By Robin Harding
Published: August 27 2010 21:50
It might as well have been a vacuum cleaner sales convention for all the tourists at the Jackson Lake Lodge appeared to care on Friday about the bookish group of people in the Explorers room. They looked instead across the stillness of the lake to the peaks of the Teton Range in Wyoming.
Yet inside the room a mild-mannered ex-academic – chairman Ben Bernanke of the Federal Reserve – was giving a speech that will affect all of their lives. Financial markets were hanging on his every word delivered at the annual Jackson Hole symposium.
The stakes for the world’s most important central banker are higher now than at any time since the depths of the financial crisis. The US economic recovery is faltering; growth in the second quarter was revised down to 1.6 per cent. Not only is that not fast enough to bring down unemployment, it may even start to rise again.
As he appeared to signal on Friday, Mr Bernanke may soon have to take the momentous step of leading his colleagues on the Federal Open Market Committee – some of them unwillingly – into a new round of quantitative easing. That would mean pumping cash into the economy by buying billions of dollars of assets in an effort to boost activity.
It will be a test of his economic judgment, of his fortitude, and of his consensual leadership style. “He’s a very gentle leader but someone who knows how to lead,” said Randall Kroszner, a Fed governor with Mr Bernanke from 2006 to 2009, and now a professor at the Chicago Booth business school.
In contrast to Alan Greenspan, his often autocratic predecessor, Mr Bernanke likes to build consensus on the FOMC. Whereas Mr Greenspan would go first when the committee stated its views on policy – and so dominate the process – Mr Bernanke waits until the end, sums up what everyone said, and then gives his own view.
That has led to fears that the Fed could be paralysed by a search for consensus if, as it is today, the committee is divided about the need for action. But people who attend the FOMC say that is to misunderstand Mr Bernanke’s character and methods. Mr Bernanke has his colleagues’ respect and, even if they disagree strongly, the FOMC is likely to follow him wherever he wants them to go.
Born in August 1953, Mr Bernanke grew up in Dillon, South Carolina, which had a population then, as now, of a few thousand people. He always seemed destined for stardom, albeit at first as an academic: he skipped first grade, topped his state of South Carolina in college entrance exams and then went on to Harvard and MIT.
With his research on the Great Depression and inflation targeting, he seems almost freakishly suited to the role of crisis central banker. Yet despite his august style and CV he has endured more criticism than almost any other central banker, some of it fair for his failure to diagnose the housing bubble in 2005 and 2006, and some of it less so for his role in the banking bail-outs of 2008.
The result is that, despite all Mr Bernanke’s achievements, his reputation is fragile. So closely does the world watch its central bankers that, if he is seen to fail now, he will face a tide of ranting commentary.
Mark Gertler, a long-time co-author with Mr Bernanke and now a professor at New York University, first met him when he was a newly-minted PhD in 1979. “He was considered one of the top students on the market – people already knew him by reputation,” he says. “I would describe him as an intuitive thinker. He’s very quick and he’s not someone to write down a lot of equations, although he’s capable of doing it.”
Certainly his record and demeanour stand him in good stead in the eyes of his colleagues. In 2002 and 2003 he gave speeches on how to avoid deflation in the US and about what Japan should do to escape its deflationary slump. Laurence Meyer, a former Fed governor and now vice-chairman of Macroeconomic Advisors, says that the 2002 paper has been a roadmap for the Fed.
Many colleagues remark on how calm he was during the worst of autumn 2008 – when total collapse of the banking system seemed possible – but say it was not joy in the battle or the phlegmatic calm of an unimaginative man. Rather, Mr Bernanke decided that being calm would work best. One person who was in a meeting with him early in the crisis remembers his saying: “We have to choose to be calm.”
Another hallmark of the Bernanke style is straightforwardness – something that confuses the market almost as much as the more cryptic remarks of Mr Greenspan. When Mr Bernanke told Congress in July that the economic outlook was “unusually uncertain” markets pounced on the phrase. Did the Fed think the economy was collapsing? Was it a coded signal about policy? The literal meaning of his words was probably all that Mr Bernanke intended.
As an appointee of George W. Bush, Mr Bernanke was always going to be viewed with some suspicion by the Obama White House, which helped to fuel the speculation about whether he would be reappointed to a second term. He does not seem to enjoy his visits to testify in Congress, often tensing visibly in the face of hostile questions.
The criticism that matters, though, is that by not easing policy any further since mid-2009 he has chosen to tolerate a grim economic outlook, in which there is no new depression but unemployment remains high for years. The Princeton economist Paul Krugman has called the Fed’s current policy “grossly inadequate” and “logically bizarre” . He argues that the Fed should already be buying more assets.
The judgment that he has made, and not changed so far, is that the uncertain benefits of boosting the Fed’s balance sheet from $2,000bn to $4,000bn or $6,000bn are outweighed by the costs and risks of doing so. He will have to judge if and when that is no longer the case. “Everything I know about Bernanke is that his instinct is to be aggressive. There’s no way on Earth he wants to be the Fed chairman who lets the economy deteriorate,” says Mr Gertler.
Much lies outside his control – not least politics that have stifled the chance of another stimulus – but he will not be remembered as a great chairman if he rescues the economy from a financial crisis, only for it to suffer a lost decade.
Copyright The Financial Times Limited 2010
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