After Alan Greenspan

Tuesday, October 25, 2005

YESTERDAY'S BIG economic story was the lack of a story: Confronted with the nomination of a new Federal Reserve chairman, financial markets didn't panic. That is a tribute to President Bush's selection, Ben S. Bernanke, who (on the likely assumption that he is confirmed) will have to fill some of the biggest shoes in Washington. The Fed's departing chairman, Alan Greenspan, acquired a nearly mythical status over the course of 18 years, pronouncing on every economic question that preoccupied the political class as well as guiding the economy through the savings-and-loan collapse, the emerging-market crises and periodic implosions in corporate America. Indeed, Mr. Greenspan seemed almost indispensable at times: In the 2000 presidential campaign Sen. John McCain joked that if the Fed chairman were to die, he would prop him up and put dark glasses on him.

Mr. Bernanke's chief asset is his stellar academic record. He has chaired the Economics Department at Princeton University, is widely cited and respected in the profession, and has specialized in the monetary policy dilemmas that confront central bankers. During a stint as a Fed governor, between 2002 and 2005, Mr. Bernanke won the respect of financial markets with ambitious big-picture speeches, notably one in which he argued that long-term interest rates, which have been surprisingly low given rapid global growth, reflect a "saving glut" abroad, and that excess foreign saving explains why the United States can borrow massively to finance its trade deficit. That speech, which presciently suggested that interest rates might remain low, earned Mr. Bernanke guru status among financial market analysts.

In such a research-based, quasi-academic institution as the Fed, Mr. Bernanke's intellectual horsepower confers the status needed to lead the institution successfully. But compared with Mr. Greenspan at the time of his appointment, or indeed with Mr. Greenspan's predecessor, Paul A. Volcker, Mr. Bernanke is a novice in policy circles and untested as a crisis manager. Aside from his three years at the Fed, he has served four months as chairman of Mr. Bush's Council of Economic Advisers; he has never had to manage the response to the default of a country, the collapse of the dollar or the implosion of a big hedge fund, all crises that may lie in his future. Given the shaky quality of the Bush economic team, that is a disturbing gap. Other Fed governors have more crisis experience, and Mr. Bernanke may need to rely on them.

Perhaps the biggest challenge for Mr. Bernanke in the short term will be to balance his appetite for big economic ideas with regard for the Fed's flexibility. In his academic writings, Mr. Bernanke has argued that central banks should set explicit inflation targets. But such targets may get in the way of other legitimate concerns; for example, heading off remote but potentially costly dangers, such as a drastic loss of confidence in the wake of a disaster. Equally, Mr. Bernanke has argued that central banks should not try to affect stock market and other asset prices, but there may be circumstances in which the Fed should try to do that. Mr. Greenspan spoke with such masterful vagueness that he never narrowed his options. That may not come easily to a clear-minded academic.

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