Bernanke may be as tough to read as Greenspan

November 16, 2005|By JAY HANCOCK

Ben Bernanke was doing his very best Greenspan, and, for the most part, it worked. But every now and then, glimmers of the Federal Reserve of the future shot through.

It's early, but a couple of things he said in his confirmation hearing yesterday before the Senate banking committee suggest that he might not be the inflation-fighting champion he claims to be.

Bernanke is President Bush's nominee to replace the lavishly praised Alan Greenspan as chairman of the Fed, the central bank that controls the nation's money supply. Like all wannabe successors to revered incumbents, Bernanke emphasized his resemblance to the lame duck.

"I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority," he said.

He came to praise, bury and imitate Greenspan. Arizona Sen. John McCain once joked that if Greenspan died, "I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."

Bernanke's opening move as potential Fed boss was to attempt the same sort of sleight of hand, without the shades and corpse.

He pledged allegiance to Greenspan's legacy of inflation fighting. He promised to continue the Greenspan Fed's "flexibility" when circumstances call for it, the most conspicuous example when the risk of persistent falling prices compelled the Fed to lower interest rates and boost inflationary risks a couple of years ago.

He promised not to comment on budgets and other fiscal policy - Congress hates that - and then almost immediately commented on fiscal policy. Whether he meant it or not, that was another nod to Greenspan, who frequently hailed Congress from the peanut gallery and got away with it.

"I'm going to begin now, I think, a practice of not making recommendations on specific tax or spending proposals," Bernanke said, according to transcripts.

But 10 minutes later he was making the loaded observation that, if current trends continue, Medicare, Medicaid, Social Security and interest on the national debt will consume all federal tax collections by 2045. And then he warned about future revenue flows as Congress waffles on whether to eliminate the alternative minimum tax.

Even Bernanke's trademark, "inflation targeting," was recast as orthodox Greenspan. Bernanke wants the Fed to announce a desired range for consumer inflation and then shoot for it. Greenspan does not favor it, but you'd never know it from listening to yesterday's hearing.

"My views on inflation-targeting now are that it represents a continuity with the existing approach of the Federal Reserve System," Bernanke said in response to a senatorial question. "The inflation-targeting ideas that I've espoused simply are an attempt to perhaps codify or strengthen this important commitment of the Federal Reserve to maintaining low inflation."

But how much of a commitment would Bernanke have? An inflation-targeting plan per se does not kill inflation. It depends on the target. He has suggested keeping "core" inflation - excluding energy and food - to 1 percent or 2 percent annually. But recent experience with oil and gas prices has shown that consumer inflation can run much higher than the core rate.

And some Bernanke comments yesterday suggested an underlying casualness about inflation that would be hard to imagine coming from Greenspan or Greenspan's predecessor, Paul Volcker.

Discussing the energy shocks of the 1970s, when inflation hit double digits, Bernanke suggested that the Fed might have been too quick to fight it by raising short-term interest rates into double digits, too.

"The Fed responded somewhat in a panicked way by raising interest rates enormously, which then contributed to the deep recessions of 1975 and 1981-82," he told the senators.

Those who believe the Fed is too pro-capital and anti-labor might agree with Bernanke that Volcker "panicked." But it's jarring hearing it from a central banker. For two decades the conventional capitalist wisdom has been that the high rates of the 1970s and 1980s were deeply painful but necessary to tame inflation for good.

Bernanke was also unusually forceful in responding to Maryland Sen. Paul S. Sarbanes, the committee's ranking Democrat, who asked whether Bernanke would adopt a European Central Bank-style focus on inflation and turn a blind eye to job growth.

"I disagree with it entirely," Bernanke said.

A vaguer reply might have sufficed. Bernanke's answer hinted, ever so slightly, that he might lean the other way, that he might tolerate a higher inflation risk to fuel job growth. In the long run, of course, higher inflation hurts job growth, as well he knows.

Nobody flinched at these comments. The bond market, always sensitive to even a whisper of inflation, barely budged. Bernanke seems a shoo-in for the job. But try as he might, he made clear yesterday that the Greenspan era is coming to a close.

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