StreetTalk: Transition at the Fed: From Greenspan to Bernanke

Bernanke appears to be operating on an even keel, albeit steering a vessel across stormy economic seas
Aug 01, 2006
Volume 19, Issue 8

When former Federal Reserve chairman Alan Greenspan's term in office expired on January 31, 2006, many people said, "There goes a legend." Maybe the better expression was, "Here comes the spin."

Brian O'Connell
The conventional belief was that Greenspan ran the nation's economy like a true cultural icon. Supposedly, he was an economic Merlin who assured prosperity by astute reading of the economic tea leaves and subtle policy adjustments. For 18 years, longer than any of his predecessors, he led the US Federal Reserve Bank (The Fed) very much in his own image—strong, deliberate, intelligent, and responding to the needs and desires of his time.

Some see it differently. Ravi Batra, author of the myth-bashing book "Greenspan's Fraud" (Palgrave Macmillan, New York, 2005) says that the "real impact" of Greenspan's term was akin to a high-explosive detonation.

A proponent of "rational selfishness" and a disciple of Ayn Rand, Greenspan "unwittingly effected a global crash and spread economic misery on our planet," writes Batra. "Duplicity underlies his actions. Whether it is Social Security, taxes, industrial deregulation, or financial markets, Greenspan sways it all."

Batra accuses Greenspan of profiting from his own tax policies, engineering through his economic policies the dot-com bubble and subsequent recession, and sending millions of Americans into poverty.

Whatever one thinks of Greenspan, he's history. That became official on February 1, when Ben Bernanke was sworn in as his replacement. The people on Wall Street and Main Street, who revered Greenspan for almost two decades, began speculating on how the new chief would perform.

That's important—not just to the life sciences industry, but to investors everywhere. The Fed is crucial to the US economy; part gatekeeper and part financial manipulator. The Federal Reserve is the bank of the US government and, as such, regulates all US financial institutions. Many have deep investment interests in the biopharm industry. One utterance from Ben Bernanke and the stock prices of Merck or Roche could plummet within minutes. The new Fed chair found that out the hard way when some cocktail party comments on inflation and interest rates to CNBC reporter Maria Bartiromo went to her audience the next morning, sending the stock market into a steep dive.

Past that glitch, Bernanke seems to be operating on an even keel, albeit steering a vessel across stormy economic seas.

Consider that, in its first 100 or so days, Bernanke's Fed has had to grapple with a record $800 billion trade account deficit, a $319 billion budget deficit, and a population that has virtually stopped saving but loves borrowing.

Bernanke's been focused on addressing these and other issues during his first few months—setting sound monetary policy that's heavy on growth and low on inflation. Unlike Greenspan, however, he has some very different notions for achieving it.

The centerpiece of his plan is creating a transparent Federal Reserve, an approach contrary to how Greenspan steered the ship. Still, Bernanke is steadfast in his belief that the Fed should make its moves abundantly clear to stakeholders, stay focused on finances and interest rates instead of debts and deficits, and speak a language that the markets can understand without the need of a translator.

"Fresh air," Bernanke's quoted as saying, "is good for the Federal Reserve." And the best way he sees to achieve it involves:

  • Setting inflation targets.
  • Leaving politics up to the politicians.
  • Depersonalizing monetary policy.
  • Communicating as clearly as possible about the Fed's intentions.

Greenspan and Bernanke both recognize the central bank's need to recalibrate its money strategy and maintain a low and stable rate of inflation. It's their philosophies for doing so, however, that are distinctly different.

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