Bernanke: A Wise Man at the Fed

by: Felix Salmon

Portfolio contributing editor Roger Lowenstein has an excellent profile of Ben Bernanke in the NYT this weekend; it hit the web yesterday. Lowenstein is sympathetic, and admiring, but not uncritical: he says at one point, for instance, that "Bernanke must be regarded as one of the intellectual authors of the low-rate policy that fed the housing bubble".

Lowenstein is very good on the differences between Bernanke and Greenspan: the former has a much more collegial approach, and is happier with differences of opinion than his predecessor was. Crucially, he speaks last at Fed meetings, rather than first, and he often keeps his personal opinions to himself:

In 2002, President Bush asked Bernanke to become a Fed governor. When the White House called, Bernanke happened to be in California, in the midst of an editing session with Robert Frank, a Cornell University economist with whom he was writing a textbook. Frank, who had been working with Bernanke for two years, said, "What's Bush doing appointing a Democrat?" Bernanke said, "Actually, I'm a Republican."

Lowenstein's strongest criticism of Bernanke is that he doesn't have the vision and strength that might be needed in a time of crisis.

Bernanke's attempt to improve the way the Fed communicates has misfired and often left investors confused, partly because he has repeatedly shifted course over the future direction of interest rates. His hero, Milton Friedman, is said to have warned against an indecisive Fed acting like a "fool in the shower" fumbling with first the hot water and then the cold. Bernanke has gotten close...
Perhaps unconsciously, he has mimicked the directive of Irving Fisher, one of the United States' first great economists, who likened the task of central bankers to that of steering a bicycle: "Turn the wheel slightly, and if that is not enough, you turn it some more, or if you turn it too much, you turn it back."

I'm not clear on what Milton Friedman did in the shower. If the water gets too hot, doesn't it make sense to increase the flow of cold water, and vice versa? And I think it's maybe a bit much to accuse him of repeatedly shifting course: he inherited a Fed which was nearly done raising rates all the way from 1% to 5.25% (the last three rate hikes were Bernanke's), and then he kept rates steady for well over a year before starting the new move back down. Does he know what he's going to do in the future? Of course not: only an idiot would be so incurious about future events. Maybe he's too honest about what he doesn't know. But I'm glad that Bernanke is the Fed chairman right now: he's much less likely than Greenspan, I think, to delude himself that everything he did in the past was the right thing to do, and thereby talk himself into exacerbating a prior mistake. You can call that confusing; I'd rather call it wise.