Pitching Curves
Outspoken Ben Bernanke is shaking up the Federal Reserve
As a graduate student in economics at the Massachusetts Institute of Technology in the 1970s, Federal Reserve governor Ben Bernanke was obsessed with two of the 20th century's biggest sources of misery: the Great Depression and the Boston Red Sox. "I missed a lot of classes my first fall at MIT because of the Boston-Cincinnati World Series," he says. The BoSox lost and have brought Bernanke mostly sorrow since. "I've been trying to wean myself from them since 1986," the year of their heartbreaking series defeat to the Mets, he says. The Depression, on the other hand, has been propelling Bernanke's career and shaping his thinking for nearly three decades.
Bernanke's thinking matters a great deal these days. Tapped by the White House in August 2002 to fill an unexpired term on the central bank's governing board, the Princeton University economist couldn't have been appointed at a more pivotal time. As a leading monetary policy scholar and now the resident intellectual at the Fed, Bernanke and his innovations on fine-tuning the economy will be important to maintaining the momentum of a still uncertain recovery while remaining ever vigilant for signs of overheating. At the same time, with job gains anemic and a presidential election looming, Bernanke and his fellow policymakers will find themselves under enormous pressure to keep the stimulus throttle open.
With Fed Chairman Alan Greenspan edging closer to retirement--almost certainly by 2006--Bernanke has quickly emerged as one of the top candidates to fill the maestro's shoes. That status has thrust his controversial ideas front and center, potentially altering the very way the Fed goes about achieving its congressionally mandated objectives of maximum employment, stable prices, and moderate long-term interest rates. "Bernanke is one of the liveliest minds to sit on the Fed board in a generation," says former Fed governor Laurence Meyer.
A meditative man and quiet Republican ("He does not wear his ideology on his sleeve and never, ever lets it affect his work," says economist Alan Blinder, a longtime friend and colleague), the 50-year-old Bernanke seems an unlikely firebrand. Studious and even bookish are adjectives that come to mind. Raised in Dillon, S.C., a farm hamlet near the North Carolina border, Bernanke, son of the town druggist, was an academic standout from the start. In high school he earned 1590 on the SAT, the highest score in the state. Yet perhaps Bernanke's greatest early source of mingled pride and disappointment came in sixth grade. He won the state spelling bee, but by adding one too many "i"s to the word "edelweiss"--the mountain flower made famous by the 1965 movie The Sound of Music --Bernanke lost the national championship and a chance to appear on The Ed Sullivan Show. "We lived in a small town that had no movie theater," Bernanke explains. (Can he spell it now? "I'll leave that as an open question," he says.)
Epiphany. Bernanke took highest honors in economics at Harvard in 1975 and a Ph.D. from MIT in 1979. At MIT, Bernanke began a lifelong search for what he calls "the holy grail of macroeconomics," the roots of the Depression. Those years were "a fascinating period of political and economic folly and genius," he says, and "a situation where bad economic thinking had very large and direct effects on human welfare, including being a major cause of World War II." Studying that cataclysm is akin to studying earthquakes to learn about geology. "Such a huge event gives you much better insight into the underlying workings of the system."
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.
Avoiding deflation is also a factor in Bernanke's advocacy of a monetary policy device--untested in the United States--called inflation targeting. In short, inflation targeting would require the Fed to articulate and work toward a long-term, Goldilocks level of inflation. It would effectively codify Greenspan's method of intuition and improvisation, thereby shifting market confidence from a person to an institution. Frederic Mishkin, a Columbia Business School economics professor and Bernanke's frequent coauthor, boils it down to the question, "How do you get the benefits of Alan Greenspan when he's not around anymore?"
Boxed in. Some critics believe such a policy could shackle the Fed, leaving it little wiggle room when economic shocks--think oil price spikes--arrive without warning, says Tom Schlesinger, executive director of the Financial Markets Center, a Philomont, Va., firm that tracks the Fed. Greenspan is also wary of targeting, noting recently that it is "highly doubtful" it could lead to improvement in the economy, strong words from the usually subdued chairman. But Bernanke maintains that rigidity is not part of his vision. "It's a relatively soft version of inflation targeting which would respect concerns that people have about tying our hands too much and reducing our flexibility." Schlesinger doesn't buy it. "Flexible inflation targeting is like being partly pregnant; either you're targeting or you're not."
It is not just inflation goals Bernanke wants to make clear. He continues to campaign for greater overall transparency at the oft-mysterious Fed, including quantitative forecasts and promptly published meeting minutes. Currently, the Fed provides only qualitative assessments of the economy and publishes minutes after they've become irrelevant, critics say.
A plain-spoken man, Bernanke delivers speeches that are paragons of clarity and simplicity, a stark contrast to those of the oracular Greenspan, who often seems to speak in tongues. "Bernanke's taking the mystery out of the secrets of the temple," says Paul McCulley, a Fed expert at bond giant Pacific Investment Management Co.
Such efforts could one day mean that the Fed's policymakers no longer mire the McCulleys of the world in Talmudic debate over the precise meanings of terms such as "considerable period" and "roughly equal," as the Fed's December pronouncement did. Could this be the end of Fed-speak?
This story appears in the December 29, 2003 print edition of U.S. News & World Report.