Markets Could Test New Fed Chairman

A new chairman of the Federal Reserve comes along about as often as a new pope, but the transition this week from Alan Greenspan to Ben Shalom Bernanke is remarkably devoid of ceremony.

The Senate is expected to approve Bernanke’s nomination today by an overwhelming margin. By Wednesday morning, Greenspan will have packed up the mementoes from his 18 1/2 -year reign and Bernanke will move into his office.

Bernanke’s parents are staying home in North Carolina because their son has told them there’s nothing to see. They don’t plan on being glued to the TV either. “We have a class at the synagogue,� Edna Bernanke said. “We’ll put a tape in the VCR and see if we caught something when we come home.�

If the changeover is low-key, that’s partly because nearly everyone seems to agree that this level-headed, collegial academic is a worthy successor to the much-lauded Greenspan.

Yet if the 52-year-old Bernanke is as qualified as anybody to serve as the 14th Fed chairman, with responsibility for keeping inflation in check while helping the world’s largest economy continue to grow, there is a good deal of uncertainty about how he will act at a moment when the economy is entering a delicate phase.

“Everybody says that they like the Bernanke appointment, but when asked why, they offer every possible combination of reasons, most of them in conflict with each other,� said James Bianco, an analyst with Arbor Research. “They like him because he’s going to stop raising rates, or they like him because he’s not going to stop. They like him because he uses rules to target inflation or because he’s pragmatic. He’s bold, he’s timid. He’s all things to all men.�

Bianco’s conclusion: “A lot of people who made assumptions about what he’s going to do are going to be surprised.�

The markets have a way of testing a new Fed chairman, just as a dog tests a leash. Shortly after Greenspan took office, the stock market crashed. On Oct. 19, 1987, known as Black Monday, the Dow Jones industrial average lost nearly a quarter of its value, a greater loss than in the Black Friday crash of 1929.

What seemed at the time to be the beginning of another Great Depression proved a relatively minor event, thanks to Fed actions to ease credit conditions. For that, Greenspan got the praise.

Economists who have known Bernanke a long time say they’re sure he will be tested too, probably soon.

“Clearly he’s going to have to earn his spurs,� said Columbia Business School professor Frederic Mishkin.

But Bernanke has advantages that Greenspan didn’t have in 1987, Mishkin said. For one thing, as a former member of the Fed board, Bernanke’s not coming into the institution cold.

For another, “the credibility of the Fed is very high. The need for someone to be a maestro is not as important as it was 20 years ago,� Mishkin said.

Bernanke is pledging “continuity� with Greenspan, which presumably means that he’ll raise interest rates if necessary to restrain inflation. But he also plans to be quieter than his predecessor, avoiding commentary on matters such as taxes that are external to the Fed.

Such reticence comes naturally to this academic. “He’s a keep-it-to-himself kind of guy,� said Andrew Abel, a University of Pennsylvania economist and coauthor with Bernanke of an economics textbook.

Abel and other friends and colleagues say they never knew Bernanke’s politics until he went to work for the White House as chairman of the Council of Economic Advisors last June.

“Some people are inclined to talk about politics and religion, and he was inclined to talk about neither,� said Mark Gertler, chairman of the economics department at New York University. “He talked about economics and sports.�

The economic era that Bernanke talked about most, the period that has occupied him academically for nearly 30 years, is the Great Depression.

“To understand the Great Depression is the Holy Grail of macroeconomics,� he wrote in a 1995 essay, calling it “a fascinating intellectual challenge.�

It’s a quest that took root when Bernanke was a child in Dillon, S.C., in the 1950s. None of his grandparents suffered unduly in the Depression -- his father’s father was a pharmacist in New York, his mother’s father a schoolteacher in Connecticut. In a period when many had nothing, they could put food on the table.

Somewhere, though, an interest was sparked in young Ben. Edna Bernanke remembers him questioning his grandmother, Marsha Friedman, about the devastating effect the Depression had on families and communities.

“He got more interested when he went to college,� Edna Bernanke said. “He was majoring in math, but that didn’t have soul in it. He said economics is math with soul.�

Kenneth Manning, a native of Dillon who went to Harvard University a few years before Bernanke, became a sounding board for the young man.

“He was fascinated by economics. It had to do with the real world; it wasn’t just a theory,� said Manning, now a professor at the Massachusetts Institute of Technology.

