Bernanke appointed US Fed Chairman

by John Q on October 24, 2005

Ben Bernanke has been appointed to replace Alan Greenspan, who’s been Chairman of the US Federal Reserve for just about as long as I can remember (the Volcker squeeze was in the early 80s, so he hasn’t been there forever, but it often seems that way).

Bernanke was the obvious candidate, but there was always the possibility that Bush would decide to mend fences with the base by appointing some obscure* supply-sider a la Harriet Miers.

Bernanke’s appointment suggests a general bias towards an expansionary monetary policy . He was prominent in saying that the Fed would not tolerate deflation, and could print money if necessary. More recently, he’s taken a very relaxed view of the US current account deficit, seeing it as the inevitable counterpart to a ‘global savings glut’. I agree with him on the first point but not on the second; there’s a significant risk that the wheels will fall off the entire policy, leading to a rapid depreciation of the dollar and an uncontrolled increase in interest rates.

Market movements were consistent with this analysis (stock prices went up, the dollar fell and the 10-year bond rate rose), but weren’t very big, suggesting that no-one is expecting really big changes.

* This is a redundancy, as there are no prominent supply-siders in the US economics profession. That is, not in the sense of supply-side popularised by Jude Wanniski and Arthur Laffers, although Mundell shares the supply-side liking for a gold standard. Almost all economists are supply-siders in the sense that they think attention should be paid to the supply side of the economy as well as the demand side.

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10.24.05 at 10:50 pm



Mark 10.24.05 at 11:49 pm

I would be much happier if I were not still paying for the “Volckler squeeze” that so sharply reduced income in the U.S.

I do hope the new clown at the Fed understands that declining incomes are not good for this, or any other country.


John F. Opie 10.25.05 at 4:50 am

Hi –

As an industrial economist, I find very few colleagues even contemplate the supply side of the economy, but are fixated on the demand side. It’s conceptually a great deal simpler than understanding all the myriad industries and sectors of the supply side, with its intricate interdependencies.

That said, it’s also a great deal more interesting as well.



Barry 10.25.05 at 6:55 am

Mark, declining incomes for half of the US work force have been almost a constant for over 30 years now. It seems to be mainstream economic thought that it’s good, or not bad, or ‘natural’, or something. The GOP really, really likes it, since they’ve got a culture war to channel the resentment to their advantage; the Democratic Party leadership needs the big donors, and labor’s been weakened.


Firebug 10.25.05 at 7:15 am

I am tired of the economic royalists who have been runnning the Fed at least since Volcker. When we get a Democratic president in office, he should nominate a populist to the Fed – someone with no ‘economics’ brainwashing at all, who will do what is right for ordinary Americans without worrying about what the rich bastards think.


Keith 10.25.05 at 8:43 am

It’s funny, Bush will apoint incompitant pals to every position– except the one that involves money. Then it’s,”Scour the Earth! Find me the best of the best!” Fuck the Judiciary, the UN, Homeland Security, FEMA, Secretary of State; they don’t matter. Never was there a more lucid illustration of the man’s priorities.


lemuel pitkin 10.25.05 at 9:36 am

I agree with him on the first point but not on the second; there’s a significant risk that the wheels will fall off the entire policy, leading to a rapid depreciation of the dollar and an uncontrolled increase in interest rates.

Not necessarily. A rapid depreciation of the dollar will result in one or more of the following:
1. an uncontrolled increase in interest rates;
2. increased inflation; or
3. capital controls.

Logically, any of these will do; it’s only the political refusal to contemplate 2 or 3 that make 1 inevitable. But given the US’s past willingness to change the rules of the international-finance game when their interests change, I wouldn’t be surprised if a Bernanke Fed decided that deep recession was too steep a price to pay for a stable dollar.

After all, America’s foreign liabilities are denominated in our own currency; there’s no reason we can’t just let the dollar fall and let the foreigners take the capital loss.


lemuel pitkin 10.25.05 at 9:37 am

Oh, and I should have added — that’s why Bernanke’s expansionary bias makes his “relaxed view of the US current account deficit” more reasonable.


jet 10.25.05 at 12:14 pm

Sounds like you want a return to that economic genius Roosevelt.


Gareth 10.25.05 at 1:52 pm

The aptly named Firebug reminds us that there are threats to reasonable economics on the left. I had almost forgotten, what with the Bush-era celebration of bad fiscal policy.


Dutchman 10.26.05 at 2:48 pm

US- golden era is over. The Fed can do little. It will have to choose between either rising rates and a bursting housing bubble or a lack of foreign investments in US-securities, leading to a south american inflation scenario. I don’t think Bernanke will accept the housing bubble to burst and to accept the deflational effects on the economy. The dollar will soon drop to 1.70$ per Euro and oil will soon be priced in an average of different currencies.


Firebug 10.27.05 at 4:57 am

Yes, Roosevelt *was* an economic genius. He got us out of the Great Depression and reduced unemployment by more than any other US President in history. And his genius consisted of his pragmatism – being willing to try just about anything, going with what worked and abandoning what didn’t. He was not wedded to some inflexible ideology. That is why I have such a low regard for the economics “profession” – it specializes in firm predictions that actually have little or no predictive value. We’ve been in a jobs depression for the past five years, and I’m sick of hearing economists say it will work itself out naturally or that they don’t know what is going on or that things are really just fine, but the people are too stupid to realize it. We need pragmatists. The economists need to be summarily brushed aside.

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