Update1 Bernanke Claims Little Fault — Who Will Be the Fall Guy?by Tim Manni
UPDATE1: Since Congress is looking for someone to blame, who’s going to be the fall guy — will it be Bernanke, Paulson, or Lewis? Former Treasury Secretary Henry Paulson is already out of office, so he makes a good candidate. BofA chief Ken Lewis is the head of an already shaky institution, and his head has been rumored to be on the chopping block for some time now. Then there’s Fed chief Ben Bernanke — his term as Federal Reserve Chairman ends at the ends of January.
While a case could certainly be made for any of the three, Megan McArdle of the Atlantic says that, “firing Bernanke lets Obama portray all of the failures of this year as Bush errors in policy or appointment.” But would that be the smartest move?
I think if he’s pushed out it will be a real pity, for several reasons. First, Bernanke really is the most superbly qualified economist out there to deal with this particular sort of crisis. But perhaps more importantly, regulatory uncertainty is not what we need now. Bernanke may be tempted to keep monetary policy loose in order to make the economy look better and save his job.
Many political analysts have said that a president’s first term is built around reelection. Since the end of Bernanke’s term is more than six months away, the president’s decision of whether or not to replace him is likely to hinge on whether the economy moves up or down through the end of the year. Since we believe economic indicators aren’t likely to fluctuate too heavily in either direction, the president will likely realize that what’s good for the markets is good for his approval rating. Not to mention history may be on Bernanke’s side:
Reappointment may be less disruptive to investors, and no first-term president has replaced a sitting chairman in 30 years. Many on Wall Street and in Washington view it as likely Bernanke will be reappointed.
“There’s a very strong case for reappointment,” said Douglas Lee, who runs Economics from Washington in Potomac, Maryland, and worked on Capitol Hill in the 1970s. “Removing a Fed chairman who is generally perceived to have done an outstanding job would be an enormous problem.”
So who is going to be the fall guy? Has Bernanke earned his right to stay on?
(Original post published 6/25/09): Federal Reserve Chairman Ben Bernanke testified in front of a Congressional committee today, defending the Fed’s actions in the controversial merger of Bank of America and Merrill Lynch. In front of the House Committee on Oversight and Government Reform, Mr. Bernanke reputed previous testimonies and claims the Fed acted inappropriately by not only pressuring the banks to merge, but that they did not properly disclose the details of the merger to shareholders and lawmakers.
Mr. Bernanke claims the Fed acted properly by fulfilling all disclosure requirements and that they conducted the deal with the “highest integrity.” The Fed chief also claimed he had no part in strong arming BofA and didn’t threaten the jobs of the bank’s board members:
“Did you personally tell Mr. Lewis that you would fire him or remove the Bank of America board?,” Chairman Edolphus Towns (D., N.Y.), asked, striking a common refrain.
“I did not,” Mr. Bernanke said.
But that simple response did not sit well with lawmakers in light of a Dec. 21 email unearthed by the panel between Federal Reserve Bank of Richmond President Jeffrey Lacker and other Fed employees. In that email, Mr. Lacker recounts a conversation with Mr. Bernanke and says that the Fed chief planned to tell Bank of America that “management is gone” if they quashed the deal and later needed more government aid.
Pressed on the issue, Mr. Bernanke said, “I don’t recollect everything that was said in that conversation.”
However, earlier this month CNNMoney.com published an article which stated that former Treasury Secretary Henry “Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke.”
We honestly can’t believe how two of the nation’s top financial officials have delivered such diverging recollections of the on goings and that more major news publications haven’t ran with.
The next piece of the puzzle will be revealed when Mr. Paulson testifies before a Congressional committee. According to Bloomberg News, Mr. Paulson is set to testify next month on “what Treasury and Federal Reserve officials did to persuade Bank of America to finish the Merrill deal after Chief Executive Officer Kenneth Lewis said he wanted to scuttle the purchase.”
For more on the subject read: “TARP’s Not-So-Dirty-Little Secrets Confirmed“