Worries over Bernanke unsettle Wall Street

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 chance 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 were rejected, uncertainty over a successor would further roil global markets, at least in the 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 — in which the recovery would collapse into another 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 a double-dip as less than 50 percent.

"It will become more acute if there are delays in confirming a successor," she says, noting 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 supports 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 the economy would be if Bernanke's Senate foes are seen as having meddled with the Fed's independence for 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 from 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.