Obama, McCain Back Bernanke, Likely to Avoid Intruding on Fed

Obama, McCain Back Bernanke, Likely to Avoid Intruding on Fed

By Scott Lanman

July 24 (Bloomberg) -- John McCain and Barack Obama miss no opportunity to contrast their differences on taxes, trade and health care. On the institution with the most influence over the economy -- the Federal Reserve -- their views have been similar and sparse.

Both of the presumptive U.S. presidential nominees praise the central bank's chairman, Ben S. Bernanke, a Republican. Both backed the Fed's moves to rescue Bear Stearns Cos. from bankruptcy and to support Fannie Mae and Freddie Mac. Both candidates' advisers say the Fed's approach to interest rates would change little with a new administration.

With neither senator eager to frighten investors or talk about shifting course during a credit crisis, the next president is likely to continue the policy of the last 16 years under Presidents Bill Clinton and George W. Bush: avoid meddling in interest-rate decisions and appoint Fed officials who are respected in the worlds of economics and finance.

``It will be difficult for either candidate to make a big change,'' said David M. Jones, a former Fed economist who has written books about the central bank.

Neither candidate has spoken extensively about the Fed during the campaign or had a chance to question the central bank's chairman in committee hearings in recent years. In March, Bernanke briefed McCain on the Bear Stearns episode over the phone, at McCain's request. They spoke for about 15 minutes, according to Bernanke's daybook.

Confidence in Bernanke

``We have complete confidence in the chairman and the Federal Reserve,'' said Douglas Holtz-Eakin, a top McCain adviser. Obama ``also has a lot of confidence in Ben Bernanke,'' said Jason Furman, the Illinois senator's economic adviser.

Still, the election will affect the institution because either Obama, a Democrat, or McCain, an Arizona Republican, will appoint three of seven Fed governors right away, due to vacancies. The new president will also decide whether to nominate Bernanke for a second four-year term after the chairman's first one ends in January 2010.

A president's stance toward the Fed isn't necessarily predictable. Republican George H.W. Bush, who was vice president when Alan Greenspan was appointed in 1987, clashed with the Fed chief and said he helped cost Bush the 1992 presidential election by keeping interest rates too high. Bush had reappointed Greenspan in 1992.

At the same time, Democrat Clinton had good relations with Greenspan, who praised the former president in his 2007 memoir for his ``consistent, disciplined focus on long-term economic growth.''

Market Regulation

Obama and McCain have also signaled they support the Fed's moves to step up regulation and enforcement. The Fed is one of four main federal agencies to supervise commercial banks, and Congress may expand its supervision over investment banks next year since the Fed has become a lender of last resort to securities firms.

Bernanke last week approved new rules requiring lenders to determine a borrower's ability to repay and barring other practices that led to the housing collapse after congressional Democrats criticized the Fed for past inaction.

In March, Obama called for giving the Fed greater supervisory authority when acting as lender of last resort, strengthening capital requirements for financial companies, and streamlining regulatory agencies.

`Really Big Role'

Furman said the administration ``has a really big role to play'' in helping the Fed solve problems in the financial sector, because the central bank ``is really focused on price stability.''

Tom Schlesinger, who heads the Howardsville, Virginia- based Financial Markets Center, said Fed boards with a majority of Democratic-appointed officials are historically ``somewhat more aggressive'' on regulation.

While McCain also favors increased market oversight and supported the Fed's action on Bear Stearns, he has voiced skepticism about government rescues of financial firms.

``It is not the duty of government to bail out and reward those who act irresponsibly,'' he said in a March speech. Government assistance should be based ``solely on preventing systemic risk.''

Whatever the approach, Bernanke, 54, is likely to remain at the helm. He's earned the goodwill of lawmakers after cutting interest rates at the most aggressive pace in two decades and acting to prevent a global financial meltdown.

`What the Country Needs'

While reappointment isn't a sure thing, it's been 30 years since a first-term president replaced a Fed chairman. Jimmy Carter chose G. William Miller to succeed Arthur Burns in 1978 -- then replaced Miller a year later with Paul Volcker after inflation spun higher.

Presidents Ronald Reagan, George H.W. Bush, Clinton and George W. Bush all reappointed Fed chairmen in their first terms.

``I would be very, very surprised if either John McCain or Barack Obama would do anything except reappoint him,'' said former House Financial Services Committee chairman Jim Leach, who now directs the Institute of Politics at Harvard University's Kennedy School of Government. ``A professional Fed chairman is what the country needs and what any new president would want.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net