Bernanke, Ben Shalom

According to Harris (2008, p. 203), Ben Shalom Bernanke (1953-) "seems to have system- atically trained himself to become a top central banker". That training and experience has been quite different than his predecessor as Chairman of the Board of Governors of the US Federal Reserve and of the Federal Open Market Committee (FOMC), Alan Greenspan. The majority of Bernanke's career has been as an academic within prestig- ious US institutions. Following a degree in economics at Harvard (1975) and a PhD at the Massachusetts Institute of Technology (1979), Bernanke initially worked as an Associate Professor at Stanford (1979-83), before holding a variety of Assistant and then Full pro- fessorial positions at Princeton (1983-2002), where he remained a member of the faculty until 2005. He served as editor of the American Economic Review between 2001 and 2004. Bernanke's principal academic work has focused on the role of monetary policy. He has published widely on the causes and consequences of the Great Depression (see Bernanke, 2000). Whilst not unequivocally supportive of all aspects of Friedman and Schwartz's (1963) work, he conforms to the position that the Fed adhered to the gold standard in a way that reduced liquidity and that it allowed an escalating set of bank failures (was "liq- uidationist"). Following Friedman and Schwartz (1963), Bernanke argues that a central bank can cause and accentuate aspects of the business cycle and that it has a key role in shaping that cycle. Concomitantly, Bernanke's interests extend to the Japanese response to deflationary pressures in the 1990s, and more generally the role and scope of central banks, particularly inflation targeting (see Bernanke et al., 1999).

Bernanke's academic work provided a basis for his transition to public service. He acquired an inside view regarding the US Federal Reserve system as a visiting scholar and then also served as a member of the Academic Advisory Panel of the New York Fed (1990-2002), before becoming a member of the Board of Governors of the Fed in 2002. He briefly served as Chairman of the President's Council of Economic Advisors (2005-06), before being appointed Chairman of the Board of Governors of the Fed in February 2006, to which he was reappointed in 2010.

Bernanke has gradually sought to change the practices and orientation of the Fed. He shares with Greenspan a broad commitment to the new-Keynesian synthesis, where the central bank can use its main policy tool, the federal funds rate of interest, to sta- bilize a trend growth rate of real Gross Domestic Product (GDP), subject to an output gap and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The central bank's key focus is price stability, and, based on central bank independence, resistance to "populist-political" pressures likely to stoke inflation through lagged expectations effects. However, Bernanke has been aware that he lacks Greenspan's ability to dominate the FOMC, and has sought to promulgate a more democratic interchange for interest rate setting. As an academic he previously advocated formal inflation targeting and has shifted the Fed in this direction (transcripts released in 2001 reveal that the Fed has had an unofficial CPI target of 2 per cent since 1996). Bernanke has moved towards a more "constrained" form of "discretion", in conjunction with a greater degree of transparency and more frequently published forecasts and data.

Bernanke's mode of communication at the Fed has been less ambiguous than Greenspan's form of "Fedspeak". The intent, in both cases, however, is to constructively shape expectations. In Bernanke's version, a basic tension has arisen in terms of the democratic nature of FOMC meetings. One cannot unequivocally create expectation- shaping FOMC trends if the potential for dissent is increased and contradictory inter- est rate changes become possible. Further, Bernanke's tenure as Chairman of the Fed has coincided with the financial crisis and its aftermath. In such circumstances, a New Keynesian economist will acknowledge that models become less reliable and that prior strategies - essentially gradual chains of small incremental federal funds rate changes - cease to be effective. This means that inflation targeting based on data transparency and a more rule-constrained approach within a New Keynesian understanding has become less relevant for Bernanke.

Bernanke has proven flexible in his approach to monetary policy: embracing rapid larger reductions in the federal funds rate of interest towards a zero-bound situation, employing varieties of quantitative easing, putting aside initial moral-hazard issues in order to supply significant volumes of liquidity to the finance system whilst also playing a supportive role to Treasury initiatives, and maintaining a set of contingency plans to deal with any incipient deflation. In 2009, he was named Time magazine's "Person of the Year".

The broader critical framework in which Bernanke should be considered is his adher- ence to the New Keynesian synthesis. The reliability of the models and strategies pro- vided by that synthesis raise further issues about what central bank policy should be, as they did not just break down but contributed to the crisis (Morgan, 2009). Bernanke is also an advocate of the financial accelerator model (which is typically not modelled in the formal sense), where the interaction between wealth effects and credit creation augments GDP growth driven by the financial sector and often in ways that are insen- sitive to chains of small incremental changes in the federal funds rate of interest. This position provides for a greater scepticism regarding the capacity of financial markets to forestall and resolve bubbles, and calls for the central bank to do more in this regard. Yet, in contradiction, Bernanke provided Greenspan's Fed with intellectual authority for its complacent attitude to the growing problems of the financial system. As both an academic and a member of the Fed Board of Governors, he generally supported the position that it was extremely difficult to identify asset bubbles and equally difficult to deflate them (rather than deal with the aftermath). Further, in 2005 he made the case that the root problem of global imbalances was excess saving in China and elsewhere, with regard to which the United States was playing a generally positive role in absorbing the excesses.

See also:

Bubble; Central bank independence; Federal Open Market Committee; Federal Reserve System; Greenspan, Alan; Inflation targeting;Monetary History of the United States,1867-1960; Output gap; Quantitative easing; Rules versus discretion.