Ben Bernanke

Ben Bernanke was a great choice for Federal Reserve chairman. He's not particularly political (the way Martin Feldstein, another guy on Bush's shortlist, is), he's not a Bush crony (like Glenn Hubbard and Lawrence Lindsay, two other short-list guys), he's got strong and sensible views on monetary policy, he's an extraordinarily accomplished academic, and supposedly he's widely respected in financial markets. Attaboy George, you finally got one right!



What can we expect from Bernanke that we don't get from Greenspan? I suspect less testimony to Congress on nonmonetary issues like budget deficits and Social Security -- which, given Greenspan's position on these issues, is for the good. We'll get essentially the same monetary policy, with one addition: inflation targets. Bernanke will try to get the Fed to adopt some type of formal inflation target system like the European Central Bank, Bank of England, Bank of Canada, and the list goes on and on have. In an inflation targeting system, the Fed says something like: we'd like to keep the CPI inflation rate at about 2%, give or take, over the medium term. So if inflation pops up to 3% this month, we won't panic, but if it stays at 3% for very long, we'll raise interest rates and slow the economy down. This is perfectly sensible policy. The Fed doesn't do this now for reasons that aren't clear to me. Greenspan says it's because we don't know how to measure inflation very well, but that doesn't seem like a sufficient reason. I think it's because he doesn't want to tie his hands, but that's the whole idea: an inflation target commits the Fed to not having an asinine monetary policy, like one that allows inflation to go into double digits or one that tolerates deflation.



There's a lot of devil in the details on inflation targets. The ECB, for example, does it wrong: their target says they don't want inflation to be greater than 2%, but says nothing about inflation below 2%. Therefore monetary policy in Europe has a deflationary bias, part of the reason for Europe's slow growth recently. Britain does it right. Read their inflation reports -- they're works of art!