Bernanke's Learning Curve
Alan Greenspan is too quirky to be replicated, and since he doesn't believe in rules, he can't bequeath any to his successor. But Ben Bernanke, who was nominated to succeed Greenspan as chairman of the Federal Reserve, shares some of the Maestro's qualities: He is a smart, introverted intellectual -- a man who loves statistics, dislikes small talk and in a crowded room sometimes seems to be in a world of his own.
I find it reassuring that Bernanke was brainy enough to win the South Carolina spelling bee at the age of 11, according to the Wall Street Journal, but not such an egghead that he didn't flame out of the national competition by misspelling the word "edelweiss." A perfect speller isn't the person I want at the Fed when the Dow crashes 700 points.
Wall Street is wondering whether Bernanke shares Greenspan's intuitive sense of financial markets. The traders were split on that question after the announcement Monday: The stock market went up; the bond market went down. Certainly, there's more money riding on Bernanke than on any other personnel choice President Bush has made. The new Fed chairman will be the world's central banker. The circuits of the global financial system will be wired into his brain, and his smallest comments will trigger reactions in markets around the world.
Bernanke struck the right note of caution in the Oval Office Monday, saying: "My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years." But over time, Bernanke may prove to be a somewhat different sort of central banker than Greenspan was -- more rule-oriented, more academic, more willing to make bets on abstract analytical ideas as opposed to seat-of-the-pants intuition.
The new Fed chairman outlined his rulemaking approach in a 2000 piece in the Wall Street Journal with the prophetic title "What Happens When Greenspan Is Gone." Noting that "the chairman will not be around forever," Bernanke and his co-authors argued that a post-Greenspan Fed should adopt an explicit policy of "inflation targeting" -- by announcing that its goal will be to keep core inflation between, say, 1 and 2 percent. In a fascinating interview last year with the Federal Reserve Bank of Minneapolis, he said, "Announcing an actual number or range would serve to anchor public expectations of inflation more firmly and avoid the risk of 'inflation scares.' " This interview offers the best outline I've seen of the policies he's likely to follow.
Because inflation is rising this year at a steeper rate than it has since 1991, with the core rate at Bernanke's tentative upper target limit of 2 percent, he will have an early test of his inflation-fighting skill. I think he's right about an explicit target -- as long as he leaves himself flexibility to break his own rules when necessary. Rigidity and financial markets don't go well together. That insight was Greenspan's greatest gift.
Bernanke's background as an academic economist -- he was chairman of the economics department at Princeton University -- is a mixed blessing. Our most successful Fed chairmen -- Greenspan and his predecessor, Paul Volcker -- learned their lessons closer to the trading floor. The same was true of Robert Rubin, the most successful Treasury secretary in modern times. A good role model for Bernanke will be Mervyn King, the governor of the Bank of England, a brilliant academic who learned to adapt to the pressures of politics and markets. Like Bernanke, King has long been an advocate of inflation targeting.
The most intriguing -- and potentially worrisome -- part of Bernanke's intellectual rsum was his argument last March that there is a "global savings glut." He stood conventional wisdom on its head by arguing that global financial imbalances -- symbolized by America's massive trade deficit -- were caused by too much saving abroad, rather than too little saving in the United States. He made a compelling case, and he may be right. But I worry that Bernanke's speech is making it easier for U.S. politicians to avoid tough choices to cut the federal budget deficit, which helps worsen the trade gap. I don't think Bernanke is part of the irresponsible "deficits don't matter" wing of the Republican Party, but his arguments gave that group intellectual succor.
The Maestro didn't have a magic wand. Greenspan was smart, and he was lucky -- but most of all he was flexible, and willing to adapt his ideas when he sensed that the economy was moving to a different rhythm than what the academic economists would have predicted. Bernanke's challenge will be to combine the monetary discipline the markets expect with a Greenspan-like suppleness of mind. The world economy will turn on his ability to learn quickly on the job.