Real people live in the real world, and their fears and hopes play a role in economics. Manning remembers once expressing to Bernanke his fears about having a mortgage -- all that debt could ruin a man.

“I may have been totally out to lunch, but he didn’t make me feel that way,� Manning said. “It was a sympathetic projection on his part.�

Bernanke could have had other careers. He was bright -- he received near-perfect scores on his SATs -- but he did much more than study during his childhood in Dillon. He played saxophone in the school band, wrote a novel about school integration, taught himself calculus, played basketball and helped his father at the family pharmacy.

Dillon, near the North Carolina border, had no movie theaters, which means that Bernanke didn’t see “The Sound of Music� when it came out in 1965. That meant he had never heard “Edelweiss,� one of the movie’s popular songs, which meant he had no idea how to spell the Alpine flower when asked to do so in the final rounds of the 1965 national spelling bee. He placed 26th.

In the four decades since that disappointment, Bernanke’s life seems to have skirted any public drama. He was not a rebel at Harvard, unlike many students of that era. As a new instructor at Stanford University in 1979, he shared a house with his wife, Anna, and two other economists. Gertler, one of the housemates, said it wasn’t exactly “Animal House.�

“It was pretty boring,� he said, at least for those seeking sensationalism. “Most of what we talked about was economics.�

Bernanke taught at Stanford until 1985, when he moved to Princeton. He became chairman of the university’s economics department, usually a thankless job at any school.

By all accounts, however, Bernanke was extremely good at it. He built consensus for department moves, a skill he is likely to employ at the Fed as well. Greenspan, for all his brilliance, tended toward the autocratic.

Robert Frank, a Cornell University professor and coauthor of an economics textbook with Bernanke, said his co-writer had “a huge ego, obviously. You don’t do what he’s done without an incredible inner drive. It’s a matter of presentation. He’s very easy to work with.�

That confidence, along with Bernanke’s much-cited brains, could come in handy. Frank believes there’s a good chance the new Fed chairman is going to confront “some bad stuff,� such as a currency run or a market meltdown.

“Wouldn’t you want the guy who knows more about this sort of thing than anyone to be running the Fed then?� Frank said. “I would.�

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(BEGIN TEXT OF INFOBOX)

Ben S. Bernanke

Born: Dec. 13, 1953, in Augusta, Ga.

Education: Bachelor’s degree in economics, 1975, Harvard University; doctorate in economics, 1979, Massachusetts Institute of Technology.

Experience: June 2005-present, chairman, President’s Council of Economic Advisors; 2002-05, member, the Board of Governors of the Federal Reserve System; 1996-2002, professor and chairman of the Economics Department at Princeton University; 1985-2002, economics professor, Princeton University.

Family: Wife, Anna, and two children.

Quote: “If I’m confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.� -- Oct. 24, 2005, when President Bush nominated Bernanke

Source: Associated Press

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(BEGIN TEXT OF INFOBOX)

Previous Fed chairmen

The Federal Reserve was created in 1913. When Ben S. Bernanke takes over he will become the 14th chairman of the central bank. Here are facts about some predecessors:

William McChesney Martin: The longest-serving Fed chairman at 18 years, nine months and 29 days. He was selected by President Truman and also served under presidents Eisenhower, Kennedy, Johnson and Nixon from April 2, 1951, to Jan. 31, 1970. Regarded as the creator of the modern Fed, Martin said it was the job of the central bank “to take away the punch bowl just when the party gets going.�

Alan Greenspan: The second-longest-serving Fed chairman at 18 years, five months and 20 days. He was selected by President Reagan and also served under presidents George H.W. Bush, Clinton and George W. Bush from Aug. 11, 1987, to today. Greenspan made the Fed a more open institution and pursued policies that produced low inflation, low unemployment and the nation’s longest economic expansion.

Marriner S. Eccles: Third in longevity as Fed chairman at 13 years, two months and 16 days. He was chosen by President Roosevelt and served as chairman from Nov. 15, 1934, to Jan. 31, 1948. Roosevelt had been impressed with the skill Eccles displayed in helping draft the law that revamped Fed operations after the 1929 stock market crash and the start of the Great Depression.

Paul A. Volcker: Served for eight years from Aug. 6, 1979, to Aug. 11, 1987. He was picked by President Carter and renominated by Reagan. Volcker pushed interest rates to the highest levels since the Civil War in a successful campaign to end a decade-long bout of high inflation.

Source: Associated Press