Thank Bush for Bernanke [Archives:2005/894/Business & Economy]

November 14 2005

By Kenneth Rogoff
The world may not know it, but we all dodged a bullet when George W. Bush nominated Ben Bernanke to succeed the all-powerful US Fed Chairman Alan Greenspan. There were some positively scary names for potential Fed chairman floating out of the White House, and I, for one, had no confidence in the outcome.

Instead, almost miraculously, we got an absolutely first-rate economist, a safe pair of hands to guide the global economy. Those of us who know Bernanke view him as someone who has the experience, intellect, and personality to sparkle in the position that he will assume next February.

Why is the job so important? Alan Greenspan is a great man, but it is a curious set of circumstances that has elevated the job of Fed chairman to Mount Olympus.

Consider, first, that the other two major central banks in the world (the European Central Bank and the Bank of Japan) simply are not fully functional. While the Fed agilely changes policy interest rates to stabilize inflation and output, neither the BOJ nor the ECB has changed its key policy rates for years now, with the ECB stuck at 2% and the BOJ at 0%.

While failure to adjust interest rates is not prima facie evidence of dysfunction – after all, even a broken clock is right twice a day – frozen interest rates really do give the appearance of paralysis. Thus, with the world's other two major central banks missing in action, the Fed has the global economic stage all to itself.

Equally importantly, the Fed Chairman also commands the US economic stage. Normally, the United States Treasury Secretary or some other leader in the administration would play a counterbalancing role. But in the Bush administration, these officials simply don't have the political support to be effective, particularly opposite Greenspan.

President Bush has clearly decided that he himself should be the administration's main economic spokesperson. Inevitably, however, Bush comes across as a cheerleader, while the more objective Fed chairman just ran circles around him.

Of course, Greenspan never had to compromise his credibility on economic issues by pontificating on Darwin's theory of evolution (which many Bush supporters deny), or buzzing on about how wonderfully things are supposedly going for US forces in Iraq. Against Bush's vapid boosterism was set Greenspan's vast knowledge and experience.

Besides, there is just no way that a US president busy with dozens of other pressing problems can compete with a Fed chairman who has the luxury of focusing full time on economic issues. So we should give Bush credit for being willing to pick someone who can maintain Greenspan's role as the chief economist of the US, by default.

Mind you, it may be quite awhile before Ben Bernanke's name becomes the global household word that Greenspan's has become. People who could care less about economics and finance often still know the name of the current US Fed chairman.

It has certainly made my life easier in explaining to people that I am a professor of economics.

Of course, some people, such as an accomplished young musician I recently met, have never heard of Alan Greenspan – or of the US Federal Reserve, for that matter (within half an hour he was mesmerized by the idea that there might be someone who could essentially print a billion dollars on a whim). But, generally, even though most people don't really understand what a central bank does, they view Alan Greenspan as a vitally important person who has something to do with setting interest rates, and thus influencing their lives.

This brings us back to the ECB and the BOJ, because their real problem is not simply interest-rate paralysis, but rather that each feels enormously constrained in addressing key economic issues outside monetary policy.

As the premier pan-European Union institution, the ECB is uniquely positioned to play a leadership role in Europe's discussion of fiscal policy, trade policy, and demographic transition. But, while it quietly makes a number of important technical contributions to various debates, it is hemmed in politically and thus cannot reach forcefully beyond its jurisdiction.

This is an unfortunate limitation of the ECB's design by a group of nation states that have not yet decided whether they prefer greater unity or greater devolution. For the BOJ, the fundamental problem is its deep institutional fear of rocking the boat politically, and thus its inability to play the role of chief economist.

As a result, America's Fed chairman today commands super-normal influence. Perhaps some day this unbridled power will be reigned in by a resurgent ECB and BOJ. In the meantime, we can only be relieved that by chance or by fate, President Bush has actually appointed a worthy replacement for Greenspan. It could have been a disaster.

Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics at Harvard University.