Bernanke: Fed Must Avoid Greenspan Errors

by: Barry Ritholtz

Well, it's a start:

Federal Reserve Chairman Ben S. Bernanke may encourage lawmakers today to stimulate the economy while aiming to avoid his predecessor's "regret'' of being tied to specific measures.

Legislators will question the Fed chief on steps to avoid the first recession since 2001 when he testifies to the House Budget Committee in Washington. Bernanke told members of Congress this week that some kind of fiscal stimulus is needed, according to Democratic lawmakers.

Former Chairman Alan Greenspan "misjudged'' the environment in which he endorsed tax cuts in 2001, and had "intense'' regret the eventual legislation excluded his specific guidance, he wrote in his 2007 book. Bernanke will try to avoid backing any particular tax or spending policies because doing so could earn criticism from legislators who oppose them, putting the Fed's reputation for independence at risk, analysts said.

Now if we can get the Fed to avoid the Greenspan policy of inflating our way out of every situation to the detriment of those who suffer from inflation, we will be making some progress.

Note that the major coverage of these Fed Chair comments misses the subtext of what Bernanke was implying (though Bloomberg came the closest): "Greenspan f&^%ed up! He compromised the Fed's independence for partisan reasons, and damaged the Fed's reputation. I won't make that mistake."

In this coming Sunday's NYT Magazine is a long piece by Roger Lowenstein titled The Education of Ben Bernanke, and I suspect it will be required reading. (I already picked out a cigar and some scotch for that very purpose).

I already spied this wonderful quote from former Fed Chair Paul Volcker: :

β€œI think Bernanke is in a very difficult situation,” Paul Volcker told me. Volcker was the Fed chief who preceded Greenspan and who conquered, painfully, the great inflation of the 1970s and early ’80s (he was chairman from 1979 to 1987). β€œToo many bubbles have been going on for too long,” Volcker added. β€œThe Fed is not really in control of the situation."

Note that when it comes to enjoying low inflation rates, Volcker is the man who was most responsible. He should get credit. Truth be told, both the 80's Ronald Reagan boom and the 90's Bill Clinton boom were benefactors of Volcker's Fed. He broke rampant inflation, and the next 20 years of falling interest rates were the direct result of his policies.

When you compare the situation Greenspan inherited with the one Bernanke got stuck with...

The Education of Ben Bernanke
NYT, January 20, 2008

Bernanke Aims to Avoid Greenspan's Stimulus `Regret'
Scott Lanman
Bloomberg, Jan. 17 2008

Bernanke Likely to Support Stimulus Effort
WSJ, January 17, 2008; Page A2

Bernanke Is Said to Support Stimulus Measures
NYT, January 17, 2008