Smith Faculty Opinion Article - October 24, 2005

Ben Bernanke
By Dr. Peter Morici, Professor of International Business

President Bush is expected to name Ben Bernanke to replace Alan Greenspan. He appears to be giving Wall Street exactly what it asked for: an inflation hawk. That would pose real dangers but don't pigeon hole him too soon.

Bernanke is a strong advocate of inflation targeting but as simple and elegant as that sounds, it can prove an unrealistic goal. These days, too much of the inflation challenge stems from structural issues beyond the control of the Fed for example, hypergrowth in China and the resulting pressures on oil prices, and the mismanagement of energy policy and resulting shortages of refining and natural gas capacity.

Inflation targeting can result in overreaction to surges in commodity prices that the Fed cannot affect at the expense of sacrificing growth the Fed can help the economy accomplish. The end result would be rising unemployment and falling wages stagflation.

Wall Street, whose view of the economy rarely extends beyond two quarters, wants an inflation hawk, even if it is at the expense of sacrificing growth and the interests of ordinary working Americans. That is even sadder because too much attention to inflation is bad for Wall Street too.

The Fed is charged with both maintaining stable prices and sustaining growth. Bernanke, while on the Fed Board, advocated attention to the output gap that counsels more moderation from strict inflation targeting and concern about unemployment. However, Wall Streets fixation with inflation even inflation that is inevitable and beyond the reach of the Fed--kept any viable candidate from talking too much about the importance of the Feds joint responsibilities.

Just like a Supreme Court nominee, we really wont know how Bernanke will vote, until he is on the job.