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October 25, 2005

The Economist on Ben Bernanke

The Economist on Ben Bernanke:

Economist.com: On Monday October 24th, Mr Bush... announc[ed] that he would nominate Mr Bernanke, who used to work at the Federal Reserve, to succeed his former boss.

No one doubts that the 51-year-old Mr Bernanke has big shoes to fill.... Mr Greenspan['s]... track record is... impressive... the spectre of inflation was finally banished... America has experienced some of the longest booms of its history, punctuated by only the mildest of recessions. And this has been achieved despite a series of crises: stockmarket crashes in 1987 and 2000, the savings-and-loan debacle, the Asian financial meltdown of 1997-98, the phoney scare of Y2K and the real terror of September 11th 2001....

The stockmarket has already endorsed Mr Bernanke, leaping upwards in response to his nomination (though the market for government bonds weakened, thanks to Mr Bernanke's reputation for erring on the expansionist side of monetary policy). This stands in stark contrast to the sharp drop that greeted news of Mr Greenspan's appointment, driven by the perception that he was a Republican yes-man.... Once he steps into Mr Greenspan’s shoes, Mr Bernanke will undoubtedly try to keep a low profile for a while as he feels out the new job. But he will probably not be able to maintain it for long. For one thing, Mr Bernanke, unlike Mr Greenspan, has endorsed the idea of setting an explicit target for inflation, which would be a substantial policy shift for the Fed. For another, the new chairman will face considerable challenges. Though guiding monetary policy is less fraught than it used to be, now that the Fed has established its hawkish credentials through a long period of stable prices, there are storm clouds gathering on the economic horizon.

The most worrying of these is America’s housing bubble. Soaring house prices have been crucial in underpinning consumer spending since 2001 as Americans have blithely ridden out slowing income growth by releasing large sums of home equity. A related problem, the gaping (and growing) current-account deficit, has many observers worried about a sudden dollar devaluation triggering a “hard landing” for America’s economy—-and thus the world economy. And rising oil prices have once again raised the spectre of the devastating combination of high consumer prices and slow growth that haunted the 1970s. There are no clear answers to any of these problems, and Mr Bernanke will have to feel his way with the eyes of the world upon him...

I don't like this stuff about Bernanke "erring on the expansionist side of monetary policy." It seems to me that it's based on a misreading of Bernanke' Fed speeches--speeches in which Bernanke wanted to make the point that the Fed had the power to halt any deflation before it could get going have been interpreted as meaning something more--and on a whispering campaign being carried out by the Bushies to the effect that they choose Bernanke because he was more of an inflation dove than Hubbard, or Feldstein, or Ferguson, or Kohn. This is (a) false and (b) likely, if carried further, to promote a reaction in which Bernanke demonstrates that it is false.

Posted by DeLong at October 25, 2005 08:33 PM