I'm baaaaack.
This morning, President Obama will announce his intent to renominate Chairman of the Federal Reserve Ben Bernanke to another four-year term in his position. I've already made the case for why Bernanke shouldn't be given a second bite at the apple, but there's plenty of interest in why Obama chose today of all days to unveil his decision, since Bernanke's first term doesn't end until January and the president's on vacation in Martha's Vineyard. Noam Scheiber, as well as sharing my appreciation for Bernanke's extremely effective and pragmatic crisis management, suggests it's about coddling the bond markets, as monetary policy decisions often are.And Noam's right, but he doesn't mention the specific reason for moving now -- today is the day that the Office of Management and Budget in the White House and the Congressional Budget Office will unveil their mid-session budget reviews, updating economic and other assumptions about future spending, revenues and deficits. The OMB has already leaked that it will be decreasing this year's deficit by about $250 billion thanks to unspent bailout money but increasing the 10-year deficit by about $2 trillion, about 2 percent of projected GDP, as it updates its economic assumptions for the first time since last year. The CBO has already predicted similar numbers, and most experts I've spoken to in advance of this morning's releases don't expect the CBO to be too far off from the OMB's projections. Despite the fact that these results were expected, and in the case of the current-year deficit, unexpectedly better (more on the reviews later and in tomorrow's column -- briefly: ignore the panic), the bond markets love to freak out at the first sign of increasing deficits. To counteract the deficit news that otherwise would put CNBC and the markets in a huff, the White House is pushing ahead the Bernanke announcement, putting a little honey in the bad medicine. Bernanke is "trusted" by the "markets," in the insane parlance of our times, and this should give them some confidence going forward. (It also won't hurt to take health-care reform out of the news cycle for a few hours or so.) And if, as Noam suggests, Bernanke's market credibility will give him more leeway to wait on raising interest rates until recovery truly comes instead of jumping early, then that will help bring down unemployment and prevent a 1937-style second recession.But the decision is not without downside. Bernanke's management of the bubble economy left a lot to be desired, so whether he can manage a recovering economy without promoting bubbles and bad practices remains to be seen (his expertise is crises). And though it is comforting that the administration seems intent to remove the Fed's consumer protection functions and place them in a new agency, since Bernanke's greatest failure was entirely abandoning that task, the proposal to endow the Fed with more prudential regulatory authority for systemic risk will bring hard questions from Congress that might make Bernanke's confirmation hearings iffy. There are also troubling questions about his role in the Bank of America/Merrill Lynch merger that could raise further confirmation troubles. Ultimately, this is a good short-term pick for today, certainly, as well as the next six months or so of crisis management and the short-term reassurance of the bond markets. Whether or not Bernanke will gain the confidence of Congress and be able to make the tricky calls required to manage monetary policy in a transition to recovery without being held hostage by a single class of investors remains to be seen, but he cannot forget that the decisions he makes about interest rates and his extraordinary lending programs will effect the entire swath of the American economy and particularly unemployment. It's clear that, after whatever conversations the two have had, Obama has confidence that Bernanke is his man. -- Tim Fernholz
