In cricketing terms, Ben Bernanke's innings as chairman of the board of governors of the US Federal Reserve System is a little like following a Don Bradman or a Brian Lara after they have scored a masterly triple century. The memories of Alan Greenspan's 18-year tenure are fresh and vivid. Mr Bernanke's every move will undoubtedly be subject to minute scrutiny and the inevitable "would Mr Greenspan have done that?" query. A crisis early in his tenure, such as a bursting of the real estate bubble, which many have been predicting, will give him the opportunity to put his own stamp on US monetary policy, but that is not something to be wished for. Under more routine circumstances, his reputation would be best served by the gradual, cautious calibration of interest rates that has characterised the Greenspan era. This may lead to accusations of being a Greenspan clone, but then, an effective central banker these days is nothing if not pragmatic. If it ain't broke, don't fix it. | |
| Over time, of course, Mr Bernanke's innings may well develop its own distinct identity. As an academic, his focus has been on the links between money and economic activity, and he ranks amongst the foremost monetary economists in the US. He has well-articulated positions on two major policy issues, one of which is broadly consistent with the Greenspan position and one which isn't. The first is his view on asset prices, which, he believes, should not be addressed by the Fed, unless it manifests in commodity price inflation, which should be the primary target of monetary policy. Despite expressing his concern on several occasions, Mr Greenspan never actually did anything to deflate the stock market and real estate booms that happened during his tenure. Indeed, the criticism has been that Mr Greenspan played along with the general upswing in asset prices, believing that this was good for economic performance because of the "wealth effect" setting in. The second is Mr Bernanke's association with the policy of "inflation targeting", which is being practised by a number of countries today, including the UK. Mr Greenspan did not accept this approach, preferring the flexibility of balancing the inflation and unemployment objectives. If the Fed does indeed move to a more pointed approach under Mr Bernanke, the global economy will probably have to deal with a somewhat higher degree of volatility in US interest rates and, consequently, capital flows. |
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| But beyond the nitty-gritty of policy lie some larger issues. Just as a great individual innings tends to divert attention from the outcome of the game itself, Mr Greenspan's status has pushed into the background the debate on the appropriate role of central banks in general and the Fed in particular. The Fed's decisions now directly affect a range of emerging market economies, whose priorities and tolerance for inflation may be quite different from those of the affluent economies. How will these be accommodated? Mr Bernanke's espousal of the view that the US current account deficit is the result of Asian under-consumption is perhaps a pointer to his approach on global inter-relationships. It suggests that he would put more weight than his predecessor behind the US campaign for rapid Chinese revaluation, which, some argue, could also have destabilising consequences. But, whatever his views and however he translates them into policy, Mr Bernanke must not forget that he will be as much a central banker to the world as he is to the US. |
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