Pitching Curves
Outspoken Ben Bernanke is shaking up the Federal Reserve
The world got its first glimpse of Bernanke's economic acuity in 1983 when, while he was an associate professor of economics at Stanford's business school, the American Economic Review (a journal that later appointed him editor) published his groundbreaking paper on the Depression. Before, economists laid all the blame for the stagnation of the 1930s on the Fed for letting the money supply fall in the face of the banking panic that followed the 1929 stock market crash. But Bernanke's research concretely linked the Depression's severity to a seizing-up of the financial system. "Ben redirected people's attention back to the problem of defaulting loans and bonds and the resulting inability of financial institutions to move credit from lenders to borrowers," says Harvard University monetary policy expert Benjamin Friedman.
Analyzing the Depression etched into Bernanke's economic soul a deep and abiding respect for the dangers of deflation, a general decline in prices that can lead to a downward spiral of production cutbacks and rising unemployment, as happened in the United States in the 1930s and more recently in Japan. Bernanke continued to quench his thirst for Depression-era wisdom at Princeton University, where he served in the economics department from 1985 (the last seven years as chairman) until his Fed appointment. He's widely credited with attracting even more impressive talent to the Princeton faculty.
During those Princeton years Bernanke got an education of another sort. For six years, he was a member of the board of education of New Jersey's Montgomery Township, which met every Monday night. "I learned something, I think, about public service, about working with other people, and dealing with sometimes emotional or otherwise highly charged issues," says Bernanke, who returns every weekend to the same community, where he lives with his wife, Anna, a middle school Spanish teacher, and their two children. "After that experience, working on the board of governors is just so relaxing." Bernanke says school board tenure awoke in him a desire for public service and forged many of the skills he uses at the Fed. "Ben was like E. F. Hutton in those old ads," says school board President Linda Romano. "When he spoke, people listened."
And Bernanke has a lot to say, especially now, about deflation and two of its main causes: the current slack labor market and low factory utilization. His handprints were visible in May when the Fed stunned markets by citing deflation as a bigger risk than inflation. After decades of fighting rising prices, the Fed now seems to be working toward what Bernanke calls the "Goldilocks" level of inflation--neither too high nor too low.
Of course, Greenspan led the way in the robust 1990s by allowing unemployment to fall well below levels previously thought inflationary. To that experimental approach, Bernanke, Fed watchers say, has added a new emphasis on the equal danger of deflation, a factor that may strengthen the bank's reluctance to raise its benchmark interest rate from its 45-year low even if the economy maintains its recent fast growth. Continuing the easy money, which some say flirts with inflation, would reflect Bernanke's view that it's a lot harder to stop deflation once it takes hold than to deal with a bit of inflation. Even more than in the 1990s, the Fed, which traditionally felt the need to steal the punch bowl just as the party was getting started, now seems happy to spike the punch.
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