Expect next week's policy meetings to signal that central bank stand ready to step in, once again, to maintain the disconnect between buoyant equity markets and sluggish economic conditions -- not as an end in itself but, given Congressional dysfunction, as virtually the only way today to support economic activity (and it is rather imperfect as the expected benefits come with growing costs and risks). Look for the Federal Reserve to alter the thrust of its policy narrative. Rather than advance its prior emphasis on tapering its monthly $85 billion purchases of market securities, it will seek to reassure markets by iterating its willingness to do more if needed. Across the Atlantic, the European Central Bank will face increasing pressure to cut its interest rate (currently at 0.75%) and liberalize the collateral requirements it imposes -- both meant to loosen monetary conditions.
Why Bernanke to succeed Tim Geithner? He is probably the most influential and credible person in official Washington who is not part of the echo chamber on deficit reduction, and a Treasury secretary concerned more about recovery than austerity is just what Obama needs. And because the Fed, almost by definition, is assumed to be conservative, Bernanke would provide some cover for an expansionary program. I can think of people who'd be even better than Bernanke but I can't think of anyone as good who stands a prayer of being nominated. It's nothing short of weird when the most reliable progressive in town around turns out to be the chairman of the Federal Reserve. But such are the reactionary times in which we live.