Uncertainty on Bernanke vote raises economic fear. By Jeannine Aversa/AP – Washington

A defeat of Federal Reserve Chairman Ben Bernanke’s quest for another four-year term could raise the risk of a “double dip” recession if political jousting over a successor were to drag on for months, economists warn. But Bernanke’s prospects appeared to brighten Sunday, with three more senators, including Republican leader Mitch McConnell of Kentucky, predicting he’ll be confirmed. A vote is expected later this week. Still, the change of Bernanke’s defeat has unsettled Wall Street, contributing to last week’s 4 percent loss by the Dow Jones industrial average, its worst performance in 10 months. If Bernanke ware rejected, uncertainty over a successor would further roil global markets, at least in short run.
Anxiety, along with sagging investments, could cause consumers and businesses to cut spending. Joblessness, already at 10 percent, could worsen. And the recovery might fail. Economists who fear a double-dip recession – regard it as a worst-case scenario. But they don’t rule it out, either. Lynn Reaser, chief economist for the National Association for Business Economics, is among them. She sees the likelihood of double-dip as less than 50 percent. “It will become more acute if there are delays in confirming a successor,” she says, nothing that the economic recovery remains fragile, with spending still weak, credit tight and job creation scarce.
“All the political angst over the confirmation couldn’t have come at a worse time for the economy,” Reaser says. A Bernanke loss would heighten uncertainty about Fed policies on interest rates and stimulus measures. In part, that’s because Bernanke devised the unconventional support for the economy and likely knows how best to safely wind them down, notes Edward Yardeni, chief investment strategist at Yardeni Research. But even more worrisome for the markets and economy would be if Bernanke’s Senate foes are seen as having meddled with the Fed’s independence political reasons. The dollar would likely fall. Higher interest rates and inflation fears would follow, stoked by uncertainty and shaken confidence. And all that would probably unsettle consumers and business, making them less likely to spend, hire or invest. Bernanke’s confirmation, which had seemed assured, was suddenly thrown into doubt last week as resistance grew among some Senate Democrats. And some senators who had supported Bernanke said they were now undecided.
The Fed chief’s term expires Jan.31. If Bernanke isn’t confirmed by then, vice chairman Donald Kohn is expected to step in as chairman and run the central bank temporarily. Bernanke is widely credited with helping to prevent the Great Recession form turning into a second Great Depression. But his support of Wall Street bailouts during the height of the financial crisis has angered Americans struggling with 10 percent unemployment and soaring home foreclosures. Backlash from Democrats over Bernanke’s role in the bailouts intensified after Democrats suffered stunning upset in the Massachusetts senate race. Democrats are eager to appear allied with ordinary American disgusted with Wall Street’s excesses. Higher interest rates that could follow a Bernanke defeat would make it costlier for the government to pay down its record-high debt. Right now, low rates are allowing the Treasury Department to manage its debts. If investors think the White House and congress will choose a successor who would keep the Fed pumping money into the economy and hold interest rates record lows for too long, it would erode trust in the Fed’s overight of the economy.
Continued low rates would please many ordinary Americans. But it would risk creating new speculative bubbles and stoking inflation. Some economists says that long run, they most fear that global investor would see a rejection of Bernanke as setting a precedent for Congress to inrude on “monetary policy.” That refers to the Fed’s decisions on whether and when to adjust rates to influence economic activity, inflation and employment. The Fed’s independence in monetary policy is vital to public confidence in the central bank. If it’s undermined, the Fed could lose its credibility on Wall Street, which would fan inflation pressures and send up interest rates, choking the economic rebound. Speaking on Sunday talk shows, Senate Republican leader McConnell and sen. Dick Durbin of Illinois, the No.2 senate Democrat, predicated the senate would approve Bernanke’s confirmation.