David Prosser: Helicopter Ben avoids the chop

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The Independent Online

Outlook The Ben Bernanke victory tour is clocking up some air miles. Fresh from his appearance at the festival of central bankers in Jackson Hole, Wyoming, over the weekend – rocking the crowd with a number about averting financial catastrophe – he had to trek up to Martha's Vineyard yesterday to be handed a second term as chairman of the Federal Reserve. President Obama even played support act.

Those in the crowd who cheered Mr Bernanke's reappointment at the Fed have short memories. Only two years ago, the Great Depression scholar was resisting all calls to cut interest rates, despite mounting evidence that the credit crunch and a collapse in the housing market was tipping the US into recession. Only 11 months ago, Mr Bernanke was being persuaded to support the US Treasury's disastrous decision to allow Lehman Brothers to collapse.

There will be many who do not recognise the President's description of Mr Bernanke as "calm and wise". After spending the final quarter of 2007 rejecting calls for rate cuts, the Fed's chairman was panicked into a dramatic 0.75 percentage point emergency reduction in January 2008 by a series of stock market reverses. And after allowing Lehman to go to the wall, Mr Bernanke took part in a series of rescue efforts to save other financial institutions.

The legacy of this inconsistency is plain to see today. The United States remains mired in recession and debt. At the same time as Mr Bernanke and the President were gladhanding in Massachusetts, the White House was quietly announcing that it now expects federal debt to rise to £9 trillion, some £2 trillion more than it was forecasting only six months ago.

The biggest criticism of all of Mr Bernanke, however, does not concern his handling of the crisis of the past two years. In the end, he got that right. Much more damning is the role he played in setting the scene for the crisis. In his early years at the Fed, he did nothing about the credit bubble that eventually burst with such devastating consequences, or about the expansion of below-the-radar securitisations and derivatives contracts that later came to be known as weapons of mass destruction.

The President's announcement yesterday will have reassured Wall Street, which has backed a second term for Mr Bernanke, and was a safe political decision too. Giving an ally such as Larry Summers the job would have been attacked as a politicisation of the Fed.

Still, Mr Obama may yet come to regret his decision. That healthcare reform, however much he likes to claim it is revenue neutral, isn't going to pay for itself unless it is utterly bland. And thanks in part to Mr Bernanke, persuading Congress to cough up any extra cash is going to be extremely hard work.

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