Monday, October 24, 2005

Bernanke Succeeds Greenspan

President Bush selected Ben Bernanke, the 51 year-old chairman of the Council of Economic Advisers to succeed Alan Greenspan as chairman of the Federal Reserve. (Business Week: Profile of New Fed Chief Ben Bernanke). The top White House economic adviser will assume the reins when Greenspan retires on January 31, 2006.

The market responded positively with a jump of 168 points today when Bush ended a great deal of speculation surrounding Greenspan's successor. Bernanke gave assurances that he would continue the proactive economic policy management techniques introduced by Greenspan, "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."

Bernanke's academic credentials are impeccable, scoring 1590 out of 1600 on his SATs and graduating summa cum laude from Harvard in 1975. He will also bring a much more down to earth language style to the Federal Reserve, eliminating what has come to be known as "Greenspeak". His economic policies were largely shaped by the Greenspan era, although there are some distinctions that may become significant.

Unlike his predecessor, Bernanke is not committed to stock market price. "Saturation coverage by cable TV networks notwithstanding," he told the Senate Banking Committee in 2002, "the stock market is not the whole economy." Perhaps not, but the stock market is an excellent indicator of the overall health of the economy. That is something Bernanke will need to learn and learn fast.

The new Fed chief is also focused on maintaining an inflation rate of 2%. This implies a fairly aggressive interest rate management philosophy, not unlike that currently being utilized by FOMC. This could signal some rather daunting interest rates with oil prices double what they were a year ago, and while inflation may end up being contained, the overall effect on the economy may be somewhat less than pleasant. Already we are seeing the financial markets and banking specifically squeezed by rising interest rates. The housing market will also suffer as higher mortgage rates make home-buying less attractive.

What stamp Bernanke will put on FOMC during his tenure remains to be seen. For the present, it appears that he will attempt to maintain Greenspan's policies, but will seek more to contain inflation than to maintain market price stability. The probability of being able to accomplish this, at least in the next 12-18 months, leaves me more than skeptical. From this angle, 2006 looks to be a very rocky economic road. Bernanke will most certainly receive a baptism by fire. Let's hope he's a quick learner.


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