Bush Selects Bernanke
As New Fed Chairman
Bernanke Pledges to Continue Policy
And Strategies of Greenspan Years
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
October 24, 2005 4:52 p.m.
WASHINGTON -- President Bush named academic economist Ben S. Bernanke, virtually unknown to the public four years ago, to succeed Alan Greenspan as chairman of the Federal Reserve, the most influential economic policy job in the world.
Mr. Bernanke, who left Princeton University to come to Washington when Mr. Bush named him to sit alongside Mr. Greenspan on the Federal Reserve Board in 2002, has been chairman of President's Bush Council of Economic Advisers since June 2005.
The announcement represents the curtain call for an extraordinary 18 years in which Mr. Greenspan's words and actions guided both the U.S. and to a great extent the world economy -- by most accounts with great success. The transition has the potential to roil markets and unsettle investors, many of whom have seen Mr. Greenspan as a rock of stability for an economy racked by record budget and trade deficits and soaring oil prices.
"Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed and it will continue to evolve in the future," Mr. Bernanke said in a televised statement, with Mr. Bush and Mr. Greenspan standing at his side. "However, if I'm confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years."
Given Mr. Greenspan's stature and the risk that a fumbled choice would unsettle markets and hurt the economy, the White House administration appears to have made a safe choice that is likely to win applause from academic economists, financial markets and -- with some dissents -- from politicians. Mr. Bernanke represents both continuity and minimal surprise on monetary policy. Since moving to the White House, he has been the financial markets' odds-on favorite for the job.
In confirmed by the Senate, Mr. Bernanke probably would be sworn in so that he could take office on Feb. 1, 2006, the day after Mr. Greenspan's term expires. At the Fed he won the admiration and trust of Mr. Greenspan and other Fed colleagues for his collegiality, open mind and prolific output of meaty, topical speeches and studies. Mr. Greenspan, in a statement, said, "Ben comes with superb academic credentials and important insights into the ways our economy functions. I have no doubt that he will be a credit to the nation."
Although any new Fed chairman is likely to pursue what he perceives as Mr. Greenspan's successful monetary policy, Mr. Bernanke may be tugged in opposite directions when it comes to the battle against inflation, the Fed chief's No. 1 job. (See an interactive graphic showing how employment, interest rates, inflation and stocks have fared during the Greenspan era.)
In his last months on the Fed, and as the chief White House economist, Mr. Bernanke has not shared the alarm notable in recent remarks by other Fed officials about the risks of inflation. "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 week. Thus, he may feel that the Fed by February may have already raised rates enough and inflation risks will be minimal.
But, as a new Fed chairman and one who comes from the White House, he will face pressure to assert both his independence and his anti-inflation credentials by continuing to tighten monetary policy.
Until he joined the CEA, Mr. Bernanke had little contact with Mr. Bush. Though a Republican, he was decidedly non-partisan. Somewhat shy and often under dressed, he is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts.
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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. The next day, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the other meeting's participants. When Mr. Bush arrived, all were wearing tan socks.
Mr. Bernanke had been Wall Street's odds-on favorite to succeed Mr. Greenspan, ranking first in many surveys of economists and consistently in recent months assessed the highest odds of winning by Internet betting sites.
The nomination came as Mr. Bush is struggling to defend his choice of Harriet Miers, the White House counsel and formerly his personal attorney, to the Supreme Court. "I'm just grateful that Bush didn't pick his personal banker and at least picked someone as Fed chairman who is clearly qualified for the job," said Bruce Bartlett, an economist who worked in the Reagan and first Bush administrations, but who has become a critic of the current president's economic policies.
And Cesar V. Conda, former aide to Vice President Dick Cheney, now a lobbyist, added, "Bush has chosen the 'John Roberts' of the economics profession, and someone who is more than acceptable to supply siders," a reference to tax-cut advocates who were skeptical of another candidate for the job, Harvard economist Martin Feldstein, whose criticism of Reagan era deficits has not been forgotten.
Sen. Robert Bennett of Utah, a senior Republican on the Senate Banking Committee, said in an interview that he had no advance word about the nomination, but called it "the right choice" given Mr. Bernanke's background and experience, particularly "at the feet of the master" as a member of the Fed under Mr. Greenspan.
He said Mr. Bernanke as chairman suggests "more of a continuum" of Greenspan policies "than some of the others named" as possible chairman picks. The senator also said the nomination of Mr. Bernanke, though Mr. Bush's CEA chairman, can't be fodder for White House critics who've taken to charging "cronyism" in the president's naming of personal associates and intimates, such as Harriett Miers for the Supreme Court, to high positions. "You can't say, 'Only George W. Bush knows him," Mr. Bennett said, adding that Mr. Bernanke "is well known in economic circles," and respected.
