USA TODAY International Edition
New chairman faces gathering ' scal storm
Alan Greenspan, the Federal Reserve chairman for a near- record 18 years, is set to leave in January to largely rave reviews. Ben Bernanke, nominated Monday by President Bush to replace Greenspan, is unlikely to depart with such acclaim, even if he lasts as long.
We make this prediction not because we are unimpressed by Bernanke. Indeed, his background as a Fed governor and as his current posting as chairman of the president’s Council of Economic Advisers make him a very attractive candidate for the job. Wall Street greeted his selection with a sharp rally. Perhaps he will even match Greenspan’s erudition and success in adding expressions such as “ irrational exuberance” to the nation’s lexicon.
The pessimism, rather, is borne of the fact that Bernanke, if con > rmed by the Senate, will have the misfortune of taking over just as a > scal storm largely beyond his control is gathering strength.
The institution Bernanke has been nominated to run manages the money supply and sets short- term interest rates paid by large > nancial institutions. These simple tools alter people’s behavior by inL uencing credit costs, as well as inLation and unemployment. The goal is to strike a balance that ensures steady economic growth.
The Fed is not good, however, at promoting virtuous behavior by government. When the nation’s leaders are intent on spending beyond the government’s means, handing out ill- advised tax cuts without matching spending cuts and ignoring the looming demographic challenges that threaten Social Security and health care, it’s hard to see what the monetary policymakers at the Fed can do to avert an economic train wreck.
Bernanke’s biggest contribution might come not from exercising the normal functions of Fed chairman, but rather from speaking out on the precariousness of the nation’s > nancial picture.
Normally, > scal policy is best left to elected of > cials while monetary policy is the domain of Fed technocrats. Greenspan’s unwise endorsement of Bush’s 2001 tax cuts shows the shortcomings of a Fed chairman entering the political sphere. But the > scal challenges facing the nation are so acute, and the resolve of politicians to address them so weak, that Bernanke would do well to amplify concerns that Greenspan has begun to cite.
The federal government is edging perilously close to a debt crisis brought on by retirement of the baby boomers, exploding health costs and irresponsible budgeting.
The U.S. government owes more than $4 trillion to individuals, corporations and other nations. Bernanke: The 51- year-old is nominated Monday to take over the nation’s Federal Reserve. It owes another $4 trillion to the Social Security Administration ( and will have to cough up a lot more keep the program solvent). It has no realistic plan for meeting its long- term Medicare and Medicaid obligations. It’s engaged in a costly war in Iraq and a huge rebuilding effort on the Gulf Coast. It has increased agriculture subsidies and approved a pork- laden highway bill. All this has transpired while lawmakers have slashed tax receipts to their lowest rate, as percentage of
the economy, since the
1950s.
Making matters worse,
at a time when Americans
should be saving for retirement and preparing to
meet the challenges of a
competitive global economy, they are deeply in debt
themselves. Consumers
owe $11 trillion.
All told, the U.S. economy accounts for about
$ 25 trillion of red ink
when governments, companies and individuals are
totaled. That’s triple the
debt of 18 years ago when
Greenspan took of > ce.
Greenspan, 79, is known
for his deft management of
interest rates and his steady
leadership after the 1987
stock market crash, the dotcom bust, the terrorist attacks on New York’s > nancial district, and other crises. For this he deserves
much credit.
But part of his success
was good fortune. He didn’t
have to deal with the retirement of the baby boom
generation during his tenure. And the restrained > scal policies of the > rst Bush
and Clinton administrations
helped spur growth.
Most important, Greenspan had the good luck to run the Fed at a time when technological innovation spurred tremendous economic advances. Perhaps his biggest accomplishment was his early understanding that gains in productivity made for an economy that could grow quickly without creating in L ation. As the economy soared in the 1990s, he let it go, rather than trying to restrain it.
It’s too bad that Bernanke, 51 and long seen as similar to Greenspan, can’t simply follow in his footsteps. Though technological innovation will no doubt continue, it will do so only under an enormous burden of rising health insurance costs and bad > scal policy.
Bernanke is clearly a smart man. He vowed Monday to “ do everything in my power . . . to ensure the continued prosperity and stability of the American economy.” Unless > scal policymakers change course dramatically, however, he won’t be smart enough or powerful enough to succeed. Greenspan: The 79- year-old leaves Jan. 31 after two decades of steering the U.S. economy. $20