Tuesday, October 25, 2005

The Bernanke Appointment

As was widely expected, GWB selected Ben Bernanke to replace
Uncle Al come the end of 1/06. This was a wise choice. The
Bernanke facial countenance reminds me of a rotogravure of a
nineteenth century British scientist, someone like the great
empiricist John Stuart Mill. Unlike Greenspan, who, when all is
said and done, was a laissez-faire theorist on the economy
and the markets, Bernanke is much more sharply focused on
the-matter-fact and how economic developments cumulate to
produce the future path of an economy. In contrast to Uncle
Al, he is at once more of a pragmatist and far more plain
spoken as well.

His primary interest from a policy point of view is to have the
Federal Reserve provide a monetary environment of stability and
to avoid policies which are so one sided as to increase economic
volatility and produce economic trends which may be extreme.
His concern is that once extremes are met within the economy,
reactive processes may be needed which in turn will produce
their own excesses and deficiencies, thus taking positive,
directional initiative away from the Fed. Thus, he is at once
an anti-Greenspan and an anti-Volcker who sees the past twenty
five years of policy as having been needlessly tumultuous and

He has also expressed a strong interest in inflation targeting,
suggesting a longer term low inflation rate consistent with
assuring a stable, growing economic environment. This will not
be an easy sell at the Fed, since many on staff will be tempted
to say that they have been endeavoring to do that. Bernanke
wishes to de-mystify this process and to foster much clearer
communication with all constituencies. However, what most
interests me about the concept is that it may well free up the Fed
to use its tools -- rate setting, liquidity provisioning and
reserve regulation -- in more flexible and pragmatic ways.

Bernanke's practical and empirical approach is very congenial to
me and I am happy to give him the benefit of the doubt.

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