Bernanke's Talents Guarantee Good Fit

By Mark J. Perry
Knight Ridder Newspapers

 

AP Photo

Ben Bernanke, President Bush's top economic adviser, will take over the Federal Reserve from retiring Alan Greenspan in January.Bush named him to the Fed board in 2002.
 		  

FLINT, Mich. — Succeeding Alan Greenspan as Federal Reserve Board chairman will surely be a tough act to follow, but newly appointed Fed chair Ben Bernanke has exactly the right combination of talents, skills and background to effectively guide the U.S. economy as successfully as Greenspan.

In fact, a new era of monetary policymaking under Bernanke could actually be an improvement upon Greenspan's impressive 18-year record of low and stable inflation. Here's why.

Bernanke has a rock-solid background as an academic economist in the area of monetary economics, with almost 150 scholarly articles in top economics and finance journals.

Bernanke's prolific research has significantly advanced our understanding of how monetary policy is linked to financial markets and economic growth, and makes him ever better qualified academically than Greenspan to lead the Fed.

As an MIT-trained economist, Bernanke has a first-rate quantitative background in statistical modeling and forecasting, giving him another possible advantage over Greenspan, who has generally shunned the mathematical approach to economic analysis and policymaking.

 

As a balance to his quantitative strengths, Bernanke has also done important research in macroeconomic history, focusing specifically on monetary policy during the Great Depression. In particular, Bernanke has confirmed Nobel economist Milton Friedman's findings that the Fed's misguided, inappropriate and destabilizing monetary tightening in the early 1930s turned an otherwise ordinary recession into the "Great Contraction."

According to Bernanke, the main lesson to be learned from the Great Depression is the importance of price level stability for monetary policymaking, which should calm the inflation-skittish financial markets.

Complementing Bernanke's academic background, is his policymaking experience, first as a Fed governor for three years, and most recently as the chairman of the Council of Economic Advisors.

 

 

AP Photo

Federal Reserve Chairman Alan Greenspan is retiring in January.
 		  
Compared to Greenspan in 1987, Bernanke now assumes the Fed helm with both more academic experience in monetary economics and with more monetary policymaking experience.

The controversial subject that could clearly sets Bernanke apart from his predecessor, is the issue of inflation targeting to guide monetary policy. While most developed economies around the world have adopted inflation targets over the last decade, only Japan and the Greenspan Fed have resisted targeting. In contrast, Bernanke is one of the leading international proponents of transparent targets for inflation.

 

Therefore, look for the Bernanke Fed to move in the direction of an inflation target, with a corresponding reduction in uncertainty about the future direction of monetary policy, inflation and interest rates.

Without the anchor of a transparent inflation target, a certain element of uncertainty and Fed-watching always swirled around the Greenspan Fed, as everybody had to guess what the Maestro would do next. Under a Bernanke Fed with an inflation target, Fed-watching will disappear, as a publicly-announced, formal inflation target will be known to the world.

As Bernanke has explained in his writings, an inflation target would create an important institutional commitment to increase the transparency of monetary policy, and would be a long-run solution to monetary stability that would not be dependent on a single individual like Greenspan. By formalizing Greenspan's credibility and established record of low and stable inflation with an inflation target, Bernanke's success as Fed chair could eventually surpass the Greenspan legacy.

 

Perhaps history will credit Greenspan as being the Fed chief with the longest record of price level stability in Fed history, and Bernanke as the Fed leader who captured and distilled much of the Greenspan wizardry into a transparent inflation target.

We can be certain about two things — the U.S. economy benefited greatly over the last two decades because of Greenspan's effective leadership at the Fed, and there is no better candidate than Ben Bernanke to continue, and possibly surpass, the legendary Alan Greenspan.

 

Mark J. Perry is a professor of economics and finance at the Flint campus of the University of Michigan. Readers may write him at UM/Flint, 350 David M. French Hall, Flint MI 48502-1950 or e-mail him at mjperry@umflint.edu.