America's top banker
Last Updated March 18, 2008
The chairmanship of the U.S. Federal Reserve Board is one of those public sector jobs that directly affects the lives of average citizens – and that includes people who live far beyond the borders of the United States. People may not know exactly how the Fed works, but many know that when interest rates rise or fall in the U.S., it is the Federal Reserve, as America's central bank, that is pulling the strings.
Ben Bernanke (Associated Press)
When you're responsible for ensuring the stability of the world's biggest economy, Fed policies attract a lot of attention … with a special spotlight reserved just for the leader.
So when President George Bush named someone to succeed Alan Greenspan after almost 19 years as the Fed's chairman, it came as no surprise that people wanted to know more about the new guy.
So just who is Ben Bernanke anyway? And how does he compare to Greenspan?
Bernanke, the economist
Ben Bernanke may have been a relative unknown to the public. But in academic and financial circles, Bernanke was already well-known and widely respected.
Just prior to his Fed appointment, he was chairman of the President's Council of Economic Advisors and had been a member of the Fed's Board of Governors since 2002.
For 17 years before that, Bernanke had been a professor in the economics department of Princeton University – the last six (1996 to 2002) as department chairman. Some of his most influential academic work dealt with the origins of the Great Depression. He argued that the aftereffects of the 1929 market crash were made worse by the Fed's bungling. The real problem wasn't the stock market crash, he said, but the Federal Reserve's policy "blunders" that followed. Bernanke showed how the Fed was wrong to raise interest rates to protect the dollar and how it made things even worse by failing to counter the collapse of the banking system.
Fed-watchers say Bernanke's research into the Fed's Depression-era failures deeply influenced him. In a 2002 speech to the National Economics Club shortly after he was appointed a Fed governor, Bernanke spoke about the dangers of deflation – when prices keep falling, consumers stop buying and jobs melt away. He felt that the likelihood of significant deflation in the U.S. was "extremely small" – in large part because of the presence of the Federal Reserve System. He then proceeded to outline steps the Fed should take to prevent deflation, as well as steps it could take to cure the problem should it take hold.
"Ben-speak" versus "Fed-speak"
If there's one thing that noticeably separates Bernanke from Greenspan, it is in the issue of transparency. Making policy moves abundantly clear, in other words. When Greenspan was in the chair, Fed announcements often required interpreters to weed through Greenspan's "Fed-speak" to divine what the Fed was thinking.
Sometimes, the translators couldn't agree. After one Greenspan speech in 1995, a headline in the New York Times read, "Doubts Voiced by Greenspan on a Rate Cut." The Washington Post report on the same speech declared, "Greenspan Hints Fed May Cut Interest Rates."
"If I seem unduly clear to you, you must have misunderstood what I said," Greenpsan famously told Congressional leaders in 1987.
Greenspan's "constructive ambiguity" was intentional, analysts said – no danger of the markets overreacting when his remarks could be interpreted in more than one way.
Bernanke, on the other hand, has always believed in speaking plainly and unambiguously. Referring to Japan's banking and economic crisis of the 1980s and 90s, Bernanke criticized Japanese policymakers for their "unconscionably slow" response to the crisis. While it's true Bernanke was not Fed chair when he wrote those remarks in 2000, it's hard to imagine Greenspan ever being that direct.
As part of his "transparency" drive, Bernanke has long argued that the Federal Reserve take steps towards setting a specific and public inflation target, much like the Bank of Canada sets a range for its desired inflation target at 1 to 3 per cent. Greenspan didn't want to do that because he wanted the Fed to have more flexibility. But Bernanke thinks it's more important that the Fed's policy directions be clearly understood. "The more guidance a central bank can provide the public about how policy is likely to evolve, the greater the chance that the market participants will make appropriate inferences," he said in 2004.
After a relatively uneventful first year on the job, Bernanke found himself wrestling with an increasingly damaged American economy. And the spotlight on the world's most powerful central banker has never been more intense.
The U.S. faced record trade and budget deficits, a badly slumping dollar, a housing market that was rapidly imploding, and shaky financial markets that were looking for someone to restore confidence in the face of what appeared to be an imminent recession.
Bernanke responded by slashing the central bank's key lending rate on six separate occasions beginning in September 2007. He flooded the financial system with hundreds of billions of dollars in additional liquidity to help restore the normal functioning of credit markets that had become "stuck" from the fallout of the subprime mortgage mess. He green-lighted a bailout of Bear Stearns, authorizing the Fed to backstop JP Morgan's buyout of the investment bank to the tune of $30 billion US.
Bernanke, always the student of the Great Depression, wants to avoid the mistakes that marked the careers of his predecessors 70 years earlier.