Why Wall Street Doesn't Want Ben Bernanke To Leave

Ben Bernanke is a frequent whipping boy for Tea Partiers, Congressional Republicans, and a lot of ordinary citizens fed up with a flaccid economy. But Bernanke remains very popular on Wall Street.

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As the Fed gets deeper into its stimulus program, it's increasingly going off the map.

Federal Reserve Chairman Ben Bernanke is a frequent whipping boy for Tea Partiers, Congressional Republicans, and a lot of ordinary citizens fed up with a flaccid economy. But Bernanke remains very popular on Wall Street, where traders are starting to worry about who might succeed him. 

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Bernanke's second term as Fed chairman expires in January 2014, and the New York Times recently reported that Bernanke is unlikely to seek reappointment to a third term. Even though that's 15 months away, rumors of Bernanke's departure may be contributing to a swoon in the stock market. And they're forcing big Wall Street money-management firms to reevaluate the prospects for stocks if Bernanke is no longer in charge of monetary policy.

Since the 2008 financial meltdown, Bernanke — first appointed by President Bush in 2006 — has aggressively pursued an "easy money" policy based on super-low interest rates and unusual types of monetary stimulus, such as quantitative easing. The Fed's goal under Bernanke has been to flood the economy with money as a way of encouraging lending, spending and other types of economic activity, and to force investors out of bonds and other safe investments they prefer during anxious times, and back into riskier assets like stocks. Bernanke, a former economics professor at Princeton, is an expert on the Great Depression, and his policies in general are the opposite of the tightening the Fed did back then, which most economists believe made the Depression worse.

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Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking, Housing, and Urban Affairs Committee, September 23, 2008.

Many analysts credit the Fed's easy-money policies for triggering a rally that has pushed stock values up by more than 100 percent since they hit a low point in March, 2009. That has helped ordinary people with retirement and investment accounts, along with wealthy investors. The 2008 meltdown wiped out nearly $10 trillion worth of financial assets held by American households, for instance. Bernanke's efforts to reinflate the stock market have helped investors recoup nearly all of those losses.

Easy-money policies have also allowed big companies to stockpile nearly $2 trillion in cash, which could itself become a powerful economic stimulant once they start using it to invest in new equipment and hire more workers. Many CEOs say they're waiting for signs of a stronger economy, and more clarity on the political outlook from Washington, before they ramp up spending in earnest.

Critics of Fed policy warn that a flood of money could produce runaway inflation. But so far that hasn't happened. Inflation is running at about 2 percent this year, and it would be lower if not for volatile swings in food and energy prices. The Fed's critics might turn out to be right some day, but many of them have been saying that inflation is just around the corner for years. The longer we go without a crushing rise in prices, the more it seems to validate Bernanke's policies.

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Republican presidential nominee Mitt Romney has said that he doesn't approve of Bernanke's aggressive monetary policy and wouldn't appoint him to a third term if elected president. That has prompted Wall Street firms to analyze the outlook for stocks and the economy if Romney becomes president, and appoints a Fed chairman who's more inclined to raise interest rates and rein in the money supply than Bernanke.

A Romney victory in November might generate a rally in stocks, since Romney's policies are presumed to be friendlier toward business than Obama's have been. But the honeymoon might not last very long.

"Positive sentiment could be offset by the likelihood that someone more hawkish than Chairman Bernanke is chosen to lead the Fed," investing firm UBS explained in a recent note to clients. "Given the market's penchant for liquidity over the past several years, we believe concerns over tighter monetary policy could create a headwind in 2013."

If Bernanke chooses to leave in 2014 but Obama remains president, that could still generate uncertainty about the direction of monetary policy, which Bernanke — not Obama — has been guiding. Obama could appoint a new chairman who shares Bernanke's predilections, such as Janet Yellen, the Fed's current vice chair, or William Dudley, president of the New York Fed. But there are many other possible candidates who might be more conventional than Bernanke, and less satisfying to Wall Street. Figuring out who should run the Fed after Bernanke is the kind of problem both Obama and Romney would like to have.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.