Nominee Forms Bonds and Policy
Tuesday, October 25, 2005
Something was amiss in the Oval Office. Ben S. Bernanke, President Bush's new chief economic adviser, had arrived to brief the president last summer wearing a charcoal suit, black shoes and -- gasp -- tan socks.
The socks prompted Bush to reach out and tug at Bernanke's trouser leg, playfully chiding him that he was not holding up the White House's sartorial standards. But Bernanke recovered quickly from his wardrobe malfunction. At another Oval Office gathering the next day, the president cracked up when a group of administration officials including Vice President Cheney showed up wearing tan socks that Bernanke had provided, a participant at both meetings recalled.
The socks episode may have been nothing more than a brief chuckle. But by helping to forge a bond between Bernanke and Bush, it may also have been a fashion faux pas that changed history. Yesterday, the president nominated the 51-year-old economist to replace Federal Reserve Board Chairman Alan Greenspan, who is planning to step down Jan. 31 from the job he has held for more than 18 years.
Bernanke's qualifications, to be sure, go far beyond his capacity to josh with Bush. A former chairman of the Princeton Economics Department and a three-year veteran of the Fed's Board of Governors, he is one of the world's foremost experts on the subject of how central banks such as the Fed should set interest rates and cause the money supply to expand or contract.
He has been influential in promoting a policy known as "inflation targeting," in which central banks explicitly put top priority on keeping the annual increase in consumer prices close to a minimal level -- Bernanke puts the desirable rate at about 2 percent. Although the policy is opposed by Greenspan and other board members as potentially restraining the Fed's flexibility, Bernanke argues that signaling the central bank's intentions in the firmest way possible to the public and the markets is the best way to keep inflation and interest rates under control.
But Bernanke's lack of pretension and sense of whimsy are among his most striking characteristics, according to many of his friends and colleagues. Those traits, they said, will serve him well if he is confirmed by the Senate for the Fed chief's job because the chairman cannot decide monetary policy alone; by tradition, he must mobilize a strong majority among the seven-member board and the 12-member Federal Open Market Committee, which have responsibility for setting key interest rates. That task requires not only intellectual firepower but also interpersonal skills.
"One of the most important qualifications to run the Federal Reserve is the ability to build consensus, which means you don't want to sound like you're saying, 'I'm smarter than you are,' " said Frederic Mishkin, a Columbia University economist who has frequently collaborated with Bernanke in academic work. "And Ben is not full of himself; he doesn't have to show that he's smarter than other people. As evidence of that, he has got tremendous clout at the Federal Reserve. You can talk to people at all levels, down in the staff or whatever -- this is someone who is respected and liked."
The son of a pharmacist and schoolteacher who grew up in Dillon, S.C., Bernanke trained at Harvard University and the Massachusetts Institute of Technology. He later thrived as a professor -- first at Stanford, later at Princeton -- both as a prolific scholar and as a teacher who was popular with students for his ability to demystify complex economic subjects. He offered keen insight into his background and personality in a speech early this year about how he had gone from the world of academe to policymaking.
"I always thought I would be an academic lifer," he said, recalling that before being appointed to the Fed board in August 2002, he had gone straight from graduate school to faculty posts. "The sum of my political experience consisted of two terms on the local school board, six grueling years during which my fellow board members and I were trashed alternately by angry parents and angry taxpayers."
As for his administrative experience, he cited his seven years as department chair, "where I had responsibility for major policy decisions such as whether to serve bagels or doughnuts at the department coffee hour."
Although he is a Republican, his politics are moderate enough that many of his colleagues say they have little sense of where he stands on controversial issues. But on subjects that he writes or speaks publicly about, he does not equivocate. An example is a paper he published in 2001 concerning how central banks should respond to "asset bubbles" such as the one that had just burst in technology stocks. The Fed, he argued, has no business using its power over interest rates to keep such bubbles from materializing; it should focus strictly on keeping consumer prices stable -- a view with which Greenspan heartily concurred.
And soon after joining the Fed, in November 2002, he delivered a high-impact speech emphasizing that the central bank would not allow deflation -- a general decline in the price level that can spiral into a depression -- to take hold. The U.S. government, he noted, "has a technology called a printing press, or today its electronic equivalent, that allows it to produce as many U.S. dollars as it wishes at essentially no cost," thereby keeping deflation at bay.
A hallmark of that speech, and others that Bernanke delivered, is the clarity with which he expressed himself. That may be one of the most crucial differences between a Bernanke Fed and the central bank run by the often-obtuse Greenspan.
"He speaks unbelievably clearly and gets to the bottom line quickly, so even people who aren't trained in economics can understand him," said Kevin A. Hassett, a scholar at the American Enterprise Institute. He added half-jokingly, "Now he'll have to learn Fed-speak."