Should You Care About Bernanke's Reappointment?

Typical Americans might be wondering: Why should I care whether Ben Bernanke is reappointed as chairman of the U.S. Federal Reserve Board?

All this discussion about whether or not the Senate will confirm Bernanke for a second term can seem very removed from your everyday life. Supporting yourself (and perhaps a family) is hard enough, never mind whether you should support President Obama's choice of the bearded economist for another term running a board of other economists doing who knows exactly what.In reality, however, the decision can have a big affect on your life, for several reasons.

First and foremost, the Fed chairman wields tremendous influence on the Federal Reserve's Open Market Committee, the group of Fed members that sets short-term interest rates.

The Interest Rates You Live With

And what do short-term interest rates affect? Just about every form of credit you'll use in your lifetime (if you choose to use credit): retail store credit cards, bank credit cards, car loans, student loans. The Fed calls all these installment debt, and they're all affected by the Fed's short-term interest rate policy.

That policy even determines rates on some small-business loans. Hence, by extension, because the Fed chairman has a lot of say on the board, his analysis will help determine what interest rate you pay on your credit card. (Of course, your credit score and past history repaying debt also factor into your credit card interest rate.)

What about home mortgages? Well, they're long-term interest rates that are more-closely tied to the 10-year U.S. Treasury note, whose rate is determined largely by market forces. Right now, the interest rate on the 10-year U.S. Treasury is about 3.60% -- pretty low by historical standards -- and that's the major reason why home mortgage rates are also low, about 5.25% for a 30-year, fixed-rate mortgage for borrowers with a great credit score.

And lately -- that is, since the financial crisis struck in 2008 -- the Fed has had a big influence on those mortgage rates as well, thanks to other capital market programs the central bank is using specifically for ensuring that home mortgages remain affordable.

Job One, With Two Goals

A second way the Fed chairman can affect your life concerns the Federal Reserve's legal responsibility to fight inflation. That's one half of the Fed's dual mandate of price stability and full employment.

Price stability means keeping inflation low, very low. How does the Fed fight inflation? Through adjustments in those short-term interest rates, through rules regarding how much reserves banks should hold and through other monetary policy tools.

Basically, when the Fed keeps short-term interest rates low, it generally encourages borrowing and commercial activity. When the Fed raises those rates, borrowing and spending is discouraged. The Fed wants the U.S. economy to grow, but if it grows too fast, too many dollars will be chasing a limited amount of goods. And when that happens, prices rise, creating higher inflation.

As mandated by Congress, the Fed is also responsible for ensuring that economic conditions lead to full employment. Again, low short-term interest rates are conducive to borrowing by businesses and consumers, and this historically has led to increased hiring and a declining U.S. unemployment rate.

Good, but Hardly Perfect

If you sensed that these goals -- low inflation and full employment -- are hard to accomplish simultaneously, you're correct. But over the roughly 100 years the Fed has been in operation, it has done a pretty good job at achieving both.

Of course, since the Fed's inception in 1913, it has made some pretty bad moves. After the 1929 U.S. stock market crash, it made a series of terrible mistakes -- for instance, tightening monetary policy (raising rates) when it should have loosened it (lowering rates). These mistakes deepened the Great Depression of the 1930s and sent the unemployment rate skyrocketing.

In the 1970s, the Fed's monetary policy was too loose (and inconsistent), resulting in double-digit inflation: At one point consumer prices were rising by more than 10% per year.

However, since 1981, the Fed has done a very good job fighting inflation, and up until the recession that started in December 2009, it did a pretty good job at achieving full employment.

How's Bernanke Doing?

And that brings us to Chairman Ben Bernanke's performance. Some critics in the Senate want to replace him, due to his failure to see the problems that subprime mortgage loans and other high-risk lending would create. When those loans went bad, it helped trigger the financial crisis and the recession. These Senators also blame Bernanke for the nation's currently high 10% unemployment rate. (DailyFinance's Peter Cohan believes the necessity for job creation argues against Bernanke.)

So, how has Bernanke done as Fed chairman? First, he has successfully navigated the U.S. financial system through its greatest crisis since the Great Depression.

Second, the dozens of high-responsibility decisions he made took place under severe deadlines or time constraints, and under huge amounts of pressure. Decisions involving literally hundreds of billions of dollars sometimes had to be made within hours.

Third, Bernanke is a specialist on the Great Depression. He knows as much about the errors of previous monetary policies, and the strengths and weakness of the spectrum of monetary tools, as any mind in academe or public policy.

Why I Vote Yes

Therefore, the calculation here argues that although Bernanke's actions have hardly been perfect, any effort not to reappoint him would represent a serious public policy mistake by lawmakers, on a number of counts. It would represent a gigantic step backward by the U.S.

A failure to reappoint Bernanke would signal instability to the financial markets -- exactly what Congress shouldn't do, given the infancy of credit market healing process. Some institutional investors may also interpret the move as the Senate giving in to ill-informed, emotional, short-term political pressure, which some investors would likely view as not conducive to rational, constructive, long-term monetary policy. As a result, some investors may opt to move capital out of the U.S. -- a decided negative for the nation and for the global financial system.

In sum, plenty of things that affect your life are riding on whether or not Bernanke is reappointed. These range from the interest rate you pay on your credit card, to how more more you'll pay for groceries, to whether or not that company in your town will be able to get a loan to expand and hire more employees. The stakes could hardly be higher.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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