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To Fill His Shoes, Mr. Bernanke, Learn to Dance

The first test will be his credibility on inflation. Last week, the White House, besieged by problems over its failed nominee to the Supreme Court, may have been focused on Bernanke's ability to win confirmation from the Senate, but the vote that ultimately matters more will be the one cast by the bond markets. Inflation will be their litmus test. Bond traders are already scouring Bernanke's record for evidence one way or the other. His nine-sentence statement on Monday did little to enlighten them. The bond market reacted by inching rates higher.

What's more, the former Princeton economics professor is currently the chairman of the president's Council of Economic Advisers. And while his White House stint has been short enough to keep him from having to answer for Bush's controversial tax cuts or big spending plans, he must still clearly establish his independence.

There is an important philosophical difference between Greenspan and Bernanke. Bernanke is a proponent of greater openness in Fed policy. He believes that's appropriate for a government institution in a democracy; it can reduce uncertainty about Fed thinking, and thus help economic players to plan. In contrast, Greenspan used ambiguity to enhance his mystique and, at times, used uncertainty as a threat of action.

As a democratic ideal, clear and visible economic rules are something to admire. But Greenspan's effective use of ambiguity provides a vital lesson in how the real world works. Transparency might not look so attractive if the public sees an institution run by unelected officials decide whether to put half a million jobs in jeopardy in order to shave a bit off the inflation rate.

Bernanke also favors "inflation targeting," an intellectual offspring of his belief in openness. Where Greenspan would answer a question about inflation with an intentionally vague but reassuring statement, Bernanke would prefer a clear and publicly announced inflation goal. Bernanke's concept boils down to setting the monetary dials to achieve a predetermined inflation rate. Yet perhaps because Bernanke has in the past qualified his message by saying he favors "flexible" inflation targets, bond traders need to hear more.

Given Bernanke's background, the fight against inflation is likely to remain primary. He studied economics during the 1970s, when oil prices soared and drove up inflation, and not even price controls could help. During the quarter century since August 1979, when Paul Volcker became Fed chairman, the story of the central bank has been its struggle to reestablish and maintain steadfastness on fighting inflation.

Bernanke understands this in theory. "Central bankers have long recognized at some level that the credibility of their pronouncements matters," Bernanke said in a speech a year ago. "I think it is fair to say, however, that in the late 1960s and 1970s, as the U.S. inflation crisis was building, economists and policymakers did not fully understand or appreciate the determinants of credibility and its link to policy outcomes."

He'll get a chance to try it in practice. Now, just as Bernanke arrives, the economic skies look ominous again. The stars aligned so neatly in the 1990s are moving. Higher oil prices are pushing up inflation while war costs and mounting budget deficits fuel inflation and threaten to drive up interest rates. Enormous foreign debts threaten to destabilize the dollar. And rising interest rates are taking a toll on the overblown housing market as well as consumer spending.

How Bernanke will approach all this is yet to be seen. After all, the former Princeton prof is a different man at a different time. The challenge for Bernanke is to make that difference count in his favor -- and in ours.

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Anna Bernasek is a writer on economics and financial issues based in New York.

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