The U.S. economy is growing again. Financial markets are on the mend and credit is once again starting to flow, thanks in no small part to the programs set up by the Fed. He has been reappointed for a second four-year term as the head of the nation's central bank, and his confirmation by the Senate is almost assured.
But when Bernanke appears before the Senate Banking Committee for his confirmation hearing Thursday, it'll be anything but a victory lap. He's as likely -- or even more likely -- to be blasted for what's still wrong with the economy, and mistakes that were made during the rescue, as he'll get thanked by mostly angry senators.
And it's not like he'll need the senators to bring up the troubles still lurking in the nation's and world's economic systems. Those problems and challenges are a constant worry for the chairman, according to Fed watchers.
Here's a quick rundown of what those experts see as the biggest worries dogging the man with the job of keeping the economy on track.
Tying the Fed's handsBernanke's biggest worry is not tough to figure out. He appears on Capitol Hill just as debate is getting started on reforming the regulation of the nation's financial system. Virtually everyone agrees that a failure of that regulation helped to cause the economic crisis of the last two years. But there is far from any agreement about how to fix things.
What worries Bernanke most are legislative proposals to strip the Fed of many of its regulatory powers and even its political independence. Some of those measures have already passed the House Financial Services Committee. Some are included in a version of the bill authored by Sen. Chris Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee.
The proposals prompted the chairman to write a rare op-ed piece in the Washington Post last weekend to plea his case.
"The proposed measures are at least in part the product of public anger over the financial crisis and the government's response, particularly the rescues of some individual financial firms," he wrote. "The government's actions to avoid financial collapse last fall -- as distasteful and unfair as some undoubtedly were -- were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression."
And many economists say he's right to worry about the proposals.
"I think the plan they've come up with is Congress' best effort to make the situation worse," said David Wyss, chief economist for Standard & Poor's. "
They say any moves that would give Congress more control over the central bank's operations, or which take away some of its powers, could limit the Fed's abilities to respond to another crisis in the market, as it did last fall.
Beyond that kind of crisis management, there are worries that if Congress can inject its way into the Fed's rate-setting decisions, it would force rates to stay too low, too long, which could cause inflation to get out of hand. Former Fed governor Lyle Gramley said experience shows nations where the central bank does not have true independence suffer from higher inflation than other economies.
And just having those inflation worries in the market would in turn cause bond yields to rise, which by itself could choke off economic growth by driving up the cost of capital for businesses and homeowners, as well as the federal government.
"If I'm a foreigner and I believe Congress is running monetary policy, I know what my first reaction will be -- demand higher yields on Treasurys," said Wyss.
Government default on debtThe panic in financial markets due to fears of a possible default by Dubai World last week could be only the first warning signs about fears of default on debt. Many other countries are seen as having debt at risk of default. And here at home, budget crisis in numerous states, most notably California, have raised some worries in the markets as well.
0:00/03:18Buffett: Bernanke deserves an AA default on public debt would not just be bad news for the citizens of whatever state or nation can't pay it bills. It could ripple through the financial markets, and banks and securities firms around the globe. That would force them to write down the value of much of their holdings by billions again, and causing credit to seize up as badly or worse than it did last fall. Think of the Lehman Brothers bankruptcy on steroids.
Wyss said that while he believes a state default will be avoid, the risk of such of event "is significant."
David Rosenberg, chief economist and strategist at investment bank Gluskin Sheff, said the brief panic caused by Dubai worries are only a warning sign of future shocks yet to come to financial markets and the flow of credit.
"There is still so much debt that is still being supported by questionable collateral (and) the cash flows required to service them," he wrote in a recent note to clients.
Pop goes commercial real estateEveryone knows about the problems caused to the economy and the banking system by the housing bubble. What is less well known by the general public is the threat posed by mounting losses in commercial real estate.
With prices continuing to slide in the sector, and with vacancy rates on the rise, increased defaults are likely. And that means new problems across the banking sector, particularly in regional and mid-sized banks that hold the many of those loans in their portfolios.
Rosenberg estimates that U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see "significant" cuts in their credit ratings.
The Fed's exit strategyDue to persistent questions raised by economists and investors, Bernanke has addressed the matter of when its easy-money policy should end more than the other economic problems facing the Fed. He has insisted that the Fed will be able to withdrawal the trillions of cash it has injected into the economy, and to start raising rates, once the time comes.
But his assurances don't mean that finding the right timing will be easy.
Starting to back away from the help provided to the economy too soon could cause problems for a still-struggling economy, possibly even forcing it back into recession.
Leaving the cash in the economy and the rates too low too long can help to inflate another asset bubble and feed inflation pressures down the road.
Early last year, with the U.S. already in recession, there were dissenting votes by Fed members about what should be done with rates. While the votes this year have been unanimous, minutes show there is wide disagreement among policymakers about the state of the economy, and the relative threats posed by inflation versus another recession.
"It's clear that there are people on the Fed who disagree with the centrist view," said Gramley.
So despite Bernanke's expressed confidence about the exit strategy, don't assume it will be an easy call.
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