Aug. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, who led the biggest expansion of the central bank’s power in its 95-year history to battle the worst economic slump since the Great Depression, was nominated to a second term today by President Barack Obama.

“Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the- box thinking that has helped put the brakes on our economic freefall,” Obama said in Martha’s Vineyard, Massachusetts, with Bernanke at his side.

Bernanke’s nomination for a second four-year term starting Jan. 31 requires Senate approval and was endorsed by the head of the Banking Committee, Christopher Dodd. The Fed chief will still face tough questioning from lawmakers who say he was slow to recognize the severity of the mortgage crisis and didn’t do enough to protect American consumers while leading bailouts of financial firms including Bear Stearns Cos. and American International Group Inc.

“While I have had serious differences with the Federal Reserve over the past few years, I think reappointing Chairman Bernanke is probably the right choice,” Dodd, a Connecticut Democrat, said yesterday in a statement. “There will be a thorough and comprehensive confirmation hearing.”

Bernanke Pledge

Bernanke today pledged to work toward restoring stability to financial markets and the economy.

“I will work to the utmost of my abilities -- with my colleagues at the Federal Reserve and alongside the Congress and the administration -- to help provide a solid foundation for growth and prosperity in an environment of price stability,” he said.

Stocks rose after reports today showed consumer confidence climbed more than forecast and national home prices increased for the first time in three years, adding to evidence of an economic recovery. The Standard & Poor’s 500 Index added 0.2 percent to 1,028 at 4 p.m. in New York after rallying as much as 1.2 percent.

The Conference Board’s confidence index rose to 54.1 in August, the first gain since May, as consumers became less concerned about the outlook for jobs. The S&P/Case-Shiller home- price index advanced 2.9 percent in the second quarter from the previous three months.

Keeping the Team

Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the crisis, an administration official said. The official said Treasury Secretary Timothy Geithner, Chief of Staff Rahm Emanuel and National Economic Council Chairman Larry Summers all recommended Bernanke be reappointed.

Bernanke, 55, slashed the main interest rate almost to zero and pumped $1 trillion into the banking system to unfreeze credit markets. He now must guide the world’s largest economy back to growth and reduce unemployment that the Obama administration today forecast would surge to 10 percent, while also planning to shrink the Fed’s balance sheet to prevent a surge in inflation.

“It’s not just that he’s done a great job of dealing creatively with the financial crisis,” said Richard Berner, co- head of global economics at Morgan Stanley in New York. “He has the capacity to deal with the challenges that lie ahead -- continuing to help the economy and markets heal and engineering the exit strategy when it’s appropriate to do so.”

Bipartisan Tradition

Obama, a Democrat, continues a recent tradition of bipartisanship in his decision to nominate Bernanke, a Republican, to a second term.

Bernanke’s predecessor and fellow Republican, Alan Greenspan, served as Fed chief for 18 years while gaining renomination by three presidents, including Bill Clinton, a Democrat. President Ronald Reagan kept Paul Volcker, first selected by Jimmy Carter, for a second term.

Almost 75 percent of investors surveyed in the first Quarterly Bloomberg Global Poll had a favorable view of the chairman in July. By almost a three-to-one margin, they said Bernanke had earned another four-year term.

The Standard & Poor’s 500 Index has risen 52 percent since a recession low on March 9. The S&P lost 38.5 percent last year. Credit markets have also recovered: The London Interbank Offered Rate for three months loans in dollars fell to 0.38 percent today. The rate surged as high as 4.81 percent in October.

Bernanke’s nomination comes as the world’s biggest economy is poised to a recover from a recession that the Obama administration today said has been deeper than previously expected.

Economic Forecasts

The Office of Management and Budget forecast that the economy will shrink 2.8 percent this year, worse than the 1.2 percent contraction projected in May. For next year, the budget office said gross domestic product will grow 2 percent, less than the 3.2 percent expected in May. The economy has contracted 3.9 percent since the recession began in December 2007.

The Libor-OIS spread, a gauge of financial stress, fell to 20 basis points today. The spread soared to 364 basis points on Oct. 10 last year after Lehman Brothers Holdings Inc.’s collapse. Greenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread was at 25 basis points.

Companies have sold a record $794 billion of dollar- denominated investment-grade corporate bonds this year, according to data compiled by Bloomberg. That’s up from $599 billion in the same period last year.

‘Critical Challenges’

“Prospects for a return to growth in the near term appear good,” Bernanke said in an Aug. 21 speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Still, he warned of “critical challenges” ahead and added: “We have an enormous amount of work to do.”

