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Associated Press
Update 18: Bush Picks Bernanke As New Fed Chairman
10.24.2005, 01:23 PM
President Bush named top White House economic adviser Ben Bernanke as chairman of the Federal Reserve Board on Monday to succeed the near-legendary Alan Greenspan.
"The decisions of the Fed affects the lives and livelihood of all Americans," Bush said at the White House as Bernanke and Greenspan looked on. He said his choice "commands deep respect in the financial community."
It was the third time in as many years the president has turned to the 51-year-old Bernanke for a sensitive post. Bush named him to the Fed board in 2002, then made him chairman of the president's Council of Economic Advisers earlier this year.
The appointment is subject to Senate confirmation, and Bush called for swift action.
"If I am confirmed by the Senate I will do everything in my power, in collaboration with by Fed colleagues to help assure the continued prosperity and stability of the American economy," said Bernanke, a Harvard educated economist.
"My first priority will be to maintain continuing with the policy and policy strategies under the Greenspan era," Bernanke added.
Greenspan, who became chairman in 1987, completes his term as chairman on Jan. 31. By naming a successor more than three months in advance, Bush appeared to be trying to clear the path for a smooth transition.
Whatever the Senate's reaction, Wall Street liked what it heard. Stocks rose as word of Bernanke's appointment circulated in advance of the presidential announcement.
"Over the course of a career marked by great accomplishment, Ben has done path-breaking work in the field of monetary policy, taught advanced economics at some of our top universities, and served with distinction on the Fed's Board of Governors," Bush said.
Bernanke has "earned a reputation for intellectual rigor and integrity," Bush said. "He commands deep respect in the global financial community. And he will be an outstanding chairman of the Federal Reserve."
Bush praised Greenspan, as well. "For nearly two decades, Chairman Greenspan has shepherded our economy through its highs and its lows. Under his steady chairmanship, the United States economy has come through a stock market crash, financial crises, from Mexico to Asia, two recessions, corporate scandals, and shocks ranging from devastating natural disasters to a terrorist attack in the heart of America's financial center," he said.
Greenspan, who is serving his fifth chairman as chairman of the Federal Reserve Board and has been named to the post by presidents of both parties, did not speak. It was a rarity in Washington that signaled the imminent shift in power over delicate issues such as interest rates. For two decades, it was Greenspan's pronouncements, opaque and otherwise, that counted most within government and on Wall Street.
While Bernanke pledged continuity with his predecessor's policies, the two men differ on whether the Fed should set targets for inflation - Bernanke thinks it should, Greenspan does not. Otherwise they share a similar philosophy, so much so that while the younger man was at the Fed, market observers often looked at his speeches for insight into Greenspan's thinking.
Bernanke has a reputation as a straight-talking economist and a Republican who avoids telegraphing any ideology.
In June 2005, Bernanke was sworn in as chairman of the President's Council of Economic Advisers. He had served as a member of the board of governors of the Fed since August 2002,
A summa cum laude graduate of Harvard University in 1975, he received his doctorate from the Massachusetts Institute of Technology in 1979. During his years in Boston, he focused on the economic underpinnings of the Great Depression and the losing track record of the city's beloved baseball team, the Red Sox.
"Economics is a very difficult subject," Bernanke once said. "I've compared it to trying to learn how to repair a car when the engine is running."
Greenspan was 61 when he first took over the demanding job as Fed chairman.
His first government service was as chairman of the president's Council of Economic Advisers during the Ford administration. He had originally been tapped for that post by Richard Nixon, who resigned before Greenspan took office.
He joined the government after a long stint running Townsend-Greenspan, a New York consulting firm which had as its clients some of the country's top corporations.
It was during this period that he gained a reputation as an economist who loved to delve into the minutia of economic data, from monthly box car loadings to steel production data to try to determine the future direction of the economy.
He pursued his Fed job in the same way, often calling economists at other agencies to discuss the fine points of the government statistics. He would rise early every morning for a two-hour soak in his bathtub, time he used to devour the latest government statistics and Fed staff memos on the economy.
Greenspan succeeded another Fed legend, Paul Volcker, who during his eight years at the Fed had pushed interest rates up to their highest level since the Civil War in a successful effort to break a decade-long bout of inflation but also pushed the country into the deep 181-82 recession.
Greenspan never had to resort to pushing interest rates so high, mainly because during his tenure inflation never soared to the double-digit rates that Volcker confronted.
The economy did suffer two recessions during Greenspan's long tenure at the Fed, a 1990-91 downturn that occurred in part because of a huge spike in oil prices following Iraq's invasion of Kuwait, and a 2001 downturn that was worsened by the deadly terrorist attacks on the World Trade Center and the Pentagon.
It was under Greenspan that the central bank began in 1996 for the first time to announce on the day of its meeting whether it had made any changes to the short-term interest rates the Fed controls.
While technically Greenspan only had one vote on the 12-member Federal Open Market Committee, the Fed chairman was exceptionally adept at building consensus among the Fed board members and regional bank presidents who make up the panel that meets eight times a year to set interest rates.
He also demonstrated a keen mastery of Washington's political power games. His long tenure at the Fed was due in no small part to his ability to get along with whoever occupied the White House.
