Bernanke's next term: As tough as the last?

In reappointing Ben Bernanke as head of the Federal Reserve, President Obama has given the central banker a tough assignment, tougher arguably than the extraordinary crisis he has already navigated in the last year and a half.

And that's the rub. Central bankers, who are great at drawing lessons from the past, don't really have a great record of anticipating the future.

So for all the accolades now being served up – "Ben Bernanke has led the Fed through one of the worst financial crises that this nation and this world have ever faced," President Obama said Tuesday in announcing the reappointment – it's important to remember that great central bankers do not make great prognosticators.

They look backward with unusual clarity, but their crystal balls are as hazy as anybody else's.

Many argue that Mr. Bernanke is partly responsible – along with his once-lauded predecessor Alan Greenspan – for the housing bubble to begin with.

So Bernanke's next term will test his mettle as surely as the last one did, because the US economy is in uncharted waters. Instead of choosing one of the two prevailing theories for how to navigate a deep, deflationary recession, America adopted both. Bernanke followed monetary theory and pumped huge amounts of money into the financial system. The White House and Congress, borrowing from Keynesian economics, pumped in government stimulus.

Either policy risks igniting the fires of inflation. Together, they could stoke it into a roaring inferno.

So the world's more powerful banker will need great forecasting and exquisite timing to guide the economy through the shoals without running aground on either shore of deflation or inflation.

"We have been bold or deliberate as circumstances demanded," Bernanke said after the president announced his reappointment, which must be confirmed by the Senate. "But our objective remains constant: to restore a more stable financial and economic environment in which opportunity can again flourish and in which Americans' hard work and creativity can receive their proper rewards."

While that scenario seems more plausible than it did in the thick of the crisis six months ago, it still remains a tall order.
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