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:
- Free Trade : NAFTA has not always been welcomed in the United States and has at times caused political attrition and differences with Canada. Under Bernanke's tenure it is reasonable to expect a relaxation of the sometimes protectionist and isolationist approach of the United States in favor of a more integrated North American trade and exchange between the two neighbors. My American readers and friends will forgive me if I theorize that, in ultimate analysis, it is in the best political interest of the American colossus to have a prosperous, economically stable neighbor to the North so that American attention and energies can be devoted to more pressing deeds, such as the completion of the ever-ending military occupation of Iraq, the never solved political question of Taiwan with China, the threatening anti-americanism trumpeted by the new leading elite in Iran, the economic antagonism created by the bulgeoning economic expansion of China and the ever-ending rivalry for economic primacy so much coveted by many leaders of the new Europe.
- Interest Rates : Bernanke favors an inflation-targeting approach. More specifically, he has made statements arguing in favor of a 2 percent inflation target in two years. If he intends to follow through, we can expect a tightening of the Feds control over money supply as well as short-term interest on treasury bills, with the end result of a more valued American Dollar and higher interest rates. This will result in an influx of foreign capitals into the United States and a strenghtening of the greenback, with a commensurate softening of American exports. A move this, that may not be entirely welcomed by the Bush Administration which, since 2003, has 'punished' the detractors of the American intervention in Iraq by letting the Dollar devaluate to impede imports- something this that Germany and France and, to a certain extent, Canada have still to digest.
- Real Estate Prices : specifically as it relates to my field of practice, the Fed may influence the real estate market both in terms of resale prices and new construction inventory by altering the equilibrium between demand an supply. More specifically, higher active and passive interest rates - if enforced by Bernanke - may have the double negative impact of shifting available capital towards high-yield savings and, at the same time, increasing mortgage rates, with the end result of curtailing demand and undercutting prices. Bernanke, therefore, will have to walk the fine line of balancing his inflation-targeting approach with the reality of the industry. Greenspan was a master of the 'let it be' philosophy, faithful to the axiom of 'there is no cure when no cure is needed'. Ultimately, it must be realized that inflation - like death - is an unavoidable fact of life.
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
Real Estate Chronicle
