To Focus on Inflation,
Not on 'Asset Bubbles'
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Ben S. Bernanke, an economist virtually unknown outside of academic circles four years ago, was picked by President Bush to succeed Alan Greenspan as chairman of the Federal Reserve Board, the most influential economic policy job in the world.
The announcement represents a curtain call for an extraordinary 18 years in which Mr. Greenspan has guided the U.S. and, to a great extent, global economy -- by most accounts with much success. The transition thus has the potential to roil markets and unsettle investors, many of whom see Mr. Greenspan as a rock of stability for a U.S. economy afflicted by budget and trade deficits, high energy prices and heavy reliance on borrowing from abroad.
Against that backdrop, the Bush administration made what appeared to be a safe choice, for itself and the economy. Mr. Bernanke (pronounced ber-NANK-ee), 51 years old, has been an academic most of his life and represents both continuity and minimal surprise on monetary policy. He was a member of the Fed board of governors alongside Mr. Greenspan from 2002 to this past June, when he became chairman of the President's Council of Economic Advisers.
Mr. Bernanke's monetary policy is likely to look much like Mr. Greenspan's: an emphasis on low inflation as the central bank's primary goal; little appetite for trying to burst stock-market or real-estate bubbles; and monetary policy that relies on data and pragmatism, not ideology. "My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years," he said yesterday.
In his last several months at the Fed and his short time at the White House, however, Mr. Bernanke has been more sanguine about inflation than some Fed officials. "The stability in core inflation and inflation expectations does suggest that overall inflation is likely to return to levels consistent with price stability in coming quarters," he told the Joint Economic Committee of Congress last Thursday.
Some in the markets say his warnings about the risk of deflation, or generally declining prices, during his early days as a Fed governor suggest he would be soft on inflation. But for most of Mr. Bernanke's Fed stint, inflation wasn't a concern of the markets or the Fed, as it is now.
Moreover, as an academic and a Fed governor Mr. Bernanke has argued that the central bank should have an explicit target for inflation -- both to guide market expectations and to hold the Fed accountable to its goal of price stability. A target wouldn't necessarily stop inflation from rising, but would make it hard for the Fed to ignore or play down such a risk.
The stock market rose sharply on news of Mr. Bernanke's nomination, though the bond market declined.
Mr. Bernanke is likely to usher in an approach that involves somewhat clearer statements and publicly enunciated rules for moving rates than seen in the Greenspan years. Mr. Greenspan has long relied on his own idiosyncratic understanding of economic data, his discretion to move rates when he thought necessary, and often opaque pronouncements.
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Early reviews of the choice of Mr. Bernanke, whom financial markets had made the favorite, were positive. Bill Dudley, chief U.S. economist at Goldman Sachs Group, called him "highly competent." Nariman Behravesh, chief economist at forecasting firm Global Insight, said the choice will "reassure global financial markets." Sen. Edward Kennedy, the Massachusetts Democrat, deemed him "certainly well-qualified."
Mr. Greenspan, who the White House said participated in the selection process, gave his blessing, citing the nominee's "academic credentials and important insights into the ways our economy functions."
But Mr. Bernanke faces many challenges, not the least of which is simply having to fill Mr. Greenspan's large shoes. It isn't clear how well Mr. Bernanke's academic grounding -- he used to head Princeton's economics department -- has prepared him for handling the financial crises that periodically erupt, such as a stock-market crash or a run on the dollar. (See an interactive graphic showing how employment, interest rates, inflation and stocks have fared during the Greenspan era.)
Though his recent move to the White House from the Fed may have helped him get Mr. Bush's nod, it adds to his challenges. The Senate is likely to scrutinize his views on deficits and tax cuts for any differences of nuance between what he says now and what he said while serving Mr. Bush. Mr. Bernanke's recent stint at the White House could limit his ability to speak publicly as Fed chairman, since any perceived echoing of the White House line might provoke accusations that he isn't independent.
Mr. Greenspan, who speaks frequently on tax, budget and other economic issues outside the Fed's purview, also once served as chairman of the President's Council of Economic Advisers, under Gerald Ford. But he didn't move directly from there to the Fed.
With Mr. Bush under fire for seeming to some people to place too high a value on loyalty, Mr. Bernanke may find it necessary to prove his political independence. But supporters note that he didn't know Mr. Bush before joining the Council of Economic Advisers and has been far from partisan in the past. Alan Blinder, a Princeton economist whom Bill Clinton named to the Fed, said, "I was his friend, colleague, and co-author for more than a dozen years before I even knew his politics."
As chairman of Princeton's economics department, Mr. Bernanke hired Paul Krugman, now a relentless Bush critic on the op-ed pages of the New York Times. Mr. Bernanke's only political office was serving on the school board of Montgomery Township, N.J. (He pushed to expand the crowded school system, a stance that eventually led to higher property taxes.)
Sen. Charles Schumer, a New York Democrat and member of the committee that will weigh the nomination, yesterday said he had told Mr. Bernanke by phone that the next Fed chairman should be "a cheerleader or jawboner to prevent our deficit from getting any worse." The senator said Mr. Bernanke replied that "at the Fed he would not comment on non-monetary matters," a stance that some inside the Fed would welcome.
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.WALL STREET JOURNAL VIDEO
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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.
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.
Greenspan (left) and Bush shook hands at the nomination of Bernanke (center).
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.
--Jackie Calmes contributed to this article.
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