The New head of the Federal Reserve, Ben Bernanke

Everywhere I go, people are asking me what I think of the new chairman of the Federal Reserve, Ben Bernanke.

I know Bernanke pretty well because he was Chairman of the Princeton Economics department at a time when I was very seriously thinking of moving there, but ended up turning down offers on multiple occasions (which rightfully aggravated Bernanke to no end).

I have two thoughts on Bernanke running the Federal Reserve:

1) If I had to guess, the Chairman of the Fed has a lot less impact on the day-to-day performance of the economy than most people think. Although Greenspan has been elevated to God-like status, I suspect that he has been at least as lucky as he has been good. One of the most important lessons of modern macroeconomics is that it is probably impossible at the present time to “fine tune” it. More or less, you just want the Fed to stay out of the way and not totally botch things. There is mounting evidence that the Great Depression (and maybe also the stagflation of the early 1970s) was due in large part to policymakers following exactly the wrong course of action.

2) With that in mind, I think Bernanke is a great choice to run the Fed. He has an enormous appreciation of the history of monetary economics and past failures of Fed policy (see, for instance, this book he has written on the Great Depression). But at the same time, he is not an egomaniac who will pursue dangerous policies because of illusions of grandeur.

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  1. StCheryl says:

    A minor correction — Bernanke has been nominated, but has not yet been confirmed by the Senate, for the post of Chairman of the Fed. He is highly qualified and relatively uncontroversial. I would be absolutely shocked if he were not confirmed quickly.

    The Fed is a unique institution both nationally and internationally. It is both part of and outside of the normal US government, and is a tremendously secretive institution. Most of what goes on there will never see the light of day. (For three years in the early 90s, it was my job to make sure that the high level discussions and deliberations met the relevant legal tests renain secret.) Even the most trivial things can be kept secret, and Fed attorneys and officials work hard not to have to give up even minor financial institution inspection reports when they are subpoenaed.

    Alan Greenspan succeeded as Fed Chairman for several reasons other his skills as an economist (whatever those are — I am not qualified to comment.) First, no one ever understood what he was saying. Many people thought he was brilliant almost no matter what he said or did. He has managed for 18 years to confuse a lot of public figures who think they are very smart, and not wanting to admit publicly that they don’t understand something, he doesn’t get questioned. Possibly because his explanation or clarification would be just as unclear as the original statment. He does this while never overtly condescending to people.

    Second, he figured out how to survive, even thrive, in Washington’s strange culture. He was very popular and has led a very active social life. He also figured out how to flatter people in Congress (see above) while saying nothing.

    Finally, he has had the benefit of presiding over relatively stable oil prices and the internet boom. Although there were numerous crises on his watch, people trusted him enough (see above) to follow him and let him calm the markets when necessary.

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  2. StCheryl says:

    A minor correction — Bernanke has been nominated, but has not yet been confirmed by the Senate, for the post of Chairman of the Fed. He is highly qualified and relatively uncontroversial. I would be absolutely shocked if he were not confirmed quickly.

    The Fed is a unique institution both nationally and internationally. It is both part of and outside of the normal US government, and is a tremendously secretive institution. Most of what goes on there will never see the light of day. (For three years in the early 90s, it was my job to make sure that the high level discussions and deliberations met the relevant legal tests renain secret.) Even the most trivial things can be kept secret, and Fed attorneys and officials work hard not to have to give up even minor financial institution inspection reports when they are subpoenaed.

    Alan Greenspan succeeded as Fed Chairman for several reasons other his skills as an economist (whatever those are — I am not qualified to comment.) First, no one ever understood what he was saying. Many people thought he was brilliant almost no matter what he said or did. He has managed for 18 years to confuse a lot of public figures who think they are very smart, and not wanting to admit publicly that they don’t understand something, he doesn’t get questioned. Possibly because his explanation or clarification would be just as unclear as the original statment. He does this while never overtly condescending to people.

    Second, he figured out how to survive, even thrive, in Washington’s strange culture. He was very popular and has led a very active social life. He also figured out how to flatter people in Congress (see above) while saying nothing.

    Finally, he has had the benefit of presiding over relatively stable oil prices and the internet boom. Although there were numerous crises on his watch, people trusted him enough (see above) to follow him and let him calm the markets when necessary.

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  3. Gringo_Nordestino says:

    THANKS!! I was waiting to see when you would comment on this. I think too much has been made of the “helicopter” comment, and in fact it was a variation of I beleive Keynes, who said to simply print the moeny and hide it in bottles in mineshafts.

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  4. Gringo_Nordestino says:

    THANKS!! I was waiting to see when you would comment on this. I think too much has been made of the “helicopter” comment, and in fact it was a variation of I beleive Keynes, who said to simply print the moeny and hide it in bottles in mineshafts.

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  5. mathking says:

    With all of the “Chicago v. Harvard” economics talk from the old blog, I just noticed that now two of the most prominent economists for the government could have Princeton connections, Bernanke and CBO director Douglas Holtz-Eakin. Both of them (and the CBO deputy as well) have also come off of stints as Chief Economist for the Council of Economic Advisors.

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  6. mathking says:

    With all of the “Chicago v. Harvard” economics talk from the old blog, I just noticed that now two of the most prominent economists for the government could have Princeton connections, Bernanke and CBO director Douglas Holtz-Eakin. Both of them (and the CBO deputy as well) have also come off of stints as Chief Economist for the Council of Economic Advisors.

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  7. semivoid says:

    Perhaps not in the day to day performance of the economy, but the Fed and the voting members of the FOMC can certainly allow things to get out of control in the long run…of course because of the God like status they are now given, one ill-advised statement will move both the bond and stock markets.

    I would point out his Macroeconomics text with Dr Abel. It is well written and confirms that he is generally politically neutral.Apparently Abel was unaware that Bernanke was a Republican at the time…

    That said the book has some issues. Specifically, the first third of the book has really corny ‘examples’. I have found that there is a general consensus that they are an irritant to readers of the text.

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  8. semivoid says:

    Perhaps not in the day to day performance of the economy, but the Fed and the voting members of the FOMC can certainly allow things to get out of control in the long run…of course because of the God like status they are now given, one ill-advised statement will move both the bond and stock markets.

    I would point out his Macroeconomics text with Dr Abel. It is well written and confirms that he is generally politically neutral.Apparently Abel was unaware that Bernanke was a Republican at the time…

    That said the book has some issues. Specifically, the first third of the book has really corny ‘examples’. I have found that there is a general consensus that they are an irritant to readers of the text.

    Thumb up 0 Thumb down 0