Without Bipartisan Support, Bernanke Should Withdraw

Helicopter Ben Bernanke passed his reconfirmation vote in the Senate Banking Committee this week. But he passed by 16 to 7. Most of the Republicans voted against Bernanke, as did one Democrat, Sen. Jeff Merkley of Oregon. The reconfirmation now goes to the floor of the Senate, where it’s going to be held up for a while. (Sen. Jim DeMint and others are insisting that a vote on the Government Accounting Office’s audit of the Fed occur first.) But when the final vote happens, I think Bernanke could be in trouble.

Mirroring the Banking Committee vote, most of the 40 Senate Republicans may vote against Bernanke, and they will be joined by a number of Democrats. If Bernanke were to be opposed by as many as 35 or 40 votes, it would substantially undermine his credibility.

Whether it’s his past inflationary-bubble monetary performance, or the bank bailouts, or the AIG bailout, or the end to secrecy at the Fed, senators on both sides of the aisle are blaming Bernanke, fingering him as the wrong guy at the wrong time. And somewhere in that mix of opposition -- led by senators Richard Shelby, Jim DeMint, Jim Bunning, and others -- Republicans are gradually moving back to a Ronald Reagan–type, King Dollar, hard-money position that is in strong contrast to Bernanke’s dollar declinism.

Aside from the fact that Bernanke doesn’t look at gold or the dollar as price signals to guide his policy, we have witnessed a complete reversal of the Fed’s intellectual framework. By that I mean, for 20 years or so, first under Paul Volcker and then during Alan Greenspan’s first three terms, the Fed argued that the tax-cut effects of low inflation would spur economic growth and low unemployment. This period lasted roughly from the early 1980s until the end of the century. But since Bernanke came on the scene, the sound-money, stable-dollar argument has disappeared.

For most of this decade, the Fed has been fighting unemployment by pumping in easy money. And it keeps telling us this will not cause inflation. With the CPI hitting nearly 5 percent in 2006 and almost 6 percent in 2008, Bernanke was dead wrong. And the fact remains that more money creation from the Fed produces inflation -- not jobs or long-term economic growth. The housing and oil bubble, which led to the Great Recession, corroborates this.

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.