The chairman of the US Federal Reserve is not just another central banker. As the person in charge of monetary policy and financial stability in the worlds largest economy, particularly during the biggest global recession in decades, the world has an interest in who is appointed to the job. By renominating Ben Bernanke for a second term, President Barack Obama has opted for continuity in a time of crisis. His renomination, which will likely be confirmed by the Senate, barring an unprecedented and frankly unexpected drama, also shows how the US can rise above partisan divides in key appointmentsBernanke was first appointed by George W Bush in 2006. Obama has now reposed faith in a man who has great academic understanding of depression economicshe spent much of his academic life before his time at the Fed studying the Great Depression of the 1930sand expertise, which have on the whole stood him in good stead during this crisis. Critics will no doubt point to the many mistakes that Bernanke may have madesome say he didnt spot the crisis coming, some say he (along with Hank Paulson) let Lehman collapse, making the crisis acute, others say that he has induced much moral hazard into the US financial system through a spree of rescues and bailouts. But the fact is that the US economy and indeed the world economy seem to have avoided the prospect of a Great Depression (we are in a deep recession, instead) courtesy Bernankes aggressive strategies on slashing rates and preventing a complete failure of the financial system. Just for that, he probably deserved a second term. It would also have been unfair to remove him soon after he had weathered the worst of the storm, without giving him an opportunity to move forward in a post-crisis scenario.
However, his second term, which will begin in January 2010, will likely be very different from his first term and will test his mettle once again, but in a different direction. The most important, and very tough, decision that Bernanke will have to take some time in 2010 will be about a hike in interest rates. If he does it too soon, he may choke a recovering economy. If he waits too long, there may be a spurt, and then, spiral of inflation. More than his firefighting of the crisis, his legacy will depend on the call he takes on monetary policy in 2010. His second challenge will be to handle the burden of additional financial regulation that will fall to the Fed after the overhaul of the regulatory systems. Again, it will be a tightrope walk to regulate banks and other financial institutions that have got used to cheap government finance and the moral hazard of bailouts. But who said that it was ever easy being the chief of the worlds largest central bank.