baum on bernanke

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    By Caroline Baum
    Nov. 16 (Bloomberg) -- Alan who?

    Ben Bernanke, President George W. Bush's nominee to succeed
    Alan Greenspan as Federal Reserve chairman, was on Capitol Hill
    yesterday for his confirmation hearing before the Senate Banking
    The former Princeton economics professor may not have said
    anything he hasn't said before. The committee members, however,
    were listening differently, or more intently, now that the one-
    time Fed governor and current chairman of the president's Council
    of Economic Advisers has been tapped to run the Fed, not just to
    occupy one of the seven board seats.
    Bernanke emphasized the importance of central bank
    transparency and accountability. He talked about maintaining
    continuity with Greenspan's policies and policy strategies. And
    he explained that long-run price stability was a means of
    achieving maximum economic growth, not its sworn enemy.
    He did it all in a manner different from Greenspan's.
    Whereas Greenspan advocated policies -- a tax cut for one
    president, a tax increase for another -- Bernanke stuck to
    principles, his own and those economic in nature.
    ``I'm going to begin now, I think, a practice of not making
    recommendations on specific tax or spending proposals,'' Bernanke

    Separate but Equal

    He had already established those boundaries, at the same
    time reinforcing his commitment to Fed independence, in his brief
    opening remarks.
    ``I recently testified before this committee in my capacity
    as chairman of the president's Council of Economic Advisers,''
    Bernanke said. ``Today, however, I appear before this committee
    in a different capacity.''
    One person, two capacities. Separate but equal. Don't look
    for Bernanke to wander too far from the monetary policy
    reservation in his semi-annual testimonies to Congress. There
    will be no lectures on corporate greed, no unsolicited
    digressions into fiscal policy.
    Bernanke, who is head and shoulders above his inquisitors,
    disagreed -- respectfully -- with the senators at times,
    especially when it came to Democrats' concerns that an explicit
    inflation target, a goal Bernanke has long advocated, would lower
    job growth and middle-income living standards.
    ``The primary contribution that the Fed can make to
    maintaining stability of the general economy,'' including maximum
    employment, is to maintain low and stable inflation, Bernanke
    told Senator Paul Sarbanes, Democrat of Maryland. The explicit
    statement of a long-run inflation objective is merely the next
    step in codifying or strengthening the ``important commitment of
    the Federal Reserve to maintaining low inflation,'' he said.

    Linear Competition

    Sarbanes wasn't buying. Armed with his charts, he pointed
    out to Bernanke that the yellow line consistently beats the red
    line in terms of GDP growth, inflation and employment. And the
    red line (Europe) is -- gasp! -- the leading practitioner of
    inflation targeting. Why should the U.S. abandon its superior
    yellow-line status and start red-lining?
    Bernanke replied that structural differences -- the
    comparative inflexibility of labor markets and burden of tax and
    regulatory policies -- were responsible for Europe's
    underperformance, not the fact that the European Central Bank
    adheres to a single mandate (price stability) and a stated
    ceiling for inflation.

    Senate Blowhards

    Sarbanes tried to score one final point, but Bernanke
    wouldn't let him have the last word. The U.S. unemployment rate
    was below Europe's ``20 years ago before the ECB was even
    created,'' Bernanke said.
    The members of the Banking Committee were pretty true to
    form, using their opening statements to voice concerns about
    their specific states (free but fair trade), favored
    constituencies (income inequality), pet issues (predatory
    lending) and worst policy fears (achieving stable prices at the
    expense of higher employment).
    Senator Chris Dodd, Democrat of Connecticut, repeatedly
    asked the witness whether he was ``alarmed'' about the current-
    account deficit, which stood at a near-record 6.3 percent of GDP
    in the second quarter.
    Bernanke was polite, unruffled yet firm. (What part of ``I'm
    not playing'' didn't Dodd understand?) The current-account
    deficit needs to come down over time, he said. It is better that
    the U.S. has willing lenders than unwilling lenders.

    Trip to Bountiful

    Questions about inflation targeting dominated senators'
    concerns, at least as they pertained to monetary policy. Bernanke
    cited evidence of ``greater stability in long-term interest
    rates'' in countries such as the U.K. and Sweden once they became
    inflation targeters ``because the market has more confidence that
    inflation and long-term interest rates will remain stable and
    less concern about short-term fluctuations.''
    Bernanke assured the committee he would seek a consensus
    before implementing a long-term inflation objective and then,
    only if it would enhance the realization of the Fed's dual
    mandates of stable prices and maximum employment.
    Inflation targeting, he explained, is only a means of
    increasing transparency, which is one area where he's already
    well ahead of Greenspan. No one seemed confused about what he
    said yesterday.
    It was a great start for the former academic. Bernanke is
    expected to sail through the confirmation process and be ready to
    take up his position at the head of the boardroom table on Feb. 1..

    Russell Comment -- Bernanke states that one of his main tasks on the Fed will be to maintain "price stability." But if inflation heats up next year, then in order to maintain "price stability" Bernanke will have to raise rates. How high will he dare raise rates in the face of the fragile condition of America's debt-logged consumers? I say there's a level beyond which Bernanke dare not raise rates -- not with US consumer holding over $10 trillion in debt. Bennie B. has his job all laid out for him.
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