The Hindu Business Line : Getting out of the Greenspan groove

For a person who comes through, in his speeches and writings, as a person with a mind of his own, the new US Federal Reserve chief-designate, Dr Ben Bernanke, is unlikely to tamely toe the line of his illustrious predecessor, Mr Alan Greenspan. He can be expected to take a firm hold of the organisation, especially when he thinks he has alternative approaches better suited to the current economic scenario, says B. S. Raghavan.

Old order changeth, yielding place to new,

And God fulfils himself in many ways,

Lest one good custom should corrupt the world.

— Lord Tennyson, Morte d'Arthur

THE CHANGE of guard at the US Federal Reserve is a momentous event whenever it happens, because its Chairman is the pivot round which the whole institution revolves. It is all the more portentous now, when someone who strode like an oracular colossus for 18 years is being replaced by one who has made his mark as a low-key scholarly academic and got to be known only when he was nominated for the post of Chairman by the US President, Mr George Bush, to succeed Mr Alan Greenspan.

The keen interest in the change over is not simply because the Fed, like Zeus on Olympus, can hurl its monetary policy thunderbolts to keep the world's most formidable and complex economy on an even keel by attuning the monetary and credit conditions and behaviour of the financial markets to the imperatives of the safety, stability and soundness of the US' entire banking and financial system. It is also because its decisions on the monetary front are bound to have implications for the trade, financial and business transactions, both within the US and round the world.

On the surface, the signals that the Fed Chairman sends through his public statements, Congressional testimony and policy announcements may relate to the exigencies of the situation within his own country, but the ripple effects, for good or bad, tend to be worldwide.

Hence, his credentials, convictions and conclusions should be of interest to policy-makers in governments, central banks and business and industry everywhere. Keeping tabs on his sayings and doings pays not only in taking countervailing measures to head off any upsets but also to draw and apply the needed lessons in what works and what does not.

Rich and prolific output

Dr Ben Bernanke, till recently Chairman of the US President's Council of Economic Advisers, and before that Professor of Economics at Princeton University, has since been confirmed by the US Senate Committee on Banking, Housing and Urban Affairs.

It is a recognition of the high respect he enjoys for intellectual and professional attainments that the whole process of hearings and confirmation was completed in less time than in the case of any other official nominee in recent memory.

He has got off to a flying start with the enthusiastic and unreserved support of the US Congress, academia, media, economic players and the general public. No other person, including Mr Greenspan, has become a Fed chairman with such a rich and prolific output of scholarly writings of great depth and clarity on issues that touch on crucial aspects of the nation's economy.

This is what will distinguish his tenure from that of Mr Greenspan who seldom committed himself to specifics, leaving it to the bulls and bears of the bourses and overwrought columnists who hung on his every word to interpret his misty pronouncements as best they could. There is, in fact, a view among observers that he was more style than substance, and over-rated as a Fed Chairman. He was also apt to trim his sails to the winds blowing from the White House.

In all these respects, the expectation is that Dr Bernanke will bring a different culture to the Fed, in line with his categorical assurance to the Senate Committee that he would preserve the institution's independent and non-partisan status and be strictly independent of all political influences, guided solely by the Fed's mandate from the US Congress and by the public interest.

In terms of both his background and mental make-up, Mr Bernanke would be more of a brisk and crisp delineator of the character and prospects of the economy at any given time.

Yet another dimension to his stewardship would be that, unlike Mr Greenspan, whose analysis tended to be home-brewed, and who was out of sync with the concomitants of the New Economy, Dr Bernanke's is likely to have a global sweep, paying attention to the connectivities and interdependence of developments outside the borders of the US.

In this sense, he will have no hesitation in steering the Fed out of the Greenspan groove.

No doubt, in his statement to the Senate Committee at the confirmation hearing, with seeming humility, he paid a tribute to his predecessor for his legacy of a monetary policy which "has been executed with both careful judgment and flexibility" and declared his avowed objective to be to give "top priority" to maintaining "continuity with the policies and policy strategies of the Greenspan Fed".

One can be sure that this was only a ritualistic politeness meant for the record. For, in his speeches and writings, Dr Bernanke comes through as a person with a mind of his own, and determined to forge ahead in a decisive and self-assured manner.

It will go against the grain of such a person to be tamely toeing the line of his predecessor.

He can be expected to take a firm hold of the organisation from the moment of assuming office, especially when he thinks he has alternative approaches better suited to the current economic scenario.

Down-to-earth signpost

For instance, Dr Bernanke has for long been ardently advocating the pegging of inflation within a specified range as a sure-fire incentive to take the scale and magnitude of investment, growth and employment to new heights.

This stems from his conviction that, as he put it to the Senate Committee, "Providing quantitative guidance about the meaning of `long-term price stability' could have several advantages, including further reducing public uncertainty about monetary policy and anchoring long-term inflation expectations even more effectively."

From this perspective, he left the Committee in no doubt that he would ask the Federal Open Market Committee "to state explicitly the numerical inflation rate or range of inflation rates it considers to be consistent with the goal of long-term price stability."

This kind of down-to-earth signpost to the new role of the Fed is in itself a radical departure from the deliberately nebulous formulations spun out by Mr Greenspan. While Dr Bernanke talks of providing quantitative guidance about the meaning of long-term price stability, Mr Greenspan would go no farther than saying, on a leave-it-or-lump-it basis, "[P]rice stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision making."

That inflation targeting is going to be the centrepiece of his monetary architecture admits of no doubt. Indeed, he regards it as capable of ushering in "long-term price stability as monetary policy's greatest contribution to general economic prosperity and maximum employment".

In pitching for it, Dr Bernanke is on the same wavelength as the IMF, which, in an article of September 2005, well before his nomination, came out with an insightful analysis of the usefulness of inflation targeting in emerging market economies, based on a detailed survey of 31 central banks, and taking into account their macroeconomic performance.

One of the points it makes is that, apart from the potential benefits of adding to the credibility of monetary mechanism, and being "intrinsically clearer and more easily observable and understandable than other targets", inflation targeting also entails "lower economic cost in the face of monetary policy failures (than) under alternative monetary commitments, like exchange rate pegs, usually involving massive reserve losses, high inflation, financial and banking crises, and possibly debt defaults"

Drum-beat of inflation targeting

India, then, had better brace itself for the drum-beat of inflation targeting reaching its shores also in Dr Bernanke's watch.

It is for the RBI to take the bull by the horns and undertake an examination of the pros and cons of it in the Indian context. However, the effectiveness and successful adoption of any such new monetary instrument is contingent upon the central bank enjoying total and complete independence in respect of the policies it wants to pursue.

But, as Dr Anand Chandavarkar puts it in a recent article in The Economic Political Weekly: "The Reserve Bank of India alone has remained inexplicably immune to reform and the global trend of legal independence and modernisation of central banks. It has dwindled to a quasi-fiscal agency with a consequent loss of status and influence. India has political and fiscal federalism, but lacks monetary federalism."

Thereby hangs another tale, which will be told at some future date. Watch this space!

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