Change at the top
Published: Sunday, January 15, 2006 at 6:01 a.m.
Last Modified: Saturday, January 14, 2006 at 10:22 p.m.
Imagine that you wake up one morning with the power to rattle or rally financial markets across the globe, determine the strength or weakness of the U.S. dollar and encourage or discourage the purchases of cars or homes across America.
That's the power Ben Bernanke will wield when he replaces Alan Greenspan as the chairman of the Federal Reserve. The 79-year-old Greenspan will retire Jan. 31, the same day the Senate will confirm Bernanke, 52, and begin his era.
A shy academician, Bernanke is expected to distinguish himself from Greenspan as more of a consensus-builder and clear-speaking communicator. He must do it while still establishing his authority over an institution historically run by strong-willed chairmen with deeper real-world experience than he brings to the role.
Short of the presidency, few jobs affect the lives of ordinary Americans more tangibly than the Fed chairman, yet few citizens know much about the Fed. So mysterious are its workings that transcripts of its closed-doors meetings are kept classified for five years.
Over the past 27 years, there have been only three Federal Reserve chairmen, and only 13 in the Fed's 92-year history. A change atop the secretive institution is a big deal, as rare as a papal installation.
The Fed's mission is to control the money supply in ways that boost employment and dampen inflation. It does so by effectively setting bank-lending rates to individuals and businesses, which in turn accelerates or slows economic activity.
For the past 25 years, two towering Fed chairmen - Paul Volcker and Greenspan - have steered the world's largest economy. On Volcker's watch, inflation was wrestled to the mat. During Greenspan's tenure, the end of the Cold War ushered in a truly global economy with the United States as its engine.
Those are tough acts to follow. And Bernanke, a seasoned academic from Princeton University who served on the Fed from 2002 to 2005, arrives without the clout that either man carried on Wall Street or in Washington. Only time will tell if that makes him less effective than his predecessors.
History is clear on one point, however: Incoming Fed chairmen tend to face early tests. Less than 10 weeks into the job in 1987, Greenspan wrestled with a stock market crash.
Bernanke arrives facing an expected economic slowdown late this year. He must decide by March whether to break a string of what's expected by then to be 14 straight quarter-point rate hikes, which began in June 2004. He also must decide how to deal with America's heavy reliance on foreigners buying Treasury debt, weak regulatory control over hedge funds that can roil markets and concerns that the nation's hot housing market is cooling and could nosedive.
Five former Fed governors said in interviews that Bernanke will have to earn the trust of financial markets. The five also expect Bernanke to be more considerate of opposing viewpoints than was Greenspan, who sometimes left Fed governors feeling that their views were marginalized.
"When the chairman made his recommendation at the start of the go-round, the game was up, it was over. Everybody knew what the chairman would be in favor of," Laurence Meyer, a Fed governor from 1996 to 2002, said in an interview.
In his 2004 book "A Term at the Fed," Meyer doubted whether he made a difference because "I ended my term not sure I had ever influenced the outcome of an FOMC meeting, but it never stopped me from trying." He was referring to the Federal Open Markets Committee, the Fed's policy-making unit.
Greenspan's dominance sometimes chafed his colleagues.
Princeton University professor Alan Blinder, who was Fed vice chairman from 1994 to 1996, felt that Greenspan didn't give his views sufficient weight. He's the only governor to fall out publicly with Greenspan, who's so revered in Washington that Bob Woodward named his flattering Greenspan biography simply "Maestro."
Blinder alleges that Greenspan and a few senior Fed staffers dubbed "the barons" essentially ran the Fed with little serious input from others.
Blinder and Bernanke rotated the job of chairman in Princeton's big-ego economics department. The department included Paul Krugman, a liberal economist and controversial columnist. That experience leads Blinder to expect Bernanke to be more collegial and open to the views of others as Fed chairman than Greenspan was.
"I'm pretty sure Ben Bernanke, coming out of the environment that he does, and being the person that he is, would rather use these occasions to engage in discussions and real debate with the committee," Blinder said.
Some other ex-Fed governors agree that Greenspan wasn't exactly a first among equals - he was a first without equals, fully in charge.
"I think Blinder is probably on the mark there," said Lyle E. Gramley, a Fed governor from 1980 to 1985. "When the greatest central banker that ever lived talks ... it does tend to have an intimidating influence on the committee."
To be sure, there were times when Greenspan sensed between meetings that he had weak support on the board. There's an unwritten rule that the chairman will resign if he loses a vote on a rate-setting action, so Greenspan took care either to persuade his colleagues of his position beforehand or to adopt rival views as his own before the vote.
"I never monitored Alan Greenspan's phone calls, but I just bet you he could sense those times, and I can bet you he got on the phone with key members of the committee," said Edward M. Gramlich, a former Fed governor whose 1997-2005 term overlapped with Bernanke's. "Whether Ben will sense that and do that is an open question."
Unlike his predecessor, Bernanke enters the big job with the benefit of Fed experience. That means he knows how difficult it is for the Fed to read the nation's economic pulse, said Alice Rivlin, a Fed vice chairman from 1996 to 1999.
"Its decisions are made in the light of considerable uncertainty," she said, adding that "there's never a clear road map of the future."
That's why Greenspan is so widely hailed. His instincts and confidence in his judgment made him authoritative. He saw through the mist; only time on the job will reveal whether Bernanke's judgment is equipped with similar fog lights.
"Greenspan was a very independent thinker; he looked at very different data than everybody. He often came to the table with very different views than the staff and had to persuade them," Meyer recalled. "Bernanke is much more a conventional thinker and is much more close with staff. He's more likely to come to the table with a position consistent with the staff forecast."
That's not necessarily good.
For example, Meyer and Fed staffers were pushing for higher interest rates in the mid-1990s to ensure that the economy didn't overheat and spark inflation. But Greenspan correctly intuited that productivity - worker output per hour - wasn't being measured adequately. He held rates low and his view proved correct, as inflation didn't rise and his policy fostered the late '90s boom.
"What we're (going to be) missing is this unique Alan Greenspan. There's just no way of getting around it," Meyer said. "Bernanke needs to keep himself open to views outside the staff, and make sure there are enough ideas (from) outside."
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