The Bernanke Watch -- Part One

The Ben Bernanke sweepstakes is heating up. Sometime over the next few months, President Obama will decide whether to reappoint the Federal Reserve chairman to a second four-year term. The betting now is that Bernanke will be back, and he almost certainly helped himself on Tuesday with his Humphrey-Hawkins testimony before the House Financial Services Committee. In his prepared remarks, along with an op-ed in the Wall Street Journal, Bernanke answered the most strident questions posed by his critics. He does, in fact, have "an exit strategy" from the Fed's expanded balance sheet and loose monetary policy, he said. He's prepared to wield a wide array of tools to make that happen. "The extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed," Bernanke said -- in other words, of course I can deal with future inflation, it's just not going to be now. Compared to some past performances, Bernanke sailed through the day.

Still, there were a few signs of tension with the Obama administration, which could bode ill for Gentle Ben. Bernanke indirectly raised questions about the administration's fiscal policy, saying current spending is unsustainable, and he appeared to differ with Treasury Secretary Tim Geithner when he called for an activist counsel of advisors to oversee systemic risk. Perhaps that too was in answer to his critics, among them Anna Schwartz, the 93-year-old scholar who earned herself a permanent place in economic history when she co-authored, with Milton Friedman, the "Monetary History of the United States." In an interview, Schwartz accused Bernanke of being "very much influenced by the Treasury." Others, however, would say it is Bernanke that has pushed the Treasury. And even if Obama has reason not to want to reappoint Bernanke, he risks political disaster if he opts for his chief economic advisor, Larry Summers, as his replacement. Summers, at this stage, would be perceived as an Obamaite infringement on the Fed's independence, not to mention an confirmation nightmare.

All in all, it's looking as if Bernanke is making the case that he's got too many balls in the air right now to be shoved aside. And he may be right.