Stock Investors Cheer the Pick
By GREG IP
October 25, 2005
Part 1 at:
<http://mailman.lbo-talk.org/pipermail/lbo-talk/Week-of-Mon-20051024/023229.html>
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If he wins Senate confirmation, a hurdle he has cleared three times in the past, Mr. Bernanke probably would be sworn in on or close to Feb. 1, the day after Mr. Greenspan's term expires. Mr. Bush still has two other empty seats on the seven-member Federal Reserve Board to fill.
Rise in Inflation
Mr. Bernanke won't immediately command the same respect from fellow Fed policy makers, members of Congress, his foreign peers or even the White House that Mr. Greenspan enjoyed. Indeed, he won't get much of a honeymoon. He will immediately be tested on how to respond to inflation, which has jumped to an annual rate of 4.7%, the highest since the early 1990s, because of rising energy prices. Excluding energy prices, inflation remains a low 2%, but Fed officials have worried that energy costs will eventually become embedded in wages and other prices.
Yesterday, Mr. Bernanke sought to associate himself with Mr. Greenspan's record. "Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed," he said. If confirmed, he said, "my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years."
One respect in which he will differ from his predecessor is in Mr. Bernanke's preference for greater public clarity on the Fed's goals and actions. He has long advocated that the central bank have an explicit numerical goal for inflation. He once suggested a 1% to 2% range as measured by the Fed's preferred price index, the personal consumption expenditures price index, excluding food and energy. By that measure, inflation was running at a 2% pace in August.
Mr. Greenspan has made the Fed more transparent, breaking with tradition to announce interest-rate moves and to explain them. Mr. Greenspan is skeptical, though, of targets, which opponents of the idea say constrain the Fed's ability to respond to shocks that endanger economic growth or jobs. Still, many economists and even Fed insiders say the Greenspan Fed has in effect operated as if it had a 1% to 2% inflation target.
Mr. Bernanke's advocacy of formal Fed clarity is matched by a personal reputation for candor and plain speaking. Though he has yet to make a notable gaffe, those traits of frankness may cause him problems as a Fed chairman, an official whose words can readily move markets and make headlines.
In another subtle difference between Mr. Greenspan and his designated successor, Mr. Greenspan long has questioned the usefulness of complex statistical models for forecasting the economy. Mr. Bernanke has done pioneering work developing them. Mr. Bernanke probably will have a closer relationship with staff economists at the Fed because he shares their academic tool kit.
In other respects, however, the shy and bookish Mr. Bernanke -- his dislike of business suits is legendary -- is similar to Mr. Greenspan. Mr. Greenspan was an associate of libertarian philosopher Ayn Rand; Mr. Bernanke read her books. Both studied baseball statistics and developed a passion for the sport. And both are described by friends as introverted.
In addition, they place substantial importance on subjecting their decisions to a thorough analysis of all available data. They believe that the Fed must focus on keeping inflation stable over and above almost any other goals.
Indeed, Mr. Bernanke, while at Princeton, co-authored an influential study that he presented at the Fed's Jackson Hole, Wyo., retreat in 1999 -- at the height of the technology-stock bubble -- arguing that the Fed shouldn't set interest-rate targets with a mind to influencing prices of stocks or other assets.
Mr. Bernanke, born in Augusta, Ga., grew up in Dillon, S.C., an agricultural town of barely 7,000 people. His father, Philip, and an uncle owned a drugstore. His mother, Edna, recalls he was so devoted to learning he would do his homework at night and do it again at school the next morning. She recalls: "One of his teachers said you could put him in a dark closet and he'd still learn. One time, a teacher was sick so he got up and taught the class."
He was South Carolina's spelling-bee champion at the age of 11, though he was eliminated in the national championship when he misspelled "edelweiss." He taught himself calculus and speed-reading. He learned enough Hebrew to later perform the bar and bat mitzvahs of his own son and daughter, ceremonies normally performed by a rabbi.
South Carolina's schools became integrated while he was in high school and his parents say the event made a significant impression on him: He wrote a novel about the best black and white football players of a newly integrated high school forming a team, his parents say. A publisher rejected it but told him to keep on writing, his father, Philip, recalls.
After an African-American friend a few years older won a scholarship to Harvard, he called Mr. Bernanke's parents to convince them their son should go there too, recalls the friend, Kenneth Manning, who now teaches the history of science at MIT. Mr. Bernanke did. At first he planned to major in English, but turned to economics and went on to earn a doctorate at MIT.
Depression Studies
>From 1979 to 1985 he taught at Stanford, then moved to
Princeton. There he expanded on Nobel laureate Milton
Friedman's research on the role of the Fed in causing
the Great Depression and wrote extensively on the
mechanics, practice and history of central banking.
"He's been a major force in monetary economics," says
Mark Gertler, a New York University economist and a
frequent co-author with Mr. Bernanke. His work has
"refined our knowledge of how monetary policy and
financial markets matter to the economy and what's the
appropriate way to conduct monetary policy."
Mr. Bernanke served two terms as chairman of Princeton's economic department, and was also editor of the American Economics Review, one of the discipline's most prestigious scholarly journals.
In 2002, Mr. Bernanke was tapped to fill a vacancy on the seven-member Federal Reserve Board, as the White House sought to beef up the Fed's monetary expertise. At first, Mr. Greenspan was wary of the new arrival, former Fed staffers and people involved in the appointment say. They say Mr. Greenspan worried that the newcomer would be a maverick in the mold of his friend, Mr. Blinder, who clashed with Mr. Greenspan in the mid-1990s.
Mr. Bernanke turned out to be collegial. He helped forge a compromise that broke a years-old impasse between other governors on what guidelines to give banks for gathering race and gender information on non -mortgage loans. He often made his case for inflation targets in the hallways of the Fed but seldom at meetings of the policy-making Federal Open Market Committee, colleagues say.
He and Mr. Greenspan developed a good working relationship. Mr. Greenspan would offer Mr. Bernanke suggestions on coming speeches, and sought his input for an important address of his own in early 2004 on what the Fed had learned in the past 15 years.
Mr. Bernanke's speeches made him the Fed's most prominent official after Mr. Greenspan. In November 2002, just three months after joining the Fed, he gave a talk called "Deflation: Making sure 'it' doesn't happen here."
At the time, inflation was quite low and the economy was struggling to build momentum, a combination that some in the markets thought could lead to deflation. There were suggestions that the Fed had limited tools to combat deflation because it already had pushed its short-term interest-rate target down to 1.25% and couldn't go much lower.
Arguing that the Fed had other tools to fight deflation, Mr. Bernanke said that the U.S. had "a printing press...that allows it to produce as many U.S. dollars as it wishes at essentially no cost," a move that would create inflation. He also alluded to a popular image in academic economics of a helicopter dropping money from the sky. Both the printing press and the helicopter were metaphors for a far more complex reality of how the Fed controls the money supply.
The speech captured what would become Mr. Bernanke's hallmarks: tackling contemporary economic problems with academic rigor and analysis of current data, then communicating in plain language. But the speech also highlighted pitfalls of that approach. Some critics still cite the speech as evidence he is soft on inflation, calling him "Helicopter Ben." Mr. Bernanke's later remarks on the subject were more nuanced.
Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush, and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush's trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.
A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting's other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.