WASHINGTON — When Alan Greenspan speaks, people listen but they don’t always understand. With Ben Bernanke, there’s no need for the economic equivalent of a decoder ring.
“Bernanke is very clear,” Alice Rivlin, former vice chair of the Federal Reserve, says of the former college professor who is President Bush’s choice to succeed Greenspan as chairman of the Fed.
“Not all economic professors are as lucid as Ben Bernanke, however,” she says. “He is one of the best.”
Greenspan plans to step down Jan. 31 after 18-plus years running the Fed. If Bernanke’s confirmation goes smoothly in the Senate, as expected, he’ll take over Feb. 1.
Leaders of the Federal Reserve traditionally have believed that operating like the banking equivalent of the Sphinx was the most effective way to carry out monetary policy. Never saying too much means never making Wall Street too jittery.
Greenspan’s Delphian discourse is the stuff of legend, causing even financial experts to scratch their heads in befuddlement. He once told a gathering of economists, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
Still, Greenspan is credited with slowly moving the Fed toward more openness and better communication with Wall Street and Main Street.
Bernanke, a Fed governor for three years who serves as Bush’s top economic adviser, thinks more can be done. He believes clearer signals from the Federal Reserve about economic conditions and interest rates will demystify the institution and help the investing public better understand its goals. And that, he thinks, can help the Fed do its work to keep the economy healthy and inflation low.
Now that he’s in line to replace Greenspan, will he follow through on that thinking in the form of clearer commentary? Edward Gramlich, a former Fed governor who worked with Bernanke, is betting Bernanke will.
“He gives material in a relatively matter-of-fact way. He has done that as long as I’ve known him, and my guess is that he will continue to,” said Gramlich, who resigned from the Fed in August. “If you are one who finds Greenspan a little inscrutable, Bernanke’s probably a lot less inscrutable.”
Richard Yamarone, economist at Argus Research, isn’t so sure.
“When you become Fed chairman you get somewhat of a zipper for your mouth,” he said. “Bernanke’s going to learn to be more tightlipped.”
The Fed determines interest rate policies that affect any person or business that borrows money. By virtue of the ability to influence the economy, the chairman is seen by many as the second most powerful person in the country.
Bernanke already has said he’ll continue Greenspan’s widely praised monetary policies. But to investors, the Fed chief’s words are often as important as the central bank’s decisions.
When Greenspan in December 1996 famously asked whether the high-flying stock market was a reflection of investors’ “irrational exuberance,” the single question sent stocks tumbling around the world.
As a Fed governor, Bernanke was willing to discuss somewhat controversial issues. Brian Sack, a senior economist at Macroeconomic Advisers who worked with Bernanke at the Federal Reserve, and other economists think that might change when Bernanke becomes Fed chairman.
“He was willing to put ideas out there for them to be discussed and perhaps he’ll be a bit more cautious as chairman in terms of throwing out ideas,” Sack said.
As a case in point, just months after his August 2002 arrival at the Fed, Bernanke made a provocative speech on the perils of deflation, a widespread price decline that can inflict serious damage to the economy. The country’s last big bout of deflation was during the Great Depression.
Even though he believed the likelihood of the U.S. slipping into deflation was remote, the grave consequences of deflation warranted Fed policy-makers considering pre-emptive policies, Bernanke argued at the time. “Prevention of deflation is preferable to cure,” Bernanke said in his November 2002 speech.
Heeding the warning, the Fed ended up pushing interest rates even lower.
It would be hard to imagine a Fed chairman giving such a speech because it might unnerve investors. Sack said Bernanke understands the need to be circumspect.
“I think there will be some appreciation that so much will be hung on every word he says that it would be natural for him to pull back a little,” Sack said. “But my guess is, in the end, it won’t be that much.”
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