Friday, October 28, 2005


Ben Bernanke: the new Era of the Feds.

It is the economic news of the week that President Bush has appointed Ben Bernanke, B.Econ, Ph.D. as the new Chairman-designate of the Federal Reserve System. Mr. Bernanke - if approved by the Senate Banking Committee - will take over the powerful post from Alan Greenspan early next year. It is almost certain, albeit not guaranteed, that Mr. Bernanke will pass the Senate test. Once that happens, a new chapter will open up on how the Federal Reserve will steer the greatest economy on the planet and, by reflection, the economies of the leading industrialized nations. The purpose of this post is to explore what we can expect in the new Era of the Feds.

To those of us who make it a point to be updated on economic matters, Ben Bernanke is perhaps most famous for his paper entitled 'Monetary Policy and Asset Price Volatility' written in February, 2000, where Prof. Bernanke explores the implications of asset price volatility for the management of monetary policy. Bernanke is also famous for his comments on deflation (as opposed to inflation), a destabilizing period of falling prices, made in his two and a half years as a Fed Governor. Bernanke is best known for raising the novel concern that the U.S. economy could be devastated by the type of deflation that has crippled Japan for many years. In a November 2002 address to the National Economics Club in Washington, DC, Bernanke raised the issue and outlined a series of tools at the Fed's disposal for "making sure 'it' doesn't happen here" as he subtitled his speech. The “Bernanke Option”, as it was described, would be used in the event that short-term interest rates fell to near zero and the Central Bank needed other ways to stimulate the economy.

In practicality, Bernanke appears to be the apt successor of the legendary Greenspan. But there are some subtle differences of opinion between the outgoing and the (hopefully) incoming Chairman that may dictate some differences in the Feds' approach to the handling of economic affairs, most notably monetary policy. Bernanke is a Monetarist - but not as much as Greenspan. Bernanke favors an explicit inflation "target," while Greenspan has pursued a more flexible policy with no stated target. Bernanke is a theorist whereas Greenspan (like Paul Volcker, his predecessor) is a practical man. But perhaps more important of them all is the fact that Bernanke is a firm believer in free trade, much more than Greenspan.

Taken altogether, these differences may signal some changes of policies. As they relate to Canada and real estate, here are the most important:

Prof. Bernanke is 51 years old and was born on Dec. 13, 1953, in Augusta, Ga. He holds a B.A. in Economics, 1975, from Harvard University; and a Ph.D. in Economics (summa cum laude), 1979, from the Massachusetts Institute of Technology. He is married to his wife Anna and has two children.

Luigi Frascati

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