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Markets Could Test New Fed Chairman

January 31, 2006|David Streitfeld | Times Staff Writer

A new chairman of the Federal Reserve comes along about as often as a new pope, but the transition this week from Alan Greenspan to Ben Shalom Bernanke is remarkably devoid of ceremony.

The Senate is expected to approve Bernanke's nomination today by an overwhelming margin. By Wednesday morning, Greenspan will have packed up the mementoes from his 18 1/2 -year reign and Bernanke will move into his office.

Bernanke's parents are staying home in North Carolina because their son has told them there's nothing to see. They don't plan on being glued to the TV either. "We have a class at the synagogue," Edna Bernanke said. "We'll put a tape in the VCR and see if we caught something when we come home."

If the changeover is low-key, that's partly because nearly everyone seems to agree that this level-headed, collegial academic is a worthy successor to the much-lauded Greenspan.

Yet if the 52-year-old Bernanke is as qualified as anybody to serve as the 14th Fed chairman, with responsibility for keeping inflation in check while helping the world's largest economy continue to grow, there is a good deal of uncertainty about how he will act at a moment when the economy is entering a delicate phase.

"Everybody says that they like the Bernanke appointment, but when asked why, they offer every possible combination of reasons, most of them in conflict with each other," said James Bianco, an analyst with Arbor Research. "They like him because he's going to stop raising rates, or they like him because he's not going to stop. They like him because he uses rules to target inflation or because he's pragmatic. He's bold, he's timid. He's all things to all men."

Bianco's conclusion: "A lot of people who made assumptions about what he's going to do are going to be surprised."

The markets have a way of testing a new Fed chairman, just as a dog tests a leash. Shortly after Greenspan took office, the stock market crashed. On Oct. 19, 1987, known as Black Monday, the Dow Jones industrial average lost nearly a quarter of its value, a greater loss than in the Black Friday crash of 1929.

What seemed at the time to be the beginning of another Great Depression proved a relatively minor event, thanks to Fed actions to ease credit conditions. For that, Greenspan got the praise.

Economists who have known Bernanke a long time say they're sure he will be tested too, probably soon.

"Clearly he's going to have to earn his spurs," said Columbia Business School professor Frederic Mishkin.

But Bernanke has advantages that Greenspan didn't have in 1987, Mishkin said. For one thing, as a former member of the Fed board, Bernanke's not coming into the institution cold.

For another, "the credibility of the Fed is very high. The need for someone to be a maestro is not as important as it was 20 years ago," Mishkin said.

Bernanke is pledging "continuity" with Greenspan, which presumably means that he'll raise interest rates if necessary to restrain inflation. But he also plans to be quieter than his predecessor, avoiding commentary on matters such as taxes that are external to the Fed.

Such reticence comes naturally to this academic. "He's a keep-it-to-himself kind of guy," said Andrew Abel, a University of Pennsylvania economist and coauthor with Bernanke of an economics textbook.

Abel and other friends and colleagues say they never knew Bernanke's politics until he went to work for the White House as chairman of the Council of Economic Advisors last June.

"Some people are inclined to talk about politics and religion, and he was inclined to talk about neither," said Mark Gertler, chairman of the economics department at New York University. "He talked about economics and sports."

The economic era that Bernanke talked about most, the period that has occupied him academically for nearly 30 years, is the Great Depression.

"To understand the Great Depression is the Holy Grail of macroeconomics," he wrote in a 1995 essay, calling it "a fascinating intellectual challenge."

It's a quest that took root when Bernanke was a child in Dillon, S.C., in the 1950s. None of his grandparents suffered unduly in the Depression -- his father's father was a pharmacist in New York, his mother's father a schoolteacher in Connecticut. In a period when many had nothing, they could put food on the table.

Somewhere, though, an interest was sparked in young Ben. Edna Bernanke remembers him questioning his grandmother, Marsha Friedman, about the devastating effect the Depression had on families and communities.

"He got more interested when he went to college," Edna Bernanke said. "He was majoring in math, but that didn't have soul in it. He said economics is math with soul."

Kenneth Manning, a native of Dillon who went to Harvard University a few years before Bernanke, became a sounding board for the young man.

"He was fascinated by economics. It had to do with the real world; it wasn't just a theory," said Manning, now a professor at the Massachusetts Institute of Technology.

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