Analysis
By Steve Schifferes
Economics reporter, BBC News

<img src=”http://newsimg.bbc.co.uk/media/images/45125000/jpg/_45125828_-73.jpg” align=”left” width=”226″ height=”170″ alt=”US Federal Reserve chairman Ben Bernanke ” border=”0″ vspace=”4″ hspace=”4″>

Ben Bernanke, the chairman of the US central bank, the Federal Reserve, has played a central role in the global financial crisis.

The Fed, along with the US Treasury, organised the $700bn (£496bn) bank bail-out plan in October 2008, and has since spent an additional $3 trillion propping up the credit markets and trying to boost the economy.

"Its credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight"

William Donaldson, former SEC chief

Mr Bernanke’s four-year term as Fed chairman comes up for renewal in January, and his reappointment is now the subject of an increasingly bitter debate between right and left.

Under fire

His role in the bail-out has come under fire from conservative Republicans and left wing Democrats, who believe that he betrayed his Republican roots by providing so much state support for the banks while ordinary citizens have suffered from the economic downturn.

Other economic conservatives fear that the huge Fed lending – along with a Federal government deficit that is expected to reach $1.7 trillion this year, is likely to prove highly inflationary, and are urging the Fed to unwind its big lending programme as soon as possible.

And some influential voices argue that, since the Fed performed poorly regulating the banks before the crisis, it should not be given the lead role now.

"Its credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight..and the heavy influence that the banks have on the Fed’s governance," say two former heads of the Securities and Exchange Commission, William Donaldson and Arthur Levitt.

‘No interference’

But Mr Bernanke has also attracted wide support among mainstream economists and investors for his handling of the crisis.

A petition from more than 250 prominent economists, including Yale’s Robert Schiller and three Nobel Prize winners (Robert Merton, Eric Maskin, and Daniel McFadden) argues that the criticisms are putting the independence of the Fed at risk.

"When the Fed judges it’s time to begin tightening monetary conditions, it must be allowed to do so without interference," they said.

And Mr Bernanke so far has one very important backer – President Barack Obama, the man who will decide later this year whether to reappoint him.

"He is doing a fine job in difficult circumstances," Mr Obama said at a press conference in June.

Popular anger

It is highly unusual in US politics for the job of Fed chairman to be so politicised – and the previous, long-serving chairman, Alan Greenspan, always attracted bi-partisan support.

The debate over Mr Bernanke’s future, however, is also a debate about the future course of US economic policy after a year of unprecedented government intervention amid the deepest economic downturn since World War II.

Mr Bernanke, and his ally US Treasury Secretary Tim Geithner (who played a key role in the financial bail-out in October when he was head of the New York branch of the Fed) have been trying to steer a middle course, providing emergency relief to the banking sector but making it clear that these are only temporary measures.

At the same time, they are planning to toughen up regulation to prevent future crises – and much of that regulatory power will be accrued by the Fed.

Critics fear that Mr Bernanke will become too powerful, and the banks would like to weaken the close regulatory oversight being proposed by the government.

At the same time, there is huge popular anger at the scale of the bank bail-out, and a belief that this constitutes "socialism for the rich", with ordinary citizens suffering from the economic fall-out from the banking crisis.

These feelings have become stronger as it has become clear that, despite President Obama’s $787bn stimulus package, the US recession is likely to be long and deep, with unemployment rising sharply and forecast to top 10%.

Recession lingering

The Fed’s own assessment of the US economy is still distinctly downbeat, and in its most recent pronouncement said that "downside risks as predominating in the near term," although it is hopeful of a mild recovery by the end of 2009.

So the Fed is likely to continue with its program of credit easing.

Despite the worries of conservative economists, it argues that there is little immediate danger of inflation at the moment with economy still weak.

The Fed’s loose monetary policy also take some pressure off the Obama administration, which is facing calls from the left for a second stimulus package to provide a further fiscal boost the the economy.

This would be politically problematic, and also make it more difficult for the President to pass his other, expensive policy iniatives, such as health care reform.

Bernanke’s Rivals

But if the economy did worsen significantly, it is still possible that Mr Obama might want to replace the man who symbolises the bank bail-out in the public imagination.

The leading candidate to replace him is the charismatic figure of Larry Summers, the former US Treasury Secretary who is now a key economic advisor to the President.

Mr Summers, a former President of Harvard, is a forceful advocate of further government intervention in the economy, but has run into trouble because of his outspoken views.

Another possibility would be Janet Yellin, a former Fed governor and advisor to President Clinton, who has dovish views about inflation.

However, many investors believe that it would be a mistake to replace Mr Bernanke, and are hoping that, in the interest of policy stability, that he is reappointed.

In the opinion of David Wyss of Standard & Poor’s: "Don’t change horses in mid-stream." </p

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