baum on bernanke

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
Committee.
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
said.

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.