Adieu Alan, Bonjour Ben, Welcome Transparency
03-02-06 Caroline Baum
I don't envy Ben Bernanke having to step into Alan Greenspan's shoes. Why, I don't even know what kind of shoes the outgoing Federal Reserve chairman wears.
Do Greenspan's footwear preferences tilt toward fine English leather tie shoes, complementing his dark banker's suits? Maybe he wears some kind of slip-on or loafer so as not to aggravate his bad back bending down to tie them?
Rather than speculate, I e-mailed a Fed press officer with my question.
``Our practice has been to decline to answer personal questions such as the one you pose,'' he replied.
Hey, this isn't his Swiss bank account I'm after! It's his shoes, visible to any passerby on the street or attendee at his frequent testimonies and speeches. Greenspan's shoes are not a state secret.
Ben Bernanke is much more open. He indulged my footwear fetish a while back, admitting he hates to shop and buys ``the first pair of black laced shoes that fit and cost under $100.''
Clothes may make the man, but shoes define the difference.
For Bernanke, transparency is a guiding principle. Greenspan talks transparency but never reveals too much. The Fed has become more transparent in the last decade in spite of Greenspan, not because of him.
Hitting His Stride
It was Bernanke who pushed for greater transparency, including earlier release of the minutes, when he was a Fed governor from 2002 to 2005. The Fed had countered calls for more timely release, claiming it took a full six weeks to edit and distribute the minutes to policy makers for approval. (Somehow the technology revolution must have bypassed the Fed.)
The minutes are now released three weeks after each meeting, and there have been no stories of Fed staffers having to work evenings and weekends to meet the accelerated deadline.
So what will the Fed be like under Bernanke? While everyone heard his promise of ``continuity'' with the policies of the Greenspan Fed at his Nov. 15 Senate confirmation hearing, it would be a mistake to assume it will be business as usual with Bernanke at the helm. Bernanke represents a departure from Greenspan in three key areas: in the importance he places on transparency; in his perception of his role of Fed chairman; and in his expected response to financial market crises.
Bernanke is certain to push for the adoption of a formal inflation target now that he's in a leadership position at the Fed. He devoted a good deal of academic research to the benefits of a target, wrote a book on it and, much to Greenspan's chagrin, advocated one every chance he got when he was a Fed governor.
The transparency playbook starts with a stated numerical rate or range for inflation. It features numerical forecasts in place of boilerplate language. And it precludes leaks to select reporters from unnamed Fed officials, one of the more unseemly characteristics of Greenspan's tenure that often left markets wondering which newspaper had the story right.
Transparency isn't about providing intermeeting guidance in code words, even if everyone understands the meaning. Transparency means the central bank is so clear about its objective that investors react to new information, not nuanced changes in the Fed's policy statement.
On that score, don't waste even a minute analyzing what the removal of the word ``measured'' from the Fed statement yesterday means. It was Greenspan's last meeting, last rate increase (25 basis points, taking the federal funds rate to 4.5 percent) and the last time we'll have to play his silly word games.
Fleet of Foot
The second difference between the outgoing and incoming Fed chairman is in how they view their job descriptions. Unlike Greenspan, who cultivated the image of an uber adviser to Congress on all issues economic (and many non-economic), Fed Chairman Bernanke will stick to his knitting. He already committed himself to the practice of not commenting on specific tax and spending policies.
Greenspan advised Bush pere to raise taxes and Bush fils to lower them. He made a deal with the first President Bush, dangling the promise of a rate cut if the president and Congress cobbled together a credible deficit-reduction package. They did, and Greenspan delivered in October 1990. He was a maestro at maintaining his credibility in the face of some highly politicized acts.
Bernanke will confine his comments to the subject of monetary policy and the economy. They will leave little room for guesswork or interpretation.
Dipping a Toe
The third area where I expect Bernanke to differ from Greenspan is in their response to financial crises. Greenspan has been accused of creating a moral hazard, of encouraging risky behavior by putting a floor under the stock market.
The Greenspan ``put'' may retire with the chairman. Bernanke will be less of an interventionist in the case of a financial market crisis -- if a big hedge fund got into trouble, for example.
On the other hand, the self-described Great Depression buff would be more aggressive in the case of banking crisis. His research into what was perhaps the Fed's biggest policy failure convinced him that the credit squeeze converted a severe but not unprecedented economic decline in 1929-30 into a protracted depression.
If a burst housing bubble impaired banks' ability to lend, Bernanke would respond more quickly and aggressively than Greenspan did in the early 1990s.
Bernanke will work to achieve a consensus on these changes, rather than impose them autocratically. As a former chairman of the economics department at Princeton University, Bernanke is comfortable with differing points of view and respectful of empirical research. Expect the Fed to be a more collegial, democratic institution than it was under Greenspan.
And one more thing: All the talk about how Bernanke has to prove his inflation-fighting credentials by raising rates at his first meeting as Fed chairman in March is just that.
He doesn't have to prove anything to anybody. He just has to do the right thing.
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Ben S. Bernanke (Ph. D., MIT, 1979), is the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University and the Chairman of the Department of Economics. He is a macroeconomist with interests in monetary policy and macroeconomic history. He is the Director of the Monetary Economics Program of the National Bureau of Economics Research and the Editor of the American Economic Review...