Nomination of New Fed Chair
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GWEN IFILL: Economists, businesses, Wall Street brokers and lawmakers have all been eagerly awaiting President Bush’s choice to succeed Federal Reserve Chairman Alan Greenspan. If confirmed, the president’s nominee, Ben S. Bernanke, would become the first new Fed chairman in nearly two decades.
Bernanke, now chairman of the president’s Council of Economic Advisers, received his bachelor’s degree in economics from Harvard, his Ph.D. from MIT. He was a professor at Princeton University and chaired its Economics Department. He’s published numerous articles and several books. And he served on the Federal Reserve’s Board of Governors for nearly three years. President Bush introduced him in the Oval Office earlier today.
PRESIDENT GEORGE W. BUSH: One of a president’s most important appointments is chairman of the Federal Reserve. In our economy the fed is the independent body responsible for setting monetary policy, for overseeing the integrity of our banking system, for containing the risk that can arise in financial markets, and for insuring a functioning payment system.
Across the world the Fed is the symbol of the integrity and the reliability of our financial system. And the decisions of the Fed affects the lives and livelihoods of all Americans. To leave this institution a chairman must be of impeccable credentials, sound policy judgment and character. Today I’m honored to announce that I’m nominating Ben Bernanke to be the next chairman of the Federal Reserve.
Over the course of a career marked by great accomplishment, Ben has done path-breaking work in the field of monetary policy, taught advanced economics at some of our top universities, and served with distinction on the Fed’s Board of Governors.
He’s earned a reputation for intellectual rigor and integrity. He commands deep respect in the global financial community. And he will be an outstanding chairman of the Federal Reserve.
BEN BERNANKE: I would like to express my deep appreciation to President Bush for the trust he has shown in me in asking me to lead the Federal Reserve System.
If I am confirmed by the Senate, I will do everything in my power in collaboration with my colleagues to help to ensure the continued prosperity and stability of the American economy.
In light of the announcement the president has just made, it is especially gratifying to have Chairman Greenspan here. In more than 18 years at the helm of the Federal Reserve, Alan Greenspan has set the standard for excellence in economic policymaking.
I am personally grateful to Chairman Greenspan for his collegiality and support during my time as a member of the Fed’s Board of Governors.
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; however, if I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.
GWEN IFILL: So, who is Ben Bernanke? For that we talk to two economists who are familiar with his work: James Galbraith is the chair in government and business relations at the LBJ School of Public Affairs at the University of Texas; and Adam Posen is a senior fellow at the Institute for International Economics. In 1999, he co-authored a book with Bernanke on monetary policy.
Adam Posen, I should mention that you also co-authored an article in the Wall Street Journal in 2000, the title of which was “What Happens When Greenspan is Gone?”
So perhaps you can give us a little guide to the meaning of what we just heard Ben Bernanke say about what he expects to happen; he used two key words: “continuity” and “stability.” Translate.
ADAM POSEN: Ben actually usually can translate for himself. And that is one of the nice changes; this is going to be a much more clear speaking Fed chairman.
In terms of continuity he means two things: first that the Fed’s basic role is to see price stability achieved over time but to intervene, to offset financial instability and periods of low growth when possible. And this is what exactly the Fed under Bernanke and Greenspan’s leadership did in 2001 after the bubble burst after 9/11.
And then when you talk about stability and moving forward what he wants to communicate is he is going to take this sort of risk management approach as Greenspan put it.
Ben, along with our other co-author on the book, Rich Mishkin, who’s a professor at Columbia, long ago argued that central banks should be looking at whatever is the fire they have to fight at that moment.
In other words, you sort of set your long-term goal which in this case would be inflation, and then you say okay, now there is a risk of a housing price bubble, or now there is a risk of falling currency. And now we’re going to deal with that, but then get back to the long-term business. And it is that kind of balancing that Ben Bernanke is going to pursue.
GWEN IFILL: James Galbraith, do you agree with that?
JAMES GALBRAITH: Well, he is unquestionably a very capable mainstream professional academic economist. I think he may be, perhaps, discounting Arthur Byrnes, the first academic economist to be appointed to lead the Federal Reserve. So it is an interesting development from that point of view.
GWEN IFILL: Why is that? What is significant about his academic background?
JAMES GALBRAITH: Well, academic economists tend to come into these positions with their own ideas. And I think the risk to the institution is that Ben Bernanke may be the prisoner of some of his ideas.
I’m a little bit concerned about the emphasis that Adam Posen already mentioned on inflation targeting as the sole or major objective of monetary policy because, of course, the Federal Reserve is bound by statute to a broader set of objectives which include primarily full employment, balanced growth and reasonable price stability.
So it will be a very interesting question as to whether Chairman Bernanke follows that mandate or whether he effectively legislates from the bench a new departure in Federal Reserve policy targets.
GWEN IFILL: Now when we talk about inflation targeting for those of us who did not get farther than Economics 101, we are talking about setting a benchmark and publicizing that, letting the world know this is where we should be aiming to end up, is that right, Adam Posen?
ADAM POSEN: Exactly right, Gwen. Inflation targeting is a bad term. We inherited it from other countries when we wrote the book. It’s really about setting a long-term benchmark by which the Fed can be judged. This is one of the two ways in which I think Professor Galbraith is being a bit unfair to Ben Bernanke.
It is all about accountability; it is all about so you cannot be, as Chairman Greenspan has been, someone who says trust me. You know, I’m doing the best I can. Here, I will chatter at you but there is no real standard by which to judge me.
