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October 25, 2005
From the blog archives...and additional thoughts on Bernanke
With all the attention on Ben Bernanke today, I looked back at some of my past posts. Here's one from April.
This excellent speech by Ben Bernanke should be read by every macroeconomics student. I think it is good that Fed governors actually get out there in the public and make speeches like this once in a while.
Here's a sample.
The person in the street might tell you that the Fed "controls interest rates." That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly.
I like that speech more every time I read it. It fits perfectly with the way I teach macroeconomics. The truth is that when Bernanke was appointed to the Board of Governors the first time I was really pleased. I had heard his name bandied about for a while as a potential governor. I think most dedicated Fed watchers had him on their short list back then. Once he joined the Board, his speeches were some of the most refreshing, at least to an academic economist. They were perhaps too refreshing--too open and honest--to be appropriate for a Fed chair. But, and this is important to remember, he wasn't the chair (or even the nominee) back then. Academic candor isn't always what the financial press wants. One sentence in one speech, and he is forever known to some as "Helicopter Ben." That is unfortunate, because that is not an accurate assessment of the totality of his writing (or even of that speech). But then, how many of us remember anything else from the speech where Greenspan said "irrational exuberance"?
Remember that Bernanke will be forging a consensus of the whole FOMC. That group includes some pretty dedicated inflation hawks right now, but it also includes some that will be reluctant to embrace explicit inflation targeting. He will also have to be the public face of the Fed in front of members of the House Banking Committee like Representatives Ron Paul, Bernie Sanders, and Maxine Waters, who will be sure to remind Bernanke at every opportunity that the Fed still does officially have a dual mandate.
When Ron Paul or Bernie Sanders would chastise Greenspan up on the Hill, the Chairman would just sit their with that trademark look on his face, waiting for an actual question that he could answer (or not). That's a skill that Bernanke will have to learn. Academic lectures won't work on the Hill. Pity. But it's true. Academic lectures explore the issue from many sides. We academics like to play "what if?" games. Fed chairmen must be more circumspect about what economic indicators play into interest rate decisions and related matters.
I'm pleased with the nomination of Bernanke because he is a good economist. It's too bad that in order to fit the central banker mold he'll now have to largely abandon the open, questioning, analytical, academic persona that my profession has been praising today. In many ways, he seemed more suited to the job of governor than chair because a governor can afford to be a little more (but only a little more) open. However, if he causes us to have a real debate about the value of inflation targeting, rules vs. discretion, and whether there really is a "global savings glut," I think it will be a positive step in the history of the Fed. At the end of this very exciting day for Fed watchers, I find myself looking forward to these debates on the horizon. He's an excellent choice to lead the Fed at this critical time.
Posted by William Polley at October 25, 2005 12:49 AM
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