David Prosser: Bernanke still a candidate for the chop

Outlook America's most public job interview continues. Ben Bernanke's testimony to the House Financial Committee yesterday focused on the Federal Reserve chairman's exit strategy – how and when the authorities might go about winding down the massive fiscal and monetary stimulus that has been thrown at the ailing US economy over the past 18 months.

Mr Bernanke's view is that an American recovery will be modest at best this year and next, yet he was at pains yesterday to stress that this will not necessarily preclude a reversal of the stimulus strategy. Interest rates may remain at their current historic low levels for some time, he said, but the Fed has already done a great deal of work on how they might be raised.

The Fed chairman's remarks were another attempt to counter his critics on the right, who are convinced that the stimulus programme will end in an inflationary crisis. Mr Bernanke, whose first term of office comes to an end in January, also has critics who believe he went soft on the banks during the credit crunch, and has been attacked too for the Fed's failure to properly regulate the financial sector in the first place.

Indeed, a powerful coalition of opposition to a second term for Mr Bernanke has been building in recent months. So far at least, the one man whose opinion really matters has been fulsome in his public praise for the Fed chairman, with President Obama backing his handling of the crisis. Nevertheless, Mr Bernanke's public utterances are increasingly being seen as attempts to justify his position, and a second term is not assured.

Nor should it be. For an economist best known prior to taking office for his work on the Great Depression of the 1930s – Mr Bernanke's treatise was that the Fed fuelled the crisis by failing to properly respond to the Wall Street Crash of 1929 – he was remarkably slow to take action when the credit crisis began threatening to plunge the global economy into a tailspin.

Eventually, out of the blue, in January of last year, Mr Bernanke and his colleagues at the Fed shocked the world with an emergency announcement that they were slashing interest rates by 0.75 percentage points in one go, the most dramatic US monetary policy intervention for more than 25 years.

This remarkable move represented a sudden moment of panic for the Fed, which had previously been complacent about the slowdown of the US economy and, in particular, the scale of the collapse of the country's housing market. Given that the Fed had also failed to spot the sort of systemic risk represented by the activities of banks such as the ill-fated Lehman Brothers, you can understand why even some of Mr Bernanke's allies thought back then that he could only ever be a one-term chairman.

Some 18 months later, Mr Bernanke's chances of securing a second term have improved. Having been slow to take action to counter the slowdown, once it did get its act together, the Fed is widely thought to have done a decent job in averting total economic meltdown. Leaning on his academic area of expertise, once Mr Bernanke recognised the threat of another depression, he was prepared to throw the kitchen sink at the problem.

Moreover, the kitchen sink does seem to have done its job. The latest economic data from the US is mildly encouraging, and there is a reasonable chance of the very modest recovery in the second half of the year that the Fed's chairman has been predicting. If that recovery does materialise, it will be harder for the President to sack Mr Bernanke.

If not, despite the argument that changing horses mid-stream is always a risky manoeuvre, there are some decent alternative candidates for the job, notably the former US treasury secretary Larry Summers, who is now a key Obama ally. That sort of appointment might not please those Bernanke critics who are concerned about inflation, but at least their bête noire would be gone. And for the President, chopping the man most closely associated with the bailout of the banks might just be a neat way of drawing a line under the credit crisis – achieving closure as our friends across the pond might put it.