Mr. Ben Bernanke has been selected by U.S. President George W. Bush to head the Federal Reserve Board. Mr. Bernanke will succeed Mr. Alan Greenspan, a man many consider the most successful central banker in U.S. history. Those are big shoes to fill, yet he must succeed: The Fed chairman is perhaps the most important banker in the world. International economic stability and prosperity depend on his ability to steer the U.S. economy with a steady hand, to anticipate troubles, and to respond quickly and effectively to crises when they do break out.
Mr. Bernanke is certainly qualified for the new job. At the time of his nomination, he was chairman of the president’s Council of Economic Advisers. He got a firsthand glimpse of how the Fed works and was able to watch Mr. Greenspan up close when Mr. Bernanke was a member of the Fed’s policymaking board from August 2002 until June 2005. But the nominee received most of his experience in academia: He served as chairman of Princeton’s economics department, and is best known for his research into the Federal Reserve’s role during the Great Depression. Hopefully, he will not have to draw too deeply on that work.
His academic focus has made some Fed watchers nervous. They worry that a good governor needs more than an academic understanding of markets. Mr. Greenspan was an economic forecaster before he became Fed chairman nearly two decades ago. His predecessor, Mr. Paul A. Volker, ran the New York branch of the Federal Reserve. Both men worked with the capitalists and financiers, and were able to understand and assess all the forces that move markets.
Mr. Greenspan in particular has been credited with a finely honed intuition about how the markets work. Ironically, the chairman’s possession of that intuition may not be that important. Rather, the markets have to believe he has that skill. The effect is psychological; if there is faith in the chairman, then much of his work is already done.
But what sometimes passes as intuition is the result of intense and continuing scrutiny of the markets. Proper regulation requires a close study of the data, and a constant search for anomalies or indications of changes in economic behavior. Mr. Greenspan, for example, is credited with noting a shift in productivity in the 1990s that persuaded him to keep interest rates low during a period of intense growth. Although his thinking went against the conventional wisdom about the relationship between inflation and growth, it encouraged the U.S. economic boom of the 1990s. It is also why intuition — flavored with minute observation of the data — is so important.
Fighting inflation is one of a central banker’s main assignments. Mr. Bernanke favors inflation targeting, a practice in which the central bank sets explicit targets for how much inflation it will allow and then aims to attain that target. The problem is how automatic that process is. If the target prevails in all circumstances, there is little room for the intuitive judgments or rapid responses to changing situations that seem necessary.
Fed watchers are worried about the boom in housing in the United States. Some go so far as to call it a “bubble,” which is always a dangerous phenomenon from a banker’s perspective. Mr. Greenspan dismisses that concern, saying there is only “froth” in certain markets. Mr. Bernanke has stuck to that view as well. This is one area that bears close watching.
But fighting inflation is only one of the Fed’s two key responsibilities: The other is maintaining full employment. (For economists, the phrase means as many jobs as can be maintained without introducing instability into an economy.) The two tasks compete with each other: As employment increases, so do inflationary pressures.
Mr. Greenspan’s insight in the ’90s about productivity let him keep interest rates down even though unemployment was dropping. Traditionally, central bankers worry more about inflation than employment, and that has some critics — especially Democrats — worried about Mr. Bernanke’s thinking on this issue.
Democrats (and others) also worry that Mr. Bernanke may not be the nonpolitical, nonpartisan figure that the world expects of a U.S. Fed chairman. They point to statements Mr. Bernanke made before his nomination in which he called for congressional action on the president’s economic agenda. Of course, then he was speaking as chairman of the CEA. In his confirmation hearings, he must convince the senators that he will be his own man.
That should not be hard. The concerns that have been voiced over his appointment would be heard no matter who was nominated. Mr. Bernanke has said that studying economics is like learning to repair a car while the engine is running. That kind of thinking should build the confidence in markets that will be the ultimate determinant of Mr. Bernanke’s success.
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