- The Washington Times - Tuesday, November 29, 2005

Ben S. Bernanke takes over as chairman of the Federal Reserve when Alan Greenspan retires at the end of January, a month shy of his 80th birthday.

Other than his tendency to set specific inflation targets, which Mr. Bernanke reaffirmed in his recent confirmation hearings, the Greenspan-Bernanke transition seems to promise few surprises and only modest change.

Mr. Greenspan leaves the economy in good shape. But he has hardly been the economic superhero mythmakers would have us believe. During his tenure, beginning in August 1987, the dollar’s purchasing power fell 42 percent.

Mr. Greenspan’s tenure also has been marked by two consistent failures: to address speculative bubbles as they form and bank supervision lapses that triggered government bailouts. He bequeaths these problems to his successor.

Optimists would argue we suffered “only” a 42 percent depreciation of the dollar over the last 18 years. Others, like Lee Hoskins, former president of Federal Reserve Bank in Cleveland, would consider that unacceptable for the world’s central reserve currency. In Mr. Hoskins’ view, “Zero is the only acceptable inflation rate for a central bank’s monetary policy.”

Just as Mr. Bernanke inherits Mr. Greenspan’s problems, Mr. Greenspan inherited various problems from his predecessor, Paul Volcker: the effects of the international payments crises of the 1980s, the savings-and-loan crises that would become evident soon after Mr. Greenspan assumed office, a 1987 stock market crash, and the bursting commercial real estate bubble that sent prices plunging in the Northeast and on the coasts.

Later problems confronting the Greenspan-led Fed included the Mexican bailout of 1995, the East Asian and Russian payments crises of 1997-98, the “dot com” bubble of 1996-2000, and the current housing price bubble, which affects (again) mostly the Northeast and coastal areas.

The recurring speculative bubbles have not happened on their own. They were stimulated by Fed “easy money” policies and were likely reinforced by the expected future bailouts. The “Greenspan put option,” as financial market analysts describe it, may be the major legacy Mr. Greenspan leaves his successor.

Mr. Bernanke will take over the Fed in February with the economy growing at a rate of about 31/2-4 percent annually if current economic trends continue. He also will take over when energy and nonagricultural commodity prices are at or near peaks in nominal dollars and with year-to-year inflation rates around 4.7 percent for all consumer prices and 2 percent for “core” inflation (without food and energy).

Mr. Bernanke comes into office with a reputation for great intelligence and plain-speaking (a refreshing change from the obfuscations emanating from the chairman’s office during the Volcker and Greenspan years). His extensive research and writing indicate the new chairman favors more transparency in monetary decisionmaking, believes the Fed should try to manage aggregate economic performance through monetary policy, and favors inflation “targeting,” perhaps in the 1-3 percent range. This distinguishes him from Mr. Greenspan, who refused to be pinned down on specific inflation targets.

Probably the greatest weaknesses of Mr. Bernanke’s ideas are related to the Achilles heel of all recent Fed chairmen since William McChesney Martin (1951-1970): failure to address price bubbles as they form, which Martin called “taking the punch bowl away just when the party gets going good,” and bank supervision failures that inevitably require political solutions, such as bailouts.

Mr. Bernanke’s recent writings on bubbles, industry-specific bailouts and bank supervisory policy are scarce to nonexistent. That doesn’t mean he lacks strong opinions: Mr. Greenspan tended to monopolize public discussion of such matters.

Mr. Bernanke’s writings display a proclivity to manage the economy actively through “forecast-based policies,” which rely, of course, on the quality of data feeding the forecasts. Such policies attempt to predict the economy’s future health by analyzing current economic data as well as anticipated economic, demographic and policy changes.

Because of this reliance on economic forecasting, Mr. Bernanke, like his predecessors, may stumble on occasion, due to bad data, bad forecasts, political pressures or all of the above.

Overall, however, Mr. Bernanke’s ascension to the Fed chairmanship provides an important plus: continuity in a world scarred by uncertainty.

Walker Todd is director of a summer fellowship program for economists at the American Institute for Economic Research, Great Barrington, Mass.

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