Remember the good old days when President Obama and Congressional Democrats voiced their staunch support for Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner? That was just last month. But these days, Democrats are suddenly distancing themselves from these figures. Could this mean an end to their reign as the leaders of U.S. government finance? I don't buy it.
First, let's consider Geithner. The Washington Post reports that the Volcker plan is evidence that Geithner and Obama's relationship may be on the outs. After all, why would Obama make such a huge policy announcement with someone other than his trusted Treasury Secretary by his side? The article says:
"His influence may have slipped," said a senior industry official who spoke on the condition of anonymity to preserve his relationship with the administration. "But you could also argue that it wasn't Geithner who lost power. It's just that the president needed Volcker politically" to look tough on big banks.
Right, you could argue that, or you could argue a few other things. First, it was Volcker's idea. He's been advocating for a while that banks need to be broken up Glass-Steagall style. So why would this be the Geithner plan, when it wasn't Geithner's idea? He does support the plan, bear in mind -- he just doesn't deserve credit for dreaming it up.
But, in fact, maybe this was a political decision. Geithner and Obama may have agreed that it would be best for Geithner to keep his distance from the Volcker plan. Why? Because it is going to fail. The Volcker Plan is a political maneuver to distract the public from the health care debacle. If the banking lobby has persuaded the Senate to think twice about the Consumer Financial Protection Agency, then it certainly isn't going to allow Washington to break up the banks or to take away its billions-of-annual-dollars prop trading business. While much of the Volcker Plan is very good, almost none of it will likely make its way into whatever financial regulation bill the President eventually signs.
As a result, it would be politically dangerous to tie someone as important as Geithner to a plan that's destined to fail. But it's easy to sacrifice Volcker: his position in the administration as an advisor is much further from the public eye than the Treasury Secretary. There's very little political risk involved for the President in a Volcker Plan failing, but far more in a Geithner Plan failing.
Finally, the President has stood behind Geithner unrelentingly thus far. To suddenly cast him aside now would also make President Obama look bad. Republicans could then blame the President for the continued economic turmoil saying, "Why do you think he fired his Treasury Secretary?" There's no way the President wants to give Republicans any additional ammo for their attacks in this year's midterm elections.
But what about Bernanke? The Senate sure does seem to be dragging its feet in reappointing him. His term ends in just nine days. What are they waiting for? Are the votes not there?
The Wall Street Journal reports today that more prominent Democrats are expressing their disapproval with Bernanke and promising to vote against his reappointment. The most recent such Senators include Russ Feingold (D-WI) and Barbara Boxer (D-CA). And that's in addition to several other Democrat Senators who have already said they want Bernanke out.
Still, I don't believe the Democrats would spur President Obama in this way by rejecting his decision to nominate Bernanke for reappointment. Chair of the Senate Banking Committee, Christopher Dodd (D-CT), explains exactly why:
"I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination," Mr. Dodd told a group of reporters. "This is not naming someone to be an assistant secretary to something. This is the most important central banker in the world."
The market has a very strong expectation that Bernanke will keep his job. And he should: he might not be perfect, but he handled the financial crisis heroically. That's why the President wants him to keep the job. And that's why the Democrats in Congress should too.
But what if a few more Democrats decide to defect to the other side and join Feingold and Boxer? If Republicans band together to vote against Bernanke's reappointment, could it really be doomed? I still say no way. If push comes to shove, I think you'll see Republicans change their stance on Bernanke quite quickly. It's easy for them to complain about Bernanke when they know Democrats will reappoint him. But if that changes, so will the ease with which they vote against keeping him around.
Think about it: would Republicans really prefer President Obama to nominate a different Fed chair from scratch? Maybe they'd rather see Larry Summers in there? How about Paul Krugman? Whoever Obama picks can't possibly make Republicans feel any better than Bernanke -- George W. Bush's pick four years ago. They'll have to be practical. And if Republicans do change their minds, then they only need a handful of Democrats to go along.
I think you're seeing a situation where the Democrats are in a little bit of disarray after the staggering Senate loss in Massachusetts. Both of these figures are caught in the crossfire. They're looking for someone to blame; they're looking for scapegoats. But at the end of the day, the political fallout from removing these two important figures in government finance would far outweigh the political benefits.