Vivek's Finance and Economics Blog

Thursday, November 17, 2005

The New Fed

I know this post is a little stale as Ben Barnanke has been chosen to succeed Alan Greenspan as Fed chariman for quite some time now. However, since it is only today that I have started this blog and the appointment of Gentle Ben is the most significant economic news of last one month, hence I would still like to comment on it . Ben Bernanke is widely considered to be one of the finest monetary economist of his generation. His appointment was widely expected and it is no secret that he was Wall Street's favourite to succeed the old oracle. The Dow index greeted his appointment with a 170 point salute. Bernanke has wide respect and renown in the academic circles for his intellect & erudition, however his skills in the real world of policy making are relatively untested. It was only in 2002 that he was appointed in the Federal Reserve as one of the board members. He must have done really well to earn the trust of Bush and Greenspan, who had little hesitation on appointing him the "second most powerful man" in the world. Still 3 years is very little experience for such a high profile and responsible job and his early days on the job will be watched with great interest. Even before the official taking over as the chairman Bernanke's backing of inflation-targeting, an idea which requires Federal Reserve to publicly state the inflation they would want to see in the economy, has raged debate in the economic circles. Greenspan is well known to be against this idea as according to him it reduces Fed's flexibility in responding to a crisis or unforeseen situation. Given that Greenspan's Fed has managed the economy so well in past 18 years, any departure from his legacy is sure to invite widespread criticism, after-all why fix something which ain't broke. The only problem with this argument is that almost all of Greenspan's legacy is not inheritable. Greenspan is famous for responding to situations from a gut-level or intuition or divine intervention, whatever one may call it, which can leave other staff members perplexed. According to reports, many times he does not follow the plain economic data , but interprets the data in his own unique way and more often than not comes up with the right response. The most famous example of this approach was when Greenspan refused to raise rates in 1996-97 when Information Technology was driving an unprecendented productivity boom in the world economy creating an economic boom of 1996-1999. Bernanke has sought to remove this reliance on one man's unique talents in something as important as economic policy making and bring more systematic approach to this imporant job. It will be very interesting to see how far Bernanke succeeds in his plans.

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