Bernanke breaks with Greenspan, stresses forecasts, consumers
Monday, 23 July 2007
Craig Torres
Federal Reserve Chairman Ben S. Bernanke's appearance before Congress marked his clearest break yet with predecessor Alan Greenspan.
In two days of testimony last week, Bernanke emphasized the Fed's predictions for growth and inflation and devoted about half his time to discussing consumer protection. In doing so, he shunned the practice of Greenspan, who distrusted forecasts and was suspicious of regulation.
``This is not Uncle Alan's semiannual report,'' said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, who has criticized the Fed for dragging its feet on banking regulation. ``We are moving forward.''
Bernanke made the outlook of the entire Federal Open Market Committee the centerpiece of his remarks, and then discussed the risks. He said the economy will continue to expand, framed by the opposing risks of faster inflation and the housing slump. When he was done, bond prices had barely moved, a sign that he has aligned investors' outlook with that of the Fed.
Greenspan, 81, ran the Fed for almost two decades until January last year. In his February 2005 testimony, he never referred to the committee's forecast. Instead, Greenspan wove his own analysis of productivity, a ``most unusual'' lag in capital spending, credit spreads, the break-up of the Soviet Union and the integration of China and India into the global economy.
He also mentioned the 10-year German Bund yield and tossed Fed watchers their phrase of the day: ``the broadly unanticipated behavior of the world bond market remains a conundrum.''
Former Fed governor Laurence Meyer said Greenspan distrusted macroeconomic models and relied on instincts developed over years as an independent consultant.
``Greenspan had this wonderful intuition that was honed through a lifetime of experience,'' Meyer said. Still, it was hard for Greenspan to talk about a model or a forecast. ``He wasn't thinking about it in the same framework.''
Greenspan was able to spot trends long before conventional economists picked them up, and his policies produced the longest economic expansion in U.S. history from 1991 to 2001.
Identifying the productivity surge in the 1990s was ``his most spectacular success,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``He was able to figure something out that was outside the consensus.''
Greenspan's personalized approach also centralized authority in the office of the chairman. Bernanke, who has also praised the former chairman's acuity, disliked that style, according to his writings as an academic and comments as Fed governor from August 2002 to June 2005.
Months after he became chairman, Bernanke, 53, commissioned a subcommittee on communications, and gave it the goal of making Fed decision-making more transparent. Bernanke wants credibility to be vested in the institution, not the person who leads it.
``It is not that Chairman Bernanke is ducking the authority,'' Posen said. ``Bernanke is consciously giving the FOMC more room to run.''
The prominence of the committee's forecast in this week's remarks may also indicate what the communications subcommittee might do, economists said. The outlook could be explained with a narrative that discussed large themes such as how a declining labor force participation rate may be slowing the overall trend rate of growth.
``That will be an important enhancement,'' Meyer said. ``They left us to parse out a little more than we should have.''
One challenge, Meyer said, is coming up with a process where FOMC members could come to an agreement on what he calls ``the narrative'' behind the numbers.
If that proves difficult, then the communications subcommittee could provide more detail on the risks to the forecast, which Bernanke also discussed in his testimony and FOMC members may find easier to agree on.
Members of Congress also noted that it was unusual for a Fed chairman to commit to a rule on consumer protection before the central bank had completed its own formal review process.
``This is an unprecedented thing,'' said Representative Charles Wilson, an Ohio Democrat. ``We are on a good path with this new man.''
The Fed's Board of Governors held a public hearing on June 14 on whether it should use its authority to prohibit or restrict certain mortgage products and practices. Banks have until Aug. 15 to comment. Still, Bernanke concluded from the evidence already in hand that a rule was warranted.
Bernanke is probably as concerned as his predecessor about the costs of regulation, and as skeptical about its effects, Posen said.
The difference is that Bernanke has taken the Fed's consumer protection mandate from Congress at face value.
Bloomberg
Federal Reserve Chairman Ben S. Bernanke's appearance before Congress marked his clearest break yet with predecessor Alan Greenspan.
In two days of testimony last week, Bernanke emphasized the Fed's predictions for growth and inflation and devoted about half his time to discussing consumer protection. In doing so, he shunned the practice of Greenspan, who distrusted forecasts and was suspicious of regulation.
``This is not Uncle Alan's semiannual report,'' said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, who has criticized the Fed for dragging its feet on banking regulation. ``We are moving forward.''
Bernanke made the outlook of the entire Federal Open Market Committee the centerpiece of his remarks, and then discussed the risks. He said the economy will continue to expand, framed by the opposing risks of faster inflation and the housing slump. When he was done, bond prices had barely moved, a sign that he has aligned investors' outlook with that of the Fed.
Greenspan, 81, ran the Fed for almost two decades until January last year. In his February 2005 testimony, he never referred to the committee's forecast. Instead, Greenspan wove his own analysis of productivity, a ``most unusual'' lag in capital spending, credit spreads, the break-up of the Soviet Union and the integration of China and India into the global economy.
He also mentioned the 10-year German Bund yield and tossed Fed watchers their phrase of the day: ``the broadly unanticipated behavior of the world bond market remains a conundrum.''
Former Fed governor Laurence Meyer said Greenspan distrusted macroeconomic models and relied on instincts developed over years as an independent consultant.
``Greenspan had this wonderful intuition that was honed through a lifetime of experience,'' Meyer said. Still, it was hard for Greenspan to talk about a model or a forecast. ``He wasn't thinking about it in the same framework.''
Greenspan was able to spot trends long before conventional economists picked them up, and his policies produced the longest economic expansion in U.S. history from 1991 to 2001.
Identifying the productivity surge in the 1990s was ``his most spectacular success,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``He was able to figure something out that was outside the consensus.''
Greenspan's personalized approach also centralized authority in the office of the chairman. Bernanke, who has also praised the former chairman's acuity, disliked that style, according to his writings as an academic and comments as Fed governor from August 2002 to June 2005.
Months after he became chairman, Bernanke, 53, commissioned a subcommittee on communications, and gave it the goal of making Fed decision-making more transparent. Bernanke wants credibility to be vested in the institution, not the person who leads it.
``It is not that Chairman Bernanke is ducking the authority,'' Posen said. ``Bernanke is consciously giving the FOMC more room to run.''
The prominence of the committee's forecast in this week's remarks may also indicate what the communications subcommittee might do, economists said. The outlook could be explained with a narrative that discussed large themes such as how a declining labor force participation rate may be slowing the overall trend rate of growth.
``That will be an important enhancement,'' Meyer said. ``They left us to parse out a little more than we should have.''
One challenge, Meyer said, is coming up with a process where FOMC members could come to an agreement on what he calls ``the narrative'' behind the numbers.
If that proves difficult, then the communications subcommittee could provide more detail on the risks to the forecast, which Bernanke also discussed in his testimony and FOMC members may find easier to agree on.
Members of Congress also noted that it was unusual for a Fed chairman to commit to a rule on consumer protection before the central bank had completed its own formal review process.
``This is an unprecedented thing,'' said Representative Charles Wilson, an Ohio Democrat. ``We are on a good path with this new man.''
The Fed's Board of Governors held a public hearing on June 14 on whether it should use its authority to prohibit or restrict certain mortgage products and practices. Banks have until Aug. 15 to comment. Still, Bernanke concluded from the evidence already in hand that a rule was warranted.
Bernanke is probably as concerned as his predecessor about the costs of regulation, and as skeptical about its effects, Posen said.
The difference is that Bernanke has taken the Fed's consumer protection mandate from Congress at face value.
Bloomberg