Tuesday 25 October 2005

Bernanke

In the past, I have written repeatedly about Alan Greenspan, chairman of the Federal Reserve (the US central bank) and savior of the world economy. It is rare for anyone to get such acclaim while still alive, but then again a lot of people his age are not alive anymore: He is almost 80. For this reason more than anything else, he is stepping down on January 31st. It is unfortunate that this happens during George Bush's reign in the White House, for selecting his replacement is a decision that requires great insight and has consequences for decades to come. Whatever good you may say about Bush, there is no hint of economic insight. His time as President has so far shown the fiscal constraint of a teenager with dad's credit card. The government, along with the nation as a whole, is plummeting into debt at an amazing speed. And Bush's board of economic advisers is currently led by Ben Bernanke. The man who, starting February 1st, will be Greenspan's successor as chairman of the Fed.

When presented like this, the choice of Bernanke sounds like an unmitigated disaster. But the financial markets have reacted with great cheer. Of course, part of this could be that they had prepared for worse. They had reason to, because the previous nomination by Bush (to the Supreme Court) was someone totally unqualified for the position, based on personal friendship rather than any consideration for the impact on society as far as anyone can see. In contrast, Bernanke is actually an intelligent man and highly qualified. A former professor of economics, he has also served as a governor at the Federal Reserve until recently. He has worked fairly closely with Mr Greenspan and is thought to hold similar opinions on main issues. He has also promised to carry on the current monetary policy without major changes. And truth to tell, he has only headed Bush's economic advisers for a short time, starting long after the current disastrous debt spree was firmly entrenched.

Was Bernanke the best choice? Possibly not, but close to it. He may be a too academic and "armchair" economist with a lack of hands-on business experience and connections. But I am hardly in a position to judge him on that! More worrying is the opinion he has voiced lately, that the trade imbalance and lack of savings is "not made in the USA". He is a main proponent of the "savings glut" theory, in which excessive saving elsewhere in the world is drowning the USA in cheap money. Many are taking this to mean that it is not a problem, and indeed Bernanke seems to have uttered doubt as to whether it really is. But a negative savings rate – that is, people are spending more than they earn – is certainly not sustainable. And it is equally certain that the longer and more intensely people live over their means, the more will it hurt at some future point. It may be that this is far into the future and very gradual. But perhaps not. It depends on factors that are most decidedly not made in the USA. If the world gets fed up with lending to a nation that shows no sign of paying back, or if the US foreign policy manages to severely aggravate its main creditors, things could get very nasty very fast. Given that some of these creditors include China and the world's main oil exporters, the latter option is not to be taken lightly.

It may be that Bernanke has chosen to mouth a theory that justifies Bush's practice, in order to get the somewhat simpleminded President to trust him. If so, he has succeeded. And he must have known for quite a while that he was one of the likely candidates for this job, which speaks in favor of such a maneuver. If so, he will soon be in a position to show his true heart. To save the world economy again may be a tough call. If he can even save the United States from the effects of its current government, he will win a place in the history books.