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.