I agree totally with Professor Galbraith and Ben Bernanke is on the record both in testimony and in his writings in agreeing that part of the Fed’s mission is to stabilize the real growth rate in the economy and to counter unemployment when possible. Nobody is talking about a narrow target; unfortunately, the term gives that impression.
What we are really talking about and this is the other way in which Professor Galbraith was a bit unfair to Ben Bernanke, is that he is talking about very practical moves in terms of what sorts of information is given to the public and given to markets, being more transparent, being more accountable.
Ben is somebody who has a real strong ethic of accountability from his days serving on the school board in New Jersey. He has been an elected official at the local level. He’s talked openly and pushed within the Fed about releasing more data.
This is someone who wants the congressional mandate to match what the Fed does and he is not going to be legislating from the bench.
GWEN IFILL: Professor Galbraith, I want you to have a chance to respond to whether you think your characterizations were fair or unfair but I also wanted you to get to the point that most people pay attention to when they pay attention at all to what the Fed does, which is interest rates, which have been steadily going up over time.
Is this something that you think would be a good idea that if a Chairman Bernanke would be confirmed that should be continued?
JAMES GALBRAITH: I don’t mean to predict what Chairman Bernanke may or may not do. And I don’t want to be unfair in that respect. I would simply point to the implications of setting a more rigid target than the law provides for or that the practical conditions faced by the Federal Reserve will permit the chairman actually to pursue.
And what you say about interest rates raises that, I think directly because the Federal Reserve has been raising interest rates. It’s raised them ten times over the last year or so. It’s running into a situation now where since long-term interest rates have not gone up at all it will either if it continues to raise interest rates, generate a condition called an inverted yield curve, which historically has been very damaging to the economy, tending to produce a recession, or if it stops, it may face the problem that the world’s holders of dollar assets may resume selling them off so that you end up losing value in the dollar and generating a renewed inflation threat that way.
That is a dilemma that the Federal Reserve will have to resolve on practical grounds. I think that articulating a specific target different from the broad and general one that they’ve got would be a mistake. It would complicate that decision-making process.
That said, I’m all in favor what Adam Posen just talked about in terms of a clearer and more above-board discussion of policy between the Federal Reserve and the Congress in its regular reports. I’m sure that can only help. And I’m sure that Professor Bernanke will be a very talented expositor of Federal Reserve policy in the months ahead.
GWEN IFILL: Adam Posen, do you see the risks, at least the challenges that await any Fed chairman who wants to continue on the interest rate direction that Alan Greenspan has set?
ADAM POSEN: Well, I agree totally with Professor Galbraith that there are these two challenges you’ve got. When inflation is rising but the economy is slowing, you have a dilemma of how much you want to raise rates. If you don’t raise rates at all, people in the markets think oh, the Fed doesn’t care any more about inflation. And then they just start passing on price increases and you end up with a real mess.
If you raise rates too much as Professor Galbraith correctly raises you end up putting people out of work perhaps unnecessarily and you end up stomping on the economy. So it is a real balance.
The advantage I think Ben Bernanke and the team at the Fed — and it is important to emphasize and Ben Bernanke said this in his nomination talk — that this is a team. This is probably the strongest Fed team we’ve had in decades. And he is going to be more collaborative, I think, than Chairman Greenspan was – but, anyway, that the team has to make a judgment call; the team has to say okay, we are to the going to stop short of raising rates just because we are worried about being unpopular or just because we don’t want to make the president unhappy. But, on the other hand, we’re not going to raise interest rates just because we don’t like the numbers.
Two quick points, one is in the book we did with Bernanke, all of us together wrote a chapter about the German experience. And we praised the fact that the Bundesbank facing an oil shock much like the one we face today in 1980 raised their inflation target over time, the Bundesbank was always seen as hyper conscious about inflation but the Bundesbank said we are not going to kill the economy to keep inflation down. We are going to realistic and communicate with the public; and that was a model we in that book praised and so I think that will be instructive for Ben Bernanke.
The second point is again in the spirit, if you look at what happened in 2001 and 2002, Ben Bernanke was one of the people on the Federal Reserve Board, not alone by any means, but advocating strong cuts in interest rates and saying let’s not worry too much about inflation. We have got a deflationary threat; we have a risk of financial problems, let’s act aggressively. And so I think there is a good record here to go on.
GWEN IFILL: What are the biggest — Professor Galbraith — given all of what we talked about so far and what we know the interests are of the nominee, Mr. Bernanke, and what the direction has been of the Fed in the past several years under Mr. Greenspan, what are the biggest challenges facing any new Fed chairman right now?
JAMES GALBRAITH: Well, the short-term challenge I have already mentioned. The long-term challenge it seems to me is the future of the world system based on the dollar reserve asset. And Chairman Bernanke has spoken to that in some recent speeches in a very interesting way. He has made very clear that he understands that stabilizing the threat that is implicit in the system we now have will require doing something about the financial position not only of the United States but of many other countries including especially developing countries, getting them out of the position where they are basically forced lenders, the poor are lending to the rich in a way which they, does them basically no good from the standpoint of their development prospects but also, puts the world on a rather unstable basis.
It will be very interesting to see whether this team at the Fed begins to address that question, not in terms of immediate policy but in terms of looking forward and designing a successor system that we might have to have recourse to should we really get to a crisis down the road.
GWEN IFILL: James Galbraith, Adam Posen, thank you.