October 24, 2005
WELCOME TO THE JUNGLE
The long wait for a name is over. Now begins the long wait to see how the new kid on the block performs.
Meanwhile, we have the president's assurances. "Ben Bernanke is the right man to build on the record Alan Greenspan has established," Bush said today in his announcement that the chair of the White House's Council of Economic Advisors has been nominated as successor to the demigod Alan Greenspan, otherwise known as the chairman of the Federal Reserve.
The nomination surprised no one, as Bernanke has been widely rumored to be on the short list of people who might be called upon to take over the most powerful central bank on the planet. With rumor replaced by fact, a new season has begun in trying to answer the question: Who is this man, and what will he do?
For those who watched the President's announcement on television, it was hard to miss the other man in the room, namely, Greenspan, whose presence seemed to imply that the maestro approves of his would-be replacement. Presumably, the Senate will fall in line as well when it eventually votes on the Bernanke nomination.
And on paper, at least, what's not to like? Bernanke was a Fed governor prior to appointment to the White House's CEA earlier this year. The presumed next Fed chairman is a Harvard graduate and was chairman of Princeton University's Economics Department. It's an impressive resume, to be sure. The question is whether Bernanke, or anyone for that matter, is up to the job of taking over the nation's monetary strings from a man who's widely celebrated as the best that central banking has produced.
By some accounts, Bernanke's the right man at the right time. “He's eminently qualified for the job," Avery Shenfeld, senior economist at CIBC World Markets, tells The Globe and Mail today. "He's a leading macro economist at the academic level and has all of the background needed to be the Fed chair. He's also someone who, by being an outspoken but brief member of the Fed, was also someone who financial markets had been able to get comfortable with." Meanwhile, Peter Morici, a professor at the University of Maryland, writes in MarketWatch.com that Bush is giving Wall Street what it wants: an inflation hawk.
Nonetheless, there's still that shadow. Although Greenspan has many critics, it's beyond debate that the Maestro's influence has been second to none in calming and charming Wall Street when necessary, bucking up support for this or that White House policy initiative, and generally influencing public opinion on a range of issues. Does Bernanke hold such powers of persuasion? Will he even try? Should we care?
Too early to tell. For perspective, it's worth reminding that Greenspan's initial arrival as Fed head in 1987 was less than universally accepted. Coming after the towering Paul Volcker, who broke inflation's back in the early 1980s, Greenspan was seen as something less than Volcker, which was a backhanded insult at the time.
Then came the stock market crash of 1987, and Alan's moment to shine arrived. And he passed the test with flying colors by opening the financial spigots at a moment of financial distress of a degree unseen since the Great Depression. A student of economic history, Greenspan was careful to avoid the Fed's past mistakes, namely, the monetary tightening of the early 1930s, an act that some say turned what would have been a recession into something materially worse.
Only fate knows if Bernanke will have an opportunity to prove his mettle with the markets. For now, he's an obscure man to the masses, but one who's known to the world of finance for his tough talk on deflation and an affinity for inflation targeting, i.e., a controversial rules-based approach to managing the nation's money supply.
Yet Bernanke says he plans no policy revolutions. "If I am confirmed to this position," Bernanke said with the Maestro and the President by his side today, "my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years." But lest anyone think the nominee will simply be a caretaker chairman following in the shadow of his predecessor, Bernanke assured that Fed policy "will continue to evolve in the future."
Still, the equity market seems pleased with the Bernanke announcement (the S&P 500 climbed 1.7% today). By contrast, the bond market prefers caution: the yield on the 10-year Treasury moved up a bit today to close the session at around 4.45%.
Perhaps the fixed-income set realizes that inflation is no less a threat now than it was before the White House announcement. Bernanke, meanwhile, has recently gone on the record as saying that the current uptick in inflation is nothing to worry about. "Inflation is up, driven by energy prices," Bernanke said on October 12, Dow Jones reported via CNNMoney. "Underlying core rates remain low, which is encouraging."
Encouraging? An alternative view is that it's only a matter of time before the core rate follows the path of the top-line inflation rate. If so, it wouldn't surprise Bernanke's critics to learn that the Fed nominee stumbled on forecasting the inflationary risks of the future. "He's been wrong about what's happening with inflation for two years," Josh Stiles, senior bond strategist at IDEAglobal in New York, says of Bernanke in a Reuters story today. "He's more focused on structural disinflation forces than he is on the cyclical inflationary forces from excessive accommodation."
Regardless of who's Fed chairman, the years ahead will almost surely require a different central bank strategy compared with what's been deployed in the past. Inflation in the last 20 years was more or less falling. Inflation's no longer falling, and it may very well be rising for more than a short period of time. That, combined with a new man at the Fed, creates a cloud of unknowing.
"There's more uncertainty with Bernanke than with Greenspan," Bill Gross, chief investment officer at Pacific Investment Management Co., said in a Bloomberg News story. Today's selloff in Treasuries "was not an expression of dissatisfaction with the choice but merely a reflection of the uncertainty."
Posted by jp at October 24, 2005 5:29 PM
The big negative has to be, he was picked by Bush.
Posted by: eric bloodaxe at October 25, 2005 10:25 AM
Too much has been made of the helicopter money comment.
Posted by: Fred at October 24, 2005 10:43 PM
This "Deficits don't matter", with even more spending to come, administration made a politically expedient decision to inflate them away, with its nomination of Bernanke. Helicopter money for everyone.
What was Wall Street thinking, today?
Posted by: vince at October 24, 2005 9:21 PM