Bernanke Vote Could Cause Sell-off

If Fed Chairman Ben Bernanke is not confirmed by the senate this week it could cause a sharp sell off in the market. Not only would it raise questions about monetary policy in the future, but the way this whole confirmation vote is unfolding raises serious questions about the ability of the Congress and the administration to lead. Barbara Boxer and Russ Feingold have chosen to defend their own seats rather than to vote based on the best public policy decision.

It will now be difficult to predict government’s response, should the economic crisis take a turn for worse. Just as bad, it is now unclear what positions a government driven by a search for votes will take on any given economic issue. The Bernanke vote obviously has broad implications for the economy and the market.

With that in mind I have been trying to discern what the chances are of his being confirmed, and if not, quantitatively what effect that could have on the market.

We now know that most of the more than 200 point drop in the market on Friday is now attributed to news of the deterioration of BBs support. So it is reasonable to assume that if he is confirmed the market should go up at least that amount. If he is not confirmed, based on the implications of this vote, it is likely to lead to a further immediate sell off as well as a possible sustained decline.

So where do things stand on the vote? Right now less than half the senators have publicly announced their position for a vote that was expected as early as last week. Important senators from both parties have declared their opposition including Republicans Shelby and Bunning. Many senators especially those up for election this cycle would like to vote no, although some recognize the risk of being tagged with causing a market rout. What to do? The best thing for many of the senators would be just not to have a vote and let Bernanke quietly fade from the chairmanship with Kohn the Vice Chairman assuming the temporary role. That is one option, and that Mitch McConnell refused to declare his position today when asked is an indication that it is a distinct possibility.

The other possibility is that members of both parties will make sure he is confirmed by at least the barest of majorities allowing their fellow senators up for election the luxury of voting no. Since at least four senators have registered their formal opposition, a vote of 60 is required to confirm. This enables at least 30 senators to put a no vote on their records and still allow confirmation.

There is no way to tell which way it will go at this point, but there are so many saying he will be confirmed that if you had to choose it would have to be he is going to be confirmed. Nevertheless the risk is there right now. Since the downside on the market of a no vote is so much greater than the upside, it is best to protect your investments from the effects of a no vote.

Barry Zee

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