To Bernanke or Not to Bernanke

This post first appeared on Minyanville.

It's every pitcher's worst nightmare -- or possibly their fondest dream, if they're the sort of person who thrives under pressure -- to take the mound in the final inning of a tie game with the bases loaded and nobody out. It's an almost impossible situation -- a disaster you didn't create, but have been called upon to make right.

Such was the position Ben Bernanke, preeminent scholar of the Great Depression, found himself in when he took over at the Federal Reserve in February 2006. The US housing market was just beginning to show signs of deterioration, and decades of excessive debt and mispriced risk were about to explode into the biggest financial crisis since the 1930s.

Now, as the Fed finishes up its June monetary policy meeting, Bernanke will remain on Capitol Hill to face questions concerning his role in the crisis and whether he's the best candidate to lead the Fed into the future. With the chairman's term ending in January 2010, President Obama has 6 months to decide whether Bernanke's performance under extreme duress -- and the unprecedented measures he took to save the global financial system -- are worthy of another 4 years.

Bernanke is a polarizing figure -- indeed, he has been since he first came to office. Coming in as he did after almost 20 years of authoritarian rule under "the Maestro," Alan Greenspan, Bernanke sought to downplay the role of Fed chairman. Some hail him as a savior: Who better at the helm during an historic credit crisis than the economist who's arguably spent his entire academic career preparing for just such an assignment?

Bernanke's papers, his dissertation, and the speeches he's made over the past 3 decades read almost like a script for handling the type of maelstrom he's faced during the past 24 months. Supporters argue that Bernanke prepared himself well -- that he performed admirably under wildly difficult circumstances.

On the other side of the fence, Bernanke's seen as the latest in a series of public figures who, in the words of Minyanville's Todd Harrison, "bought the cancer and sold the car crash."

In other words, Bernanke's chosen to kick the can just far enough down the road to avoid disaster -- but ignoring the inevitable day of reckoning. In expanding the Fed's balance sheet by $2 trillion -- and ballooning its obligations by trillions more in off-balance-sheet liabilities -- Bernanke has risked a complete debasement of the dollar and flung open the door to the dangers of hyperinflation.

Critics also argue that Bernanke overreached his authority when he strong-armed Bank of America (BAC) CEO Ken Lewis into completing the purchase of Merrill Lynch at the end of 2008. The chairman's role in pushing Bear Stearns into the waiting arms of JPMorgan Chase (JPM), guaranteeing hundreds of billions of dollars of Citigroup's (C) toxic assets, bailing out American International Group (AIG), and taking over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), will all be up for debate.

To be sure, Bernanke has ben busy these past 3-and-a-half years.

Ultimately, President Obama must decide not just whether Bernanke is the right man for the job, but whether replacing him is worth the economic -- not to mention political -- cost. According to Bloomberg, the last 4 US presidents all retained the Fed chairmen from their first terms through their second. Bernanke's 2 most likely replacements, should he not be reappointed (current White House economic advisor Larry Summers and San Francisco Federal Reserve Bank president Janet Yellen) are undoubtedly well aware of this disheartening fact.

The end of Bernanke's term might seem like it's just around the corner. But if we've learned anything from this crisis, it's that 6 months is more than enough time for the world to change in a big way.