A lifelong conservative Republican, Greenspan was first selected as Fed chairman by Ronald Reagan in 1987. He was re-nominated by the senior George Bush, also a Republican, and won two more selections for four-year terms by Bill Clinton.
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Bernanke Picked by Bush to Succeed Greenspan at Fed (Update1)
Oct. 24 (Bloomberg) -- Ben Bernanke, chairman of Council of Economic Advisers and a former Federal Reserve governor, was named today by President George W. Bush to succeed Alan Greenspan as Fed chairman.
Bernanke ``commands deep respect in the global financial community,'' Bush said as Bernanke and Greenspan stood by his side in the Oval Office. ``Ben Bernanke is the right man to build on the record Alan Greenspan has established.''
Bernanke, 51, will replace the man Bush today called a ``legend'' and former Fed Vice Chairman Alan Blinder describes as ``the greatest central banker who ever lived.'' Bush's decision to tap Bernanke for the CEA in June was widely seen as grooming him to replace 79-year-old Greenspan, whose term ends in January after more than 18 years at the Fed. Greenspan also is a former CEA chairman.
``He's got the right pedigree,'' Ethan Harris, chief U.S. economist for Lehman Brothers Inc. in New York, said of Bernanke, a former economics and policy professor at Princeton University. That said, ``you're replacing an icon with a mere mortal, and he's going to have to prove himself in the job.''
Greenspan maneuvered the economy through two stock-market collapses, in 1987 and 2000 and two recessions in 1990-91 and in 2001. The expansion between those downturns was the longest in U.S. history. Greenspan's non-renewable term ends Jan. 31 and the nomination of his successor is subject to Senate confirmation.
Banking Committee Chairman Richard Shelby said last week he expected hearings and a vote on Bush's selection would be conducted before the end of the year.
Bernanke at Fed
Bernanke joined the Fed as a governor in 2002 and over almost three years helped re-charge the research agenda by reaching out to junior staff economists in informal cafeteria seminars and through speeches on communication policies and alternative steps the central bank could conduct to ward off deflation. He described himself as ``a mainstream economist'' in a recent interview.
``Economists in general have considerable faith in the power of markets to solve economic problems, and view the role of government as to provide a foundation or a backdrop that allows markets to work as effectively as possible,'' Bernanke said. ``Part of that implies free and open trade among countries. It involves applying cost-benefit analysis to regulations.''
As chairman of the Fed, which sets interest rate policy, Bernanke must establish credibility in three areas, and he must do so fast. None of his predecessors faced financial markets that move as quickly on instant information as they do today.
What Bernanke Must Do
Bernanke must convince bond markets that he is an inflation fighter. Even as the Fed has lifted the benchmark lending rate 11 times over the past 15 months off the lowest levels in 46 years, inflation, by every measure, has moved higher.
The new chairman ``needs to commit themselves very firmly to the Fed's commitment to price stability in deed as well as word,'' said J. Alfred Broaddus Jr., former president of the Richmond Federal Reserve Bank.
The consumer price index rose 1.2 percent in September, the biggest jump since 1980. Stripping out the storm-related effects of rising energy costs and food, the price benchmark rose 2 percent, at the upper limit of price increases for Fed officials who have specified one.
Anchoring inflation at a rate no higher than where it is currently is a primary goal of Fed policy makers, according to several recent speeches.
Inflation Targeting
Bernanke is an advocate of a strategy called inflation targeting where a central bank specifies a numerical goal for prices. The Federal Open Market Committee debated the strategy as early as February, and decided to defer the discussion.
Bernanke is unlikely to push the strategy unless he has unanimity, and Governors Roger Ferguson Jr. and Donald Kohn are opposed. Both may be willing to discuss a numerical description of what defines low inflation, and that could help solidify the Fed's inflation-fighting credibility with financial markets, households and businesses.
``Certainly, an inflation target that is explicit is one more step toward greater transparency,'' Broaddus said.
Since he was sworn in at the CEA on June 21, Bernanke has testified twice before Congress and given five speeches on non- controversial subjects. As a Fed chairman, his second test will be gaining credibility on Capitol Hill.
For much of the past decade, Greenspan received lavish praise during his appearances on Capitol Hill, and Congressmen rarely challenged the Fed's policies.
Dealing With Congress
Greenspan ``has a great deal of credibility with financial markets at home and abroad, and also a great deal of credibility on Capitol Hill,'' said Michael Mussa, senior economist at the Institute for International Economics before the announcement. ``A new Fed chairman will not instantaneously inherit the mantle.''
The Fed is unusual among the world's central banks in that it has two mandates: stable prices as well as sustained growth that will result in low unemployment. Bernanke will have to at least express concern about jobs and growth in his nomination hearing, and, if confirmed, during his semi-annual testimony in February.
Delivering on the expansion will be tricky, however.
Economists expect U.S. growth to slow, even as inflation expectations rise in the aftermath of a 51 percent increase in retail gasoline prices this year. Fed officials have made it clear they intend to keep leaning against inflation by pushing up the federal funds rate, even after Hurricanes Katrina and Rita hurt third-quarter growth prospects.
St. Louis Fed Bank President William Poole even said that the Fed could err on the side of raising interest rates too high to clamp down on inflation because it could them cut them quickly if growth began to falter.
