The Monkey Cage

Ben Bernanke's Second Term as Chairman of the Federal Reserve

Ben Bernanke begins his second term as chairman of the Board of Governors of the Federal Reserve on Monday. Yet, as recently as a week ago, his reconfirmation seemed to be on the ropes. The Republican upset in Massachusetts raised the specter that confirming Bernanke could become a liability this November. Amidst such concerns, Democratic and Republican Senate leaders refused to tip their hands about how they or their caucuses would vote. Democrats wanted Republicans to pony up votes to share the blame for an unpopular appointment; Republicans wanted Democrats to shoulder the load for confirming Obama’s nominee (even if he was originally a Bush appointee). At the same time, senators likely understood that if Bernanke were to be defeated, a more dovish nominee could not be confirmed and a more hawkish chair would not be nominated.

There is plenty of commentary on why Bernanke’s confirmation became so contentious. His critics (including the ranking Republican on the Senate Banking Committee, Richard Shelby) charged that Bernanke was asleep at the wheel as the housing bubble emerged, that he failed to adequately deploy the Fed’s supervisory powers to regulate reckless banks, and that he then pushed to bail them out when the economy teetered in September 2008. To be sure, Bernanke had his fair share of defenders, who argued that his boldness prevented economic Armageddon and that rejecting a Fed nominee would wreak havoc in markets, undermining the recovery.

That a Democratic Senate might reject a Democratic president’s Fed nominee might seem unlikely to some. Still, we know that the White House felt it needed to make an aggressive push and that financial giants like Warren Buffett were enlisted to lobby selectively on Bernanke’s behalf. Even Bernanke called and visited with wavering senators in a public and unprecedented effort to save his job (this, on top of last year’s first-ever appearance of a Fed chair on 60 Minutes).

This past Thursday, the Senate confirmed Bernanke. Seventy-seven senators voted to cut off debate (invoking “cloture”) and seventy (including a bare majority of Republicans) voted for confirmation. Bernanke now holds the dubious distinction of securing confirmation as Fed chair with the smallest margin ever.

The vote raises two questions: What forces shaped the vote? And of what consequence is the vote?

Modeling the vote

If a vote against Bernanke were a mechanism for avoiding blame for a poor economy, senators facing voters this fall should have been more likely than their colleagues to vote against Bernanke. The message from Massachusetts — beware frustrated voters— — does appear to have been heard by this cohort. Republicans on the ballot were roughly thirty percent less likely to vote to confirm Bernanke, compared to their other Republican colleagues. Democrats on the ballot were roughly twenty percent less likely to confirm than other Democrats.

In contrast, many have said that opposition to Bernanke might have represented populist ire on the left and right about government bailouts that favor financial elites at the expense of ordinary citizens. That assessment also rings true, as the most extreme senators on the left (think Bernie Sanders) and right (think Jim Bunning) disproportionately voted against confirmation. Liberals on the far left were about fifteen percent less likely than centrists to side with Bernanke, and while conservatives on the far right were roughly a quarter less likely to vote to confirm.

As is clear from the vote tally, Republicans were generally less likely to side with Bernanke. Without the burden of carrying water for a Democratic president, Republicans were willing to let Harry Reid shoulder the burden of finding votes from his side of the aisle. More surprising is that objective economic conditions at home mattered little: Unemployment rates in the states had little direct effect on senators’ votes.

Finally, and not surprisingly, senators who rely most heavily on campaign support from the financial sector voted disproportionately in favor of confirmation. That effect holds up even after controlling for ideological and electoral considerations (as well as membership on the Senate Banking Committee). I suspect that reflects in large part the geography of the financial sector. Senators from the Northeast and Mid-Atlantic, representing large concentrations of the financial industry, were more likely to support Bernanke and presumably more skittish about attacks on bankers of any sort.

Consequence?

Although Bernanke remains as chair, the political impact of the confirmation tussle looms large.

First, brewing dissatisfaction with the Fed’s performance extends far beyond the confirmation vote. The House has voted to allow audits of monetary policy, while proposals in the Senate would strip the Fed of its supervisory powers, rein in its emergency lending powers, and confine it to the task of setting (interest) rates (which, of course, some could argue is the most important element of central banking). Bernanke’s wafer thin confirmation margin reveals legislators’ wariness—if not downright distrust—of the Federal Reserve. Granted, it’s not clear that there are sixty Senate votes (nor a House majority) for rewriting the Federal Reserve Act. Still, Bernanke’s weak showing will increase the resolve of Fed critics to restructure the nation’s financial architecture, stripping the Fed of key powers and scrutinizing its decision-making. A weakened Bernanke may have a tougher time blocking such change.

Second, the road to confirmation has imposed a steep tax on the Fed’s independence. Bernanke’s explicit lobbying for senators’ support, as well as claims from the Democratic leader that his support was “conditional,” belies the myth of Fed independence. That of course raises the possibility that political pressure could interfere with the Fed’s conduct of monetary policy— thus stoking the risk of inflation. In other words, not only does Bernanke face the challenge of fending off encroachments on central bank powers, he will also simultaneously have to consider how and when to tighten the reins on the economy. If one in ten Americans remains out of work, such tightening will likely elicit rebukes from many on Capitol Hill—further complicating the Fed’s ability to manage inflation expectations.

Getting back to his chair at the Fed will likely prove easier than governing from it.