To Fill His Shoes, Mr. Bernanke, Learn to Dance
Few figures in public life succeed in maintaining both their stature and popularity over a long period of time. That's what makes Alan Greenspan such a tough act to follow. In his 18 years as chairman of the Federal Reserve, Greenspan has occasionally drawn criticism, but no one disputes his technical prowess or sniffs at his track record of low inflation and steady, almost uninterrupted growth.
Enter Ben S. Bernanke, President Bush's nominee to take Greenspan's place when his term ends at the end of January. Ushered before the media last Monday, Bernanke pledged "continuity" with the departing prince of monetary policy. That was reassuring to many. Despite their deep divisions, both Democrats and Republicans think that more of the same would be just fine.
But more of the same what? Bernanke can't pursue exactly the same policies as Greenspan did even if he wants to. The economy is a moving target, and policies can't just stand still.
If continuity means delivering the same results, that's even harder to promise. Greenspan's success has changed our expectations of the Fed. It's not enough to keep inflation low. We want the Fed to deliver it all: full employment, sustained economic growth, low interest rates and a strong stock market. It's as if we've come to assume the Fed controls the economy.
But it doesn't. For all its powers -- the power to set short-term interest rates and to print money, just to name two -- the Fed can only indirectly influence what happens in the economy as a whole. That's because the collective power of other independent players -- the rest of government, the private sector and foreign trading partners -- dwarfs even the Federal Reserve system. The Fed is a big player, but only one among many.
So how, exactly, did Greenspan convince so many people that he essentially "runs" the economy? What has been the essence of his tenure at the Fed?
From the time of his appointment by President Ronald Reagan in August 1987, Greenspan recognized that his image was critical. By carefully molding it, he could gain a degree of influence over lawmakers and bond markets. That in turn would enable him to nudge politicians and bond traders in ways that served his ends. So Greenspan crafted his public statements to persuade the world of his deep knowledge and vigilance about the economy. He moved with deliberation and spoke with a mesmerizing, yet strangely soothing, lack of clarity.
Greenspan did, however, make one thing clear: the need to combat inflation. He realized that he needed to establish his credibility on this front. Soon after his appointment, the Fed raised interest rates by half a percentage point and sent a message about his determination to tame price increases. He understood that an unhappy bond market could undo a Fed chairman and that the economy would suffer the consequences. So he never wavered on this point.
He also picked his battles. He avoided taking any action to pop the stock market bubble in the 1990s or the real estate bubble of the past couple of years, limiting himself to noting the "irrational exuberance" in the 1990s or "froth" in housing markets. But when the occasion warranted, he took risks -- and they paid off. After the 1987 stock market crash, a major test of his leadership in the early days of his tenure, he pumped liquidity into the markets to prevent a run on financial institutions and keep markets functioning. During the 1990s "productivity miracle" he kept interest rates low and the economy did not overheat. The public applauded and the traders of Wall Street believed they recognized a kindred talent.
Indeed Greenspan pulled off the rare feat of balancing the three goals spelled out in the 1913 law that created the Federal Reserve: "maximum employment," "stable prices" and "moderate long-term interest rates." In other words, jobs, low inflation and growth.
On the surface, Bernanke seems like a reasonable candidate to step into Greenspan's place. There is, after all, no strict rsum requirement for the job. Past chairmen have included a former stockbroker, bankers, a business executive, a government servant and a consultant. One, Arthur Burns, earned a PhD in economics as a young man. (Greenspan also received a doctorate, but it was more of an honorary degree granted after he had served as the chairman of President Ford's Council of Economic Advisers.) So by comparison, Bernanke's expertise -- built on his M.I.T. degree in economics, Ivy League pedigree, academic research and experience as a Fed board member -- is indisputable.
But for Bernanke to deliver "continuity" with the Greenspan era is not just a matter of technical knowledge. It means, above all, establishing his own stature and, perhaps in the post-Greenspan era, celebrity as well.