The Bernanke Circus

Fed Chair Ben Bernanke's nomination for a second term was approved by the Senate Banking Committee by a vote of 16-7.  Democrats supported the move 12-1 and the GOP vote was 4-6.

Our focus?  What does it mean for investors?

Analyzing the Opposition

Opponents fall into the following categories:

  • Those who do not like the Fed at all, questioning the powers and authority
  • Those who believe the Fed should focus on inflation alone, ignoring the legal dual mandate — full employment and price stability.  Some of these critics also prefer their own inflation measures, typically commodity prices rather than generally accepted gauges of inflation.
  • Those with a partisan agenda.  Some GOP negative voters freely admitted that Bernanke was probably the best of those who might be nominated from the Obama Administration.  Put another way, they would not support any likely Obama candidate.

Analyzing Supporters

Most supporters, representing mainstream viewpoints, understand that Dr. Bernanke inherited a very difficult situation.  There is a consensus that the Fed policy staved off the worst effects of the credit crisis and helped to stabilize the economy.  It is a rejection of those who think that having a "cleansing depression" would have been good for us all.

Supporters had criticisms of Bernanke, but tried to assess the balance of his performance.  I suggest that readers consider two important viewpoints:

First, conservative, free-market advocate Bob McTeer who writes in Fed Bashing: Unfair and Costly as follows:

It is taken as given these days that the Fed created the housing
bubble. If this is true, then it must follow that the Fed is
responsible for the bursting housing bubble, the ensuing financial
crisis and subsequent recession. But, as I recall, the Fed did not
create the housing bubble. It was the collateralized subprime loans,
not a reversal of home prices, that caused the problems. Maybe there
were too many loans, but, if so many had not been bad loans, air could
have come out of the bubble without devestation.

And further:

I’m beating this dead horse because the casual and careless accusations
that “it’s all the Fed’s fault” has caught on with an angry public and
thus with Congress. The institution that did the most to save our
financial system is about to be punished for it.

And finally, powerfully, but readers should check out his entire article:

Fed bashers who really care about their country should be more cautious lest they get what they pray for.

Second, liberal critic Brad DeLong.  His list of criticisms are mostly the opposite of those cited by the Bernanke opponents!  Read his list, but his realistic conclusion is as follows:

Now I am morally certain that had I been in Bernanke's (or Paulson's,
or Geithner's) shoes over the past two years, I would have made more
and bigger mistakes, and we would right now be worse off. He has done
better as Fed Chair than I would have, or indeed that almost everyone I
can think of would have. So I am inclined to judge Bernanke lightly,
and say that the Senate should confirm him for a second term in spite
of his mistakes: he is, I think, one of the very best we can get for
the job right now, and he won't make the same mistakes again.

And finally, you can consider the CNBC debate among Larry Kudlow, Diane Swonk, and Steve Liesman.  Swonk and Liesman highlight the moves to avoid financial catastrophe.  Kudlow emphasizes the need to defend the dollar at all costs.  Swonk also notes the likely impact on financial markets if Bernanke is not re-confirmed.

Check out the video here.  You can and should consider the arguments by all, but it seems to us that Kudlow has an agenda, while Swonk and Liesman have a more balanced viewpoint.

Investment Conclusion

Here at "A Dash" I try to focus on what events mean for investors.  The Bernanke circus is a political distraction.  He is a Bush appointee.  Had McCain won the election and renominated Bernanke, the Senate vote would be a quite different partisan mix.  It is pretty easy for a Senator to posture and assign blame.  There are obvious issues and plenty of room for second-guessing.

It all gets plenty of buzz in the investment blogosphere.  The media bias is negative, as I noted in this article.

Meanwhile, he is still the Fed Chair with unanimous support.  He will get confirmation in the Senate some time in January.

The astute investor looks beyond the political debate and focuses on policy — what will actually happen.

As investors think ahead to 2010 opportunities, balancing risk and reward, we should all keep our focus.  The  political debate is an interesting sideshow.  Meanwhile, don't fight the Fed.

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