Markets soar on news of Bernanke's second term

Reappointment triggers 80-point jump in Dow Jones
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The Independent Online

Markets and economists gave a hearty welcome to the reappointment of Ben Bernanke as chairman of the Federal Reserve, after President Barack Obama plumped for continuity over the chance to pick his own man for the most important job in finance.

Announcing that Mr Bernanke will be nominated for a second four-year term, the president lavished praised on the Princeton University academic's "temperament, courage and creativity" as he has battled the worst financial crisis since the Great Depression.

And there was a swipe against political critics of the Fed and its chairman, many of whom are arguing that the central bank's unprecedented interventions to shore up markets overstep its authority and that it should not be handed new powers under Mr Obama's plan to overhaul financial regulation.

"Even though there is some resistance on Wall Street from those who prefer things the way they are, we will pass the reforms necessary to protect consumers, investors, and the entire financial system," the president said. "And we will continue to maintain a strong and independent Federal Reserve."

Mr Obama interrupted his holiday in Martha's Vineyard to make the announcement, and both he and Mr Bernanke appeared looking relaxed in open-necked shirts. Mr Bernanke had been told of the president's decision to reappoint him last Wednesday.

Coming alongside more positive economic data, the announcement contributed to an 80-point jump on the Dow Jones Industrial Average yesterday morning, as economists welcomed an end to months of unsettling speculation. The Fed has pumped hundreds of billions of dollars into the credit markets and designed numerous schemes to guarantee private debt andhelp small businesses and consumers are to get loans, so any sudden changes in policy at the personnel at the Fed could have large knock-on consequences throughout markets.

Jeffrey Kleintop, chief market strategist at LPL Financial, said: "We do know what might have happened if someone else was nominated by the President. History shows us the reaction can be materially negative for the markets. In 1987, President Reagan nominated Alan Greenspan and the 10-year Treasury yield saw one of the biggest ever one-day moves.A big move in rates to the upside resulting from the uncertainty associated with a new Fed head would be unwelcome."

The reaction from Mr Bernanke's fellow central bankers was also enthusiastic. Mervyn King, governor of the Bank of England, said he was "delighted" and that a partnership the two men forged as fellow academics at MIT "has stood us in good stead in dealing with the crisis". Jean-Claude Trichet of the European Central Bank said: "The Federal Reserve and the ECB have, together with other central banks, initiated an unprecedented level of close cooperation, which has been key in coping with the present situation. I very much look forward to continuing that."

Critics of Mr Bernanke said he had been slow to realise the economic and financial implications of the collapse in the housing market and the dislocations in the credit markets that began in 2006 and 2007. Others worry that he may have been too closely associated with the massive injections of liquidity into credit markets and that he'll risk inflation by waiting too long to pull the money back when the economy recovers.

The chairman countered some of those critics in his remarks alongside Mr Obama yesterday by affirming the need to be vigilant on inflation. "I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities to help provide a solid foundation for growth and prosperity in an environment of price stability."

Mr Bernanke was nominated to the job by George W Bush in 2005, and even before Mr Obama was inaugurated there were leaks from within his campaign that he hoped to appoint his own man at the Fed when Mr Bernanke's term expires next January. Larry Summers, currently the president's chief economic adviser, had been floated as one possibility, and a number of other candidates have been rumoured.

However, a large majority of private sector economists told pollsters they wanted Mr Bernanke reappointed, and by yesterday that had become the assumption in political circles. Alan Greenspan, Mr Bernanke's predecessor, said he had "earned" a second term.

Mr Obama lavished praise on Mr Bernanke's handling of the credit crisis. "Ben approached a financial system on the verge of collapse with with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall."

Ben Bernanke: Scholar turned banker

Ben Bernanke couldn't have provided more of a contrast with his predecessor, Alan Greenspan. Whereas the former Federal Reserve chairman was Delphic to the point of incomprehensibility, Mr Bernanke took office in 2006 promising more transparency. Where Mr Greenspan ruled the interest rate-setting Federal Open Market Committee with an iron will, his successor sought debate and consensus. And as the credit crisis erupted, and the Fed was forced into more and more extraordinary interventions – bailing out Bear Stearns, AIG and Citigroup; not bailing out Lehman Brothers – Mr Bernanke even made TV appearances and hosted town hall meetings to try to explain what it was doing.

So befits a soft-spoken academic, whose unprepossessing manner belies a strong confidence in his own intellectual abilities. Raised in South Carolina, the son of a pharmacist and a schoolteacher, 55-year-old Mr Bernanke shares a love of basketball with President Obama. Educated at Harvard and MIT, it was as a professor at Princeton where he made his name as one of the foremost scholars of the Great Depression –and of how central bank inaction turned a banking crisis into an economic calamity.

"As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another," President Obama said yesterday. "But because of his background, his temperament, his courage, and his creativity, that's exactly what he has helped to achieve."