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Jewish World Review Oct 28, 2005 / 25 Tishrei, 5766 Faceless face at the Fed By Robert Robb
http://www.JewishWorldReview.com |
One of the most important tasks for new Fed Chairman Ben Bernanke, assuming
what should be an easy confirmation, will be to make his job less
important.
Bernanke seems well suited to do that, which is a compliment.
The primary economic contribution that a central bank can make is to
maintain a stable currency. Bernanke's predecessor, Alan Greenspan, has
certainly led the Federal Reserve Board in accomplishing that during his
18-year tenure.
But Greenspan also clearly saw a role for the central bank in fine-tuning
and regulating the overall economy, pressing the gas when the economy was
slowing, putting on the brakes when it was growing faster than Greenspan
thought prudent. Over the last six years, the Fed has changed the interest
rates it sets some 30 times.
Greenspan was also a high-profile kibitzer about fiscal policy and other
issues, such as Social Security reform. His public standing was so high
that both parties sought to use his often opaque pronouncements to advance
their positions.
Republicans stressed that Greenspan supported tax cuts and thought they
should be made permanent. Democrats stressed that he worried about deficits
and thought tax cuts should be offset. Neither party made much of
Greenspan's view that offsets should occur primarily if not exclusively
through reductions in federal spending, since neither party has the stomach
for doing it.
This broader role of the Fed chairman as an economic oracle and, in Bob
Woodward's highly unfortunate metaphor about Greenspan, maestro is
unwarranted and potentially dangerous.
The Fed can ruin the economy by creating inflation or depriving it of
liquidity in a downturn. But the tools available to the Fed are
insufficiently powerful or precise to be constantly fine-tuning economic
performance.
In reality, the interest rates the Fed sets only affect the cost of capital
at the margins. Long-term interest rates have remained remarkably
impervious to the Fed's six-year period of hyperactively seeking to
influence them. That's in part because the Fed has done its primary job of
maintaining price stability so well, since long-term interest rates are in
significant part a function of inflation expectations.
The Fed has more direct influence on the money supply and thus inflation.
But even here, there's a great deal of imprecision. It's hard to control
what is increasingly more difficult to define and measure.
Because of his public standing, Greenspan was able to get away with
drifting into fiscal policy and other issues. But it's a dangerous
undertaking for a central banker. Getting into the business of politicians
in other areas increases the risk of politicians trying to get into
monetary policy. And that, history proves, is a pathway to economic
disaster.
When President Bush appointed him, Bernanke was careful to say that he
sought "continuity" with Greenspan's policies and strategies. But there is
reason to believe that he will depart from Greenspan's approach in ways
that are useful and beneficial.
Bernanke is one of the foremost advocates of a central bank publicly
setting an inflation target. Greenspan resisted this because it would limit
flexibility. But that's actually one of its virtues.
A publicly set inflation target obviously puts price stability above other
economic goals, decreasing the temptation to attempt to fine-tune the
economy. Moreover, it more properly aligns public expectations with what a
central bank can and should do, which is to maintain a stable currency.
As Bernanke put it in a Wall Street Journal column he co-wrote in 2000:
"(T)he transparency of the inflation-targeting approach would encourage
politicians and the public to focus on what monetary policy can do (namely,
maintain long-run price stability), rather than on what it can't do (create
permanent increases in growth through expansionary policies)."
Bernanke has a calm view of the so-called twin deficits, the current
account deficit in trade and investment and the federal budget deficit. He
brought fresh insight into the current account deficit by arguing that it
was more a function of a worldwide savings glut finding safe harbor in the
United States than a reflection of fundamental flaws in the U.S. economy.
He's also more likely to stick to his knitting publicly than Greenspan was,
leaving fiscal policy and other issues to the politicians elected to tend
to them.
Achieving a stable currency is a remarkable and powerful economic
achievement. But done right, the doing of it should be practically
unnoticed.
If, in five years, Bernanke is as well known as Greenspan is today, it will
be more a sign of failure than of success.
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JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
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