An early suc­cess for Ben Ber­nanke

The Washington Times Weekly - - COMMENTARY - Robert No­vak

Ben S. Ber­nanke, the rookie avi­a­tor fly­ing the cen­tral bank’s mone­tary air­plane through un­cer­tain eco­nomic weather, two weeks ago sur­vived his first ma­jor test with a soft land­ing. With Wash­ing­ton in a ran­cid mood this sum­mer, the new chair­man of the Fed­eral Re­serve Board has re­ceived lit­tle credit for a suc­cess­ful maiden flight that is very good news for the econ­omy.

Mr. Ber­nanke’s de­ci­sion to pause on Aug. 8 and not in­crease in­ter­est rates for the first time in 18 meet­ings of the Fed­eral Open Mar­ket Com­mit­tee drew wide­spread com­plaints that he was a slacker in the war against in­fla­tion. But con­trary to the ex­pec­ta­tions of th­ese naysay­ers, core in­fla­tion fig­ures re­leased by the La­bor De­part­ment Aug. 15 matched its big­gest drop in three years. The mar­kets, far more im­por­tant than opin­ions of the eco­nomic sa­vants, gave Mr. Ber­nanke a vote of con­fi­dence. A boost in bond prices re­flected no fear of in­fla­tion.

Mar­ket ap­proval of Mr.

Ber­nanke’s per­for­mance con­sti­tutes early suc­cess in achiev­ing

a most daunt­ing

task for any cen­tral banker: to

slow a rapidly

grow­ing econ­omy enough to

con­trol in­fla­tion

with­out crash­ing

and burn­ing in a re­ces­sion — that is, a soft land­ing. Mr. Ber­nanke’s leg­endary pre­de­ces­sor, Alan Greenspan, crashed twice in three at­tempted land­ings dur­ing his long ten­ure at the Fed. This early suc­cess con­sti­tutes a rare vic­tory for Pres­i­dent Bush, whose se­lec­tion of Mr. Ber­nanke to re­place Mr. Greenspan Feb. 1 did not win plau­dits from the fi­nan­cial com­mu­nity or many con­ser­va­tives.

Ac­tu­ally, no Fed chair­man has been bet­ter qual­i­fied to run the Fed than Mr. Ber­nanke, who as chair­man of Prince­ton’s eco­nomics de­part­ment was a lead­ing stu­dent of mone­tary pol­icy. He served for seven years as a Fed gov­er­nor be­fore head­ing Mr. Bush’s Coun­cil of Eco­nomic Ad­vis­ers (CEA) for seven months prior to re­turn­ing to the cen­tral bank. But he was not fa­vored as Mr. Greenspan’s suc­ces­sor by the Fed bu­reau­cracy, con­ser­va­tive Fed-watch­ers or Wall Street spec­u­la­tors.

The pop­u­lar choice to head the Fed was a familiar face in big­time eco­nomics: Martin Feld­stein, a 68-year-old Har­vard pro­fes­sor. As Pres­i­dent Ron­ald Rea­gan’s CEA chair­man 23 years ago, Mr. Feld­stein was the bete noire of sup­ply-siders who des­ig­nated him as “Dr. Gloom” for pub­licly de­mand­ing higher taxes and higher in­ter­est rates.

Oddly, Mr. Feld­stein has be­come a fa­vorite of lat­ter-day sup­ply-siders, though he still evokes the im­age of Dr. Gloom by ad­vo­cat­ing anti-in­fla­tion­ary in­ter­est rate in­creases no mat­ter what the cost. “It is un­der­stand­able that it [the Fed] would like to achieve the soft land­ing of low in­fla­tion with con­tin­ued solid growth,” Mr. Feld­stein wrote in The Wall Street Jour­nal on Aug. 7, the day be­fore Mr. Ber­nanke’s pause. “But that may not be pos­si­ble. And if the Fed wants to con­vince the mar­kets that in­fla­tion will be con­tained in the fu­ture, it must show that it is will­ing to take the risk of tight­en­ing too much.”

Fol­low­ing Mr. Feld­stein’s line, crit­ics took Mr. Ber­nanke to task for not dar­ing to tighten too much. They would have been in full cry had the Aug. 15 in­fla­tion num­bers been high and the mar­ket re­ac­tion neg­a­tive. How­ever, the op­po­site re­sults two weeks ago evoked no cheers for Mr. Ber­nanke.

It may be too dif­fi­cult for idol­aters of Mr. Greenspan as “the mae­stro” to credit Mr. Ber­nanke’s early suc­cess. If an un­her­alded eco­nomics pro­fes­sor can so quickly re­place the leg­end, is it pos­si­ble that Mr. Greenspan’s leg­endary sta­tus was mostly hype? Hardly any­body wants to ac­knowl­edge that Mr. Greenspan helped pro­duce a bub­ble econ­omy by bring­ing in­ter­est rates down to 1 per­cent and then over­shoot­ing the mark in rais­ing them.

But there are dol­lars-and-cents rea­sons for Mr. Ber­nanke’s un­pop­u­lar­ity among fi­nan­cial sharks. High-ticket, spec­u­la­tive in­vestors count on se­ri­ous op­por­tu­ni­ties in a cen­tral bank cre­at­ing a tur­bu­lent at­mos­phere where short-sell­ers can pros­per. They are not re­freshed by the Fed’s pause.

While Mr. Bush keeps hands off Fed pol­icy, he and his eco­nomic team are de­lighted by Mr. Ber­nanke not fol­low­ing Mr. Feld­stein’s for­mula of dar­ing to tighten too much. Europe’s econ­omy is lag­ging to­day and faces a reg­i­men of higher taxes and higher in­ter­est rates that will sup­press growth. If Amer­i­can tax cuts and a pause in higher in­ter­est rates do not gen­er­ate in­fla­tion, prophets of gloom will be proved wrong.

Robert No­vak is a na­tion­ally syn­di­cated colum­nist.

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