In Europe, Jean-Claude Trichet, President of the European Central Bank, was quick to praise Mr. Bush's choice. "Ben Bernanke is a highly respected central banker, a remarkable economist and a man of experience. I will be very happy to have the possibility to develop with him the same highly close and fruitful cooperation, and enjoy the same confident and friendly personal relationship that I had with Alan Greenspan."
It has been a remarkable rise for an academic economist little known to the public just four years ago and, in three months, could become the world's most influential economic policy maker. Until 2002, Mr. Bernanke, 51 years old, had spent his entire professional life as an academic.
In those circles, he had built a high profile. He had become one of the country's leading thinkers on monetary policy, writing in particular at length on the lessons of the Great Depression and how the Fed contributed to it. He has also been a leading thinker on econometrics, the discipline of applying complex mathematical and statistical methods to economic questions. Many of his former graduate students now work at the Fed.
Once he joined the Fed, Mr. Bernanke become one of the most outspoken members of the Fed board. In November 2002, he made waves with a speech to economists called, "Deflation: Making sure 'it' doesn't happen here." At the time inflation was quite low and the economy was struggling to built momentum, a combination that some in the markets and, later, the Fed thought could make deflation -- or generally declining prices -- possible, although unlikely. Had it loomed, the Fed had limited tools to combat it because its short-term interest rate target, the federal-funds rate, was already down to 1.25%.
The speech captured what would become Mr. Bernanke's hallmarks: tackling contemporary economic problems with both his academic background and a careful analysis of current data, then communicating both in plain language that non-economists could easily understand.
But the speech also highlighted the pitfalls of that approach. He pointed out that deflation was unlikely because when all else failed, the U.S. had "a printing press … that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Many in the market remember those words and think they mark Mr. Bernanke as soft on inflation. In his years at the Fed, Mr. Bernanke did tend towards the dovish end of the spectrum, more willing than some others to cut interest rates further or hold them low longer to ward off the risks of deflation to underpin the economic recovery. But inflation was not perceived as a significant economic threat in the U.S. during his time on the Fed board.
Perhaps more important than his views on current interest rates is his steadfast advocacy of increased transparency at the central bank. At the Fed he was a strong advocate of giving more information to the public about the central bank's expectations and goals on the economy. The Fed has adopted some of the planks he, and others there, advocated, such as releasing minutes to its policy meetings in just three weeks instead of after the subsequent meeting. It has not followed his most radical recommendation, which is to announce an explicit, numerical goal for inflation to both guide the public's expectations and hold the Fed accountable. Mr. Greenspan has resisted such a step, one that most other major central banks have adopted, for fear it would limit the Fed's flexibility in responding to surprise developments.
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Greenspan (left) and Bush shook hands at the nomination of Bernanke (center).
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Still, many other members of the Fed's policy committee have warmed to the idea and it seems likely that with Mr. Bernanke as chairman, the Fed will eventually adopt some form of a target.
Mr. Bernanke steps into big shoes. Since Ronald Reagan named him in 1987 to chair the Federal Reserve, Mr. Greenspan has become one of the most successful and well-regarded economic policy makers in the world, an icon of American economic stability and an oracle whose views are sought on matters far beyond questions of monetary policy and banking. Mr. Bernanke may take some comfort, though, that -- at the time -- Mr. Greenspan wasn't seen as someone whose stature would ever match that of his predecessor, Paul Volcker, who helped break the back of inflation in the early 1980s. William Greider, a journalist who chronicled the Volcker years critically, predicted that Mr. Greenspan "would be unable to dominate the Federal Reserve Board the way Volcker had… [and] would be less able to intimidate the politicians."
But Mr. Greenspan proved him wrong. "His performance as chairman of the Fed has been impressive, encompassing and overwhelmingly beneficial -- to the nation, to the institution and to the practice of monetary policy," the Fed's former vice chairman, Alan Blinder, said at the Fed's annual retreat at Jackson Hole, Wyo., this summer.
"No one has yet credited Alan Greenspan with the fall of the Soviet Union or the rise of the Boston Red Sox … but within the domain of monetary policy, Greenspan has been central to just about everything that has transpired in the practical world since 1987," Mr. Blinder and a colleague wrote.
George Takei and his partner have been together for 18 years.
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