At Arm's Length - Ben Bernanke - Federal Reserve - Greenspan - White House - fiscal policies - monetary policies - dollar - Financial Commentary about Money, Investing, and How It Affects the Average Investor

Editor's Note: This originally appeared on our sister site, the BlueMoney Report and should be noted that it is commentary. It does, however, reflect the views of our editorial staff.

At Arm's Length: 10.24.05

Bernanke: A Seemingly Safe Bet

With the White House's announcement of a candidate to replace Alan Greenspan, the current, so-to-be-retired Federal Reserve Chief, the President has taken a bold step in the right direction. His offering of Ben Bernanke to succeed Greenspan into the top banker position will be met with a warm reception from not only the media and economists, but the markets as well. Congress will apporve him without much of a fight and everyone will see him as a safe bet to keep the economy on track.

Arriving almost from nowhere, former Fed governor Ben Bernanke, now the White House's Chief Economic Advisor since his appointment on June 21st of this year, has had a quick ride to the top job as controller of monetary policy. Bernanke ascended to the governor's board in 2002 and became a media darling of sorts. He was a plain speaking economist from Princeton, who, unlike his boss, spoke about such topics as deflation and economic policy in easy-to-understand English.

Economists like him because of his rather succinct views on deficits. Of all of the candidates, he seemed least likely to get the position because of this factor. The understandable change of mind by the White House, especially in light of the numerous fiascos currently besieging the administration, is an effort to show the public that the President is concerned by the economy he created with a genial nod and a wink from the current Fed chief. The search for Greenspan's replacement was originally aimed at finding a qualified member from the business community.

Looking to soothe so much economic disarray might be more than a mere mortal such as Bernanke might want to assume. We are in the midst of a slow slide into a fiscal abyss and anyone who takes the helm in such conditions can find the water much rougher to navigate.

Surpluses are now deficits and this has come on the heels of runaway government spending and poor fiscal planning. Imbalances in trade have begun to weigh on the economy, the once feared inflation is now here, which will force the Fed to begin to raise interest rates at a much quicker rate, and the obvious vacuum that has become more evident with each new financial disaster, tax cut, and act of God event, leaves the nominated replacement with more trouble than anyone should want.

In previous columns, I have speculated about any successor's ability to operate monetary policy the way Greenspan did. Before Greenspan, a Fed chief would offer a more structured approach to monetary policy sending clear messages to not only the government but the consumer's directly affected by their actions. Greenspan always seemed to be reacting to many masters, slave to all but loyal to himself and what appears to be his legacy, claiming flexibility and economic nimbleness as his best traits.

The new Fed chief will need to make quicker, more decisive decisions, refuse to turn a blind eye on poor fiscal policies and possibly even push the White House to abandon their underlying agenda of shifting the burden of economic responsibility on the citizenry.

In 2001, while still at Princeton, Mr. Bernanke wrote in a paper entitled Is Growth Exogenous?: Taking Manikow, Romer and Weil Seriously. In it he writes. "that long-run economic growth is determined solely by exogenous technical change and is independent of variables such as the aggregate saving rate, schooling rates, and the growth of the labor force." This does fall in line with certain policies Mr. Bush has sought to enact and could underpin the administration's attempts to spend the economy out of a slowdown. Any support of the White House's policies could seem apolitical as a result of this text.

But now we are saddled with inflation as evident in numerous reports released over the last several weeks from the CPI to the Producer's price Index to Philadelphia Fed's October survey of the prices-paid index. How Bernanke will approach this subject may also be held in another paper concerning is belief in how Central Banks react. Written with Mark Gertler, the authors ask the question: "should central banks respond to asset price volatility?" He admits that, even as the Fed has embraced the notion that inflation can be controlled through policy, the practice has largely gone untested.

The use of the Fed as a means of controlling inflation will be closely watched. Even Mr. Bernanke has written that "the effects of such attempts on market psychology are dangerously unpredictable". Will Mr. Bernanke's Fed have an open debate on the subject?

Greenspan has used the notion that in a low interest rate environment, one that creates a wealthier borrower - since the stock market decline, that asset wealth has been largely real estate related - and in turn allows more self financing and as a result, leads to increased investment and output. This thinking has been only partially correct. Instead, companies have shaved off cumbersome promises to their employees in the form of health and pension coverages, sliced off huge swaths of employees and held back on capital expenditures, using their new found cash reserves to buy back shares at an increased rate.

In a speech at the Macroeconomic Advisers Washington Policy Conference, Mr. Bernanke said:

One of the most impressive aspects of Americašs market economy is its resilience and adaptability, which if anything have increased over time. Flexible labor markets, a culture of entrepreneurship, efficient and highly liquid financial markets, and intense market competition all help to explain the ability of the economy to perform well even in difficult circumstances. Could this suggest that Mr. Bernanke might be slow to react to external pressures on the economy?

At his acceptance speech for the nomination by President Bush, he affirmed that he would follow the current policies that his predecessor has begun. That's not what worries me the most.

What faces Mr. Bernanke and his colleagues at the Fed has more to do with keeping the dollar in the right supply. So far, the value of the dollar has been not much more than a symbol of value. To date, we have many of our current fiscal problems because of the uncertainty of that value and the right supply of those dollars in the marketplace.

Keynes once suggested that inflation simply makes the working man seem richer, a monetary slight of hand that forces more spending which results in a growing economy. Bernanke will not have Greenspan's magical talent to dodge serious problems through economic doublespeak. Instead, he will need to shock the markets with open debates on policy and direction but he must do this without the influence of the White House.

The previous week's articles.

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