Forget the presidential election. The real question on every investor's mind ought to be, who will be the next chairman of the Federal Reserve?
In terms of sheer financial firepower packed into a single individual, the chairman of the Federal Reserve has unrivaled influence over the U.S. economy, and to some extent even the world economy. Current chair Ben Bernanke's term is up in 2014, and speculation has already begun as to who might replace him.
Give a guy a break
Bernanke was initially appointed Fed chairman in 2006, by President Bush. Barack Obama reappointed him in 2010. There's nothing stopping the next president, whomever it is, from reappointing Bernanke. But if that happens to be Mitt Romney, it's unlikely to happen. He's already indicated he would appoint someone else.
If Barack Obama wins reelection, he could again appoint Bernanke. The president obviously thought well enough of him to reappoint him in the first place. But Bernanke might not even want the job: Serving eight years in the most powerful economic office in the country during the worst economic crisis since the Great Depression must have worn on the poor guy.
Rumor has it, in fact, that Bernanke is interested in returning to academia -- sooner rather than later.
A banker's best friend
But if the president does win reelection, and assuming Bernanke is up for the job, he would be a likely choice for appointment. The president is obviously comfortable with him, having served side by side with him through the darkest days of the crash. And from a bank investor's standpoint, if not for Bernanke, even more banks might have gone down:
- Bernanke's Fed backstopped the Bear Stearns deal, the first moment of real drama in the crisis, as the investment bank was scooped up moments before imploding by JPMorgan Chase (JPM +3.14%). Without the soft landing provided by the Fed, Bear's disintegration might have had a messier effect on not just the banks but on the financial system as a whole.
- Bernanke's Fed also worked tirelessly with then New York Fed governor Timothy Geithner and then Treasury Secretary Henry Paulson to arrange Bank of America's (BAC +2.91%) purchase of Merrill Lynch, again just in the nick of time, as Lehman Brothers' bankruptcy had started a run.
- Again with Geithner and Paulson, Bernanke's Fed worked tirelessly to implement the Troubled Asset Relief Program, which injected cash directly into capital-starved banks. Goldman Sachs (GS +3.96%), Morgan Stanley (MS +4.27%), and Citigroup (C +4.99%) all benefited enormously from TARP and might not have been around today otherwise.
Choose wisely
So Bernanke's been there for the banks, but what if he doesn't want the job?
- Again assuming an Obama second term, one of the names being bandied about is Larry Summers. Summers was Treasury Secretary under Bill Clinton and is a former economic advisor to President Obama. He certainly has the brains to do the job, but is cantankerous. And as one of the primary jobs of the Fed chairman is to lead -- and listen to -- the six other Fed governors, he could be a relatively ineffective chairman, which is exactly what the world doesn't need right now -- or ever, for that matter.
- Treasury Secretary Tim Geithner is also an obvious choice from the president's point of view -- another old war buddy from the crisis -- but it's unclear if he would even want the job. Geithner already tried to walk away from his current position. But for investors, he's no enemy of the banks, having gone out of his way to save them in 2008. Like Summers, however, Geithner has a reputation for being a bit of a pill.
- Dan Tarullo is another name being thrown around. He's currently a governor and the Fed's top banking regulatory official. Tarullo is pushing for new regulation that's potentially strict enough to break up the country's six biggest banks. While at first glance this suggests he's no friend of the banks, if there's investor value being locked up in these giant, too-big-to-fail institutions, his appointment could ultimately lead to good things for investors.
Fingers crossed for Ben
Bernanke is the smartest kid on the block. He's also a good listener, thoughtful (as in, he actually thinks things through before acting), and is about as non-partisan a Fed chairman as you could hope for. Summers and Geithner don't play well with others. Tarullo could be interesting, but he'd be a very different kind of chair than Bernanke (read: more radical).
Janet Yellen, the current Vice-Chairman of the Federal Reserve, is another possibility. Like Bernanke, she's a monetary dove. As such, she might be the next best thing to Bernanke if he doesn't want the job. Hope for Bernanke, but be OK with Yellen.
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