor his reappointment as Fed chair, while over 40 percent want a new face at the helm of the central bank. If that sentiment is echoed in the Senate, and if Bernanke receives 35 or more votes against him in the floor vote, it will not have been a truly bipartisan reconfirmation. And without that, I don’t see how he can effectively govern as Fed chairman.
Paul Volcker suffered 16 nay votes in his reconfirmation in 1983. But Bernanke could get hit by more than twice that number. This has never happened before in history.
I don’t think the Fed chairman understands just how vulnerable his political position is. So his task right now is to re-canvas senators across-the-board -- Republicans and Democrats. He’s going to have to wear down some shoe leather and make his bipartisan peace with the Senate if he expects to survive.
It’s more than Bernanke’s neck that’s at stake. Without bipartisan confidence, he will be totally ineffective as a Fed leader. And that very ineffectiveness will wear down the dollar and come at the expense of the country.
Bernanke and his advisors need to make a sober assessment of all this. If Bernanke cannot garner truly bipartisan support, he should spare the country a lot of agony and withdraw his name from consideration.