The Institutional Risk Analyst
January 28, 2010

“Anybody who says we don’t have to do anything, we can just keep on doing what we’re doing, has got their head in the sand. Social Security and Medicare are both cash negative today. They are both headed for insolvency. Those who say we don’t have to do anything, they are guaranteeing a disaster.”

Senator Kent Conrad (D-ND)
January 26, 2010

andrew jackson
The 2010 elections promise to be the most contentious and significant since the election of Andrew Jackson in 1828.

In the last presidential election, the issues before the country were President George Bush and the war in Iraq vs. the promise of change via a young and untested Democratic Senator from Illinois named Barack Obama. The Federal Reserve and the banking industry were not even factors in the election.

Today the Federal Reserve and the bailouts for the largest banks are the central issues in American politics. The upset defeats of Democrats John Corzine in New Jersey and Martha Coakley in Massachusetts, following the earlier Democratic loss in Virginia, were driven by the public’s growing disgust with the management of the economy.

The 2010 elections promise to be the most contentious and significant since the election of Andrew Jackson in 1828. For those of you who missed that particular episode in American history, Jackson was the first American leader who was actually chosen by popular vote and not selected by the nation’s founders or their offspring. And one of the key issues which drove the hero of New Orleans into the presidency was popular anger at the central bank.

The 2010 mid-term elections and the general election in 2012 likewise promise to see the unseating of an entrenched elite and the start of an extended period of political instability in America. Below we discuss why a “yes” vote for Ben Bernanke may doom members of the Senate in both parties who are up for re-election to defeat in November.

Politics

The White House is telling members of the Senate that a vote in support of Ben Bernanke will not be a political liability. Indeed, in meetings and telephone calls, President Obama is urging a “yes” vote on Bernanke as a way to support the recovery of the US economy. The White House also claims that the defeat of Bernanke will be bad for the financial markets.

But wait a minute. Fewer than 1 in 5 Americans support the re-nomination of Chairman Bernanke, a remarkable poll statistic since few members of Congress much less most Americans have any idea about the job responsibilities of Bernanke and other Fed governors. More, Chairman Bernanke was a Bush appointee, and then reappointed by Obama, so he is associated with two unpopular political figures. His confirmation is being managed by Linda Robertson, the former chief lobbyist of Enron. Chairman Bernanke is toxic measured in any political terms and is perceived as more friendly to Wall Street than Main Street by a 2 to 1 margin.

A vote for Bernanke is an endorsement of all financial policies undertaken from 2007-2009. These issues are not going away, and will remain salient for the foreseeable future, especially as credit remains tight and the real economy continues to shrink. Indeed, the negative impact of the Bernanke years could doom President Obama and many incumbent members of the House and Senate. And while the markets might initially react negatively to a defeat of Chairman Bernanke’s re-nomination, the impact of his continued service at the Fed in the weeks and months ahead may be far more problematic, both for global financial markets and political careers.

The Economy & Jobs

[efoods]Chairman Bernanke is responsible both for the economy and the bailouts. He has overseen an economy with 10% unemployment and no credit, with massive bonuses for bankers who were rescued at public expense. The high unemployment was inevitable after the boom years of Alan Greenspan, but Chairman Bernanke was also at the Fed during that period. More, Chairman Bernanke is also on record advocating policies that would suppress employment levels rather than increase them.

Regardless of what one believes about Bernanke’s involvement in covering up undue manipulation of Bank of America (BAC) CEO Ken Lewis, excess payments to American International Group’s (AIG) bank counterparties or attempts to stymie the investigation of abuses committed during the bailout by SIGTARP, the reality is the Fed has a dual mandate – price stability and full employment. One either measure of his job, Chairman Bernanke has not been a success.

Fed Deception of Congress Regarding AIG

Even as the Senate prepares to vote on the Bernanke nomination, Rep. Darrell Issa (R-CA) has asked the Chairman of the House Committee on Oversight and Government Reform to subpoena AIG-related documents from the Fed, documents which apparently prove that Chairman Bernanke played a major role in deciding to bail out AIG and, indirectly, Goldman Sachs (GS) and other large bank dealers.

In a January 26, 2010 letter obtained by The IRA, Issa claims that Bernanke overruled a recommendation by Fed staff that AIG be allowed to declare bankruptcy “just like Lehman Brothers” and instead authorized the bailout of the crippled insurance giant over the objections of Fed staff in Washington. The Fed appears to be withholding these documents from Congress until after the Senate votes on the Bernanke nomination.

Rep. Issa, the ranking member of the Committee, refers to a statement by Senator Jim Bunning (R-KY), whose staff has been examining these same documents under strict rules of confidentiality imposed by the Fed’s staff, to the effect that Chairman Bernanke overruled the recommendation of his staff and pushed the bailout of AIG. How can the Senate vote on the Bernanke nomination when the Fed is refusing to come clean on AIG?

Members of the Senate need to ask themselves a question: With the current disclosure by the Fed, what further revelations will surface regarding the central bank, AIG and the bailout of the large New York banks between now and November?

So given the above, why is Chairman Bernanke seemingly en route to confirmation? Why do members of the Senate seem to indifferent to the mounting popular anger at Chairman Bernanke and the Fed? There are several reasons the Senate is making a major political and economic miscalculation in its appraisal of Ben Bernanke’s role at the Federal Reserve. The most significant is that Senators think that the Federal Reserve and the bailouts are not voting issues, because there are no traditional organized constituent groups that lobby around them.

Staffers who frame issues for Senators do not know that Fed and its profile in American politics has changed in a way reminiscent of the days of President Jackson and the battle over the Second Bank of the United States. After all, issue groups have an incentive to mislead incumbent Senators in a way biased towards the interest of incumbent financial interests. This is a terrible mistake for the political health of any Senator who wants to get reelected in 2010 or 2012. The bailouts happened from 2008-2009, and voters now understand them and loath them. And this applies equally to Democrats and Republicans in the Senate.

Look at how the Fed and AIG are changing the dynamic for incumbent GOP Senators. Republicans are seeing bailout-themed primary campaigns, where incumbents like Utah Senator Bob Bennett and Arizona Senator John McCain are explicitly attached to the bailouts. As noted above, democrats saw losses in Virginia, New Jersey, and Massachusetts. And Brown voters in Massachusetts showed significant dissatisfaction with Democratic ties to Wall Street. But the same populist wave will carry away Republicans as well.

Bottom line: A “yes” vote for Chairman Bernanke raises the likelihood of defeat for every member of the Senate standing for election in 2010 and 2012. And in any event, the rising tide of popular unhappiness with Washington and Wall Street promises to remake the American political landscape in a way not seen in the post WW II era. The comfortable assumption of stability in American political life is about to be replaced by instability and change, but that is what democracy is all about.

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