Bernanke’s performance

Ben Bernanke took over from Alan Greenspan as Fed Chairman in February 2006. Since then he has slowly but surely demonstrated that he is coming to grips with his job.
The most important quality of a central banker in my opinion is focus. A central banker must focus on a few key issues and forget everything else. Bernanke has not allowed himself to be distracted by the US sub prime mortgage crisis. He has refused to respond to calls for easier money. He realizes that lowering interest rates in a bid to rescue this troubled market might lead to excess borrowing and inflationary pressures in other sectors of the economy.
Endorsing Bernanke’s stand, Prof. Allan Meltzer of Carnegic Mellon recently mentioned in a Businessweek report: “The people on Wall Street are making a lot of noise because they do not like to lose money… it would be a huge mistake to change policy to rescue a bench of people who made stupid mistakes. Capitalism without failure is like religion without sin. It doesn’t work.”

At the same time, Bernanke has shown flexibility when needed. Just a couple of days back (on August 17) the Federal Reserve cut the discount rate by 0.5% to 5.75%. The Fed admitted market conditions and increased uncertainty could slow down growth in the months to come. The move came amidst worries that problems in the mortgage sector could affect the real economy.

Bernanke’s general philosophy seems to be that in the long run, low inflation promotes stable, job generating growth. He is quite happy to keep interest rates high to check inflation, even if some people are unhappy. As Business week concluded: “Clearly this is one soft spoken professor who knows how to say no.” (Bernanke had taught at Princeton from 1985 to 2002.)
The growing stature of Bernanke is also a tribute to the strength of the Fed as an institution. The Fed has produced three top class leaders in a row- Paul Volcker followed by Greenspan and now Bernanke. Clearly the Fed knows how to choose its leaders and give them a free hand to run the place according to their discretion.