Does Bernanke Get a Second Term?

One of the bigger guessing games in Washington over the next year or so is going to be the fate of Fed Chairman Ben Bernanke. President Obama gave him a pat on the back today which set off a round of “Bens In” talk but it’s a long time until reappointment and there are lots or land mines on that road.

Probably the biggest is regulatory reform where Bernanke has something of a tightrope to walk. On the one hand he has to be careful not to upset the administration’s apple cart by coming out too strongly against any particular part while at the same time appearing to maintain his aura of independence. Oh, and just to complicate things, he is not a king or president. The Fed chairman is surrounded by a group of regional Fed bank presidents who are not shy.

Bernanke is said to be in favor of the enlarged roll of systemic regulator for the Fed but opposed to the Fed ceding its responsibility for consumer loans to the proposed consumer protection agency. That seems to me to be a fairly large point of disagreement. The agency seems to me, for better or worse, to be a pet project of the administration. Personally, I see it developing either as a toothless tiger or an unmanageable intrusive force in the consumer financial services. I doubt that Bernanke can stop it and I suspect his opposition will be half-hearted.

A larger question is going to surround the role of the Fed as the systemic regulator. I’ve written that I think it threatens the bank’s independence. Some others see that as well as a job that will spread it too thin. Here are some thoughts from the New York Times today:

“The plan does give more power to the Fed and just complicates its job and therefore raises questions about its ultimate mission,” said John B. Taylor, a professor of economics at Stanford and a Treasury under secretary in the Bush administration. His book, “The Road Ahead for the Fed,” (Hoover Institution Press) is being published this week. “If the Fed goes further off its course and doesn’t focus on what it did in the 1980s and 1990s, it will have less control over inflation. It will lose its independence. It will have to become more political.”

Vincent R. Reinhart, a resident scholar at the American Enterprise Institute and former director of the Fed’s division of monetary affairs, said that policy makers needed to be concerned about mission creep.

“The main problem in becoming the systemic risk regulator is that it can be a very diffuse responsibility,” Mr. Reinhart said. “Should the Federal Reserve have been monitoring Enron and Long Term Capital Management and the Hunt brothers when they were involved in silver market manipulation?”

He added: “What is the ideal governor of the Fed supposed to be, someone who understands monetary policy, systemic risk, bank regulation, consumer affairs and Congressional relations? You are reaching the point where the agency is being spread pretty thin.”

These are influential men and if they are voicing these sorts of objections it’s logical to assume that others have similar feelings or at least taking note of their concerns. Those Fed regional bank presidents are likely to be heard on the subject before this thing gets set in cement.

In the end, Bernanke’s biggest battle may well end up within his own shop and if that battle should become a threat to the overall regulatory plan it might well seal his fate.

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