Al-Ahram Weekly Online   4 - 10 February 2010
Issue No. 984
Published in Cairo by AL-AHRAM established in 1875

Bailout Ben

The man who saved Wall Street has the full confidence of Obama, says Anayat Durrani

The US Senate confirmed Ben Shalom Bernanke for a second four-year term as chairman of the Federal Reserve Board. The final vote of 70-30 came three days before his current term expired. Bernanke was reconfirmed after weathering weeks of bipartisan criticism over the economy and government bailouts.

Bernanke's confirmation was by a slimmer margin than any previous Federal Reserve chairman. Former chairman Paul Volcker holds the record for the most opposition to a second term on an 84-16 vote in 1983.

Senate opposition to Bernanke became more heated after Republican Scott Brown's upset victory in the Senate race in Massachusetts, which cost the Obama administration its 60-seat control of the Senate. Public dissatisfaction over the economy helped Brown capture the Senate seat held for more than 45 years by the late popular Democrat Ted Kennedy.

Senators criticised the Fed for ignoring the housing and credit bubbles amidst rising unemployment. They criticised Bernanke for placing the needs of Wall Street above those of Main Street Americans suffering during the recession. Criticism of Bernanke has centred on his support of Wall Street bailouts, specifically the $182 billion bailout of insurance giant American International Group Inc (AIG).

Opponents of Bernanke charge him with failing to prevent the financial crisis of 2008. Senator Bernard Sanders, an independent from Vermont, said Bernanke "was asleep at the switch while Wall Street became the largest gambling casino in the history of the world and hurtled into insolvency." Senator Richard Shelby, a conservative Republican from Alabama, said, "Bernanke fiddled while our markets burned."

Former Federal Reserve Senior Economist and Emory University Professor Jeff Rosensweig told Al-Ahram Weekly he was happy to see the reappointment of Bernanke. Rosensweig, a former student of Bernanke at MIT, said, "he did a good job keeping the financial system from crashing, and people forget that just one year ago the fear was a worldwide second great depression," said Rosensweig. "It helped his case that the US clearly moved into economic recovery in the late summer of 2009," he added.

The US Federal Reserve sets interest rates and creates money, effectively controlling employment and inflation. The media and government officials claim the recession is miraculously over, citing a fourth quarter 5.7 per cent growth rate, and credit Bernanke with deft handling of the crisis.

But while the recession may have reached a turning point, economist James Galbraith, professor at the University of Texas at Austin, says the challenge remains to replace jobs. "This will take years even if policy is correct all the way through. The fourth quarter is something of a false dawn, with a strong boost from the inventory cycle. There is little reason to be optimistic that strong growth will continue, say, six months ahead."

Bernanke was originally nominated by former president George W Bush in 2005 and is linked with the Bush administration's unpopular $700 billion bank bailout. Time named "Bailout Ben" person of the year. The magazine said Bernanke saved the United States from a second Great Depression.

The "patron saint of Wall Street greedheads," as Time itself admitted, "King Ben is the unelected general of the fourth branch of government." Recall, the fourth estate was once considered the press. Bernanke was honoured as "the most important player guiding the world's most important economy," whose give-away of trillions to his friends apparently helped "to protect ordinary folk on Main Street."

Obama credited Bernanke with providing "wisdom and steady leadership" during the financial and economic crisis. While the economy is on the road to recovery, Obama said he needed Bernanke's help to get the job done. "The Senate did the right thing," Geithner said in a statement. "Chairman Bernanke will continue to play a vitally important role in guiding the nation's economy."

Meanwhile, as Bernanke enters his second term as Fed chairman, the matter of the Federal Reserve's independence on deciding monetary policies like interest rates remains a contentious issue. Since its establishment in 1913, it has controlled the nation's money supply independent of Congress.

But many Americans both right and left are fed up with the fact that this elitist bank -- appropriately called the Fed -- is accountable to no one and yet effectively controls the entire economy. Just whose interests are being served by its board of directors? Is what's good for the Fed good for America? In a country where one's local sheriff is elected, surely the most powerful person in the land should be elected too.

A revolt inspired by this logic sprang up in the Capitol after the massive bailout in 2008, resulting in Congress passing the Paul-Grayson amendment last April to audit the Federal Reserve, something that has never been done since it was founded. It has been stymied by Bernanke as it "would shatter the Fed's independence". Well, Ben, that's precisely the point.

Congress is also seeking legislation to remove the Fed's ability to regulate banks and Senate confirmation of Federal Reserve Bank presidents, which Bernanke also opposes.

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