Ben Shalom Bernanke grew up in Dillon, South Carolina, where his family owned a pharmacy opened by his Austrian immigrant grandfather. He went north to Harvard University in Cambridge, Massachusetts, graduating summa cum laude with a bachelor’s degree in economics, then received a doctorate in economics from the neighboring Massachusetts Institute of Technology in 1979.

A self-described “Great Depression buff,” Bernanke joined the central bank as a governor in 2002 after serving as chairman of Princeton University’s economics department. President George W. Bush appointed Bernanke chairman of the Council of Economic Advisers in 2005 before naming him a few months later to the top Fed post.

Town-Hall Meeting

“I did spend a lot of my career studying the Great Depression and other financial crises,” Bernanke said in a town-hall-style meeting on July 26 organized by PBS television. “And I didn’t expect it would be so helpful, so useful, as it has been.”

By his own admission, Bernanke was slow to recognize the severity of the mortgage meltdown at the heart of the recession.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” he said in an interview last November with the New Yorker magazine.

In August 2007, the collapse in credit markets forced Fed policy makers to lower the discount rate just two weeks after declaring inflation was their paramount challenge. The next month, the Fed cut its benchmark federal funds rate for the first time in four years.

Lehman Collapse

Bernanke came under fire for failing to prevent the collapse of Lehman Brothers, which triggered the biggest drop in the S&P 500 Index since Sept. 11, 2001, and deepened the credit freeze.

Stephen Roach, chairman of Morgan Stanley Asia Ltd. and the investment bank’s former chief economist, faulted Bernanke for failing to rein in the housing bubble and said Obama should have replaced him.

“Bernanke has done a great job, post-Lehman,” Roach said. “But going into this crisis, he really was the architect, if not the co-collaborator, in creating some of the conditions in the economy that led to the recession.”

Bernanke called Lehman’s failure “unavoidable” in his Jackson Hole speech. No buyer could be found, he said, and the investment bank didn’t have enough collateral to qualify for a Fed loan large enough to save it.

Two days after Lehman’s bankruptcy filing, the Fed took control of AIG in an $85 billion bailout designed to prevent the worst financial collapse in history.

As Lehman’s collapse sent shock waves through financial markets, Bernanke launched unprecedented programs -- one to contain fallout from a run on money-market funds, and another to buy short-term debt from companies such as General Electric Co.

Asset-Purchase Plan

Bernanke also supported then-Treasury Secretary Henry Paulson’s proposal for a $700 billion Troubled Asset Relief Program, initially intended to buy toxic assets from banks and later used to purchases equity stakes in the lenders themselves.

In December, with the economy contracting, the Fed’s key interest rate was slashed almost to zero, where it has remained. In the following months, the Fed launched programs to pump money into the economy through purchases of mortgage-backed debt, U.S. Treasuries and securities backed by auto loans, credit cards and commercial-property mortgages.

“This last couple of years has been clearly a move through uncharted territory, and as we’ve seen it’s taken a lot of unconventional moves to try to deal with the situation,” said Robert Parry, former president of the San Francisco Fed. “There’s been a lot of innovation that’s gone on, and it seems to me that much of it has been successful.”

Banking Supervision

Yet the expansion of Fed authority has put Bernanke in the crosshairs of critics in Congress. Some lawmakers have accused the Fed of overstepping its authority and failing to properly supervise the financial firms that packaged and sold the mortgage-backed securities at the heart of the crisis.

“I’ve been astounded and shocked by certain regulatory malfeasance of the Federal Reserve and the reserve banks in the regulatory process in the last several years,” said Alabama Senator Richard Shelby, the ranking Republican on the Banking Committee.

Other lawmakers accused Bernanke of improperly pressuring Bank of America Corp. Chief Executive Officer Kenneth Lewis to proceed with its planned acquisition of Merrill Lynch & Co. The House Oversight Committee subpoenaed and released dozens of Fed e-mails and other documents. Bernanke told the panel in June that the central bank acted with the “highest integrity.”

There’s little indication that Bernanke would fail to gain Senate approval. The Fed chief has cultivated relationships with key members of Congress, winning their respect while they criticized some of the central bank’s actions.

‘Right Choice’

Senator Charles Schumer, a member of the Banking Committee and a New York Democrat, endorsed Bernanke’s reappointment, calling him “the right choice for these tough times.”

European Central Bank President Jean-Claude Trichet said he was “extremely pleased” to learn of Bernanke’s nomination.

“We have had an excellent and very close working relationship during the current episode of exceptional challenges for the world economy,” Trichet said in a statement.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net; Michael McKee in New York at mmckee@bloomberg.net.

Last Updated: August 25, 2009 18:08 EDT