Yale faculty expressed support for newly-appointed Federal Reserve Chairman Ben Bernanke, who was appointed Wednesday, replacing former chairman Alan Greenspan.
Yale College and School of Management professors said the media stereotype of Bernanke as an academic — he taught and chaired the economics department at Princeton University — does not take into account his extensive experience in Washington. Bernanke has served on the Federal Reserve’s Board of Governors and most recently chaired the President’s Council of Economic Advisors.
Yale economics professor Ray Fair said he thinks Bernanke’s experience at the Fed and on the CEA has given him a fair amount of background in policy-making.
“He’s not just some Ivory Tower guy who dropped into this position,” said Fair, whose research focuses on macroeconomics. “In my personal opinion, Bernanke will make a fine Fed chairman.”
SOM professor Martin Shubik said he thinks Bernanke’s academic and political experience will benefit him in his four-year term as Fed chairman and in his new 14-year term as a member of the Fed’s Board of Governors.
“He was a distinguished member of the Princeton economic faculty, which is very good,” Shubik said. “While you can have academics who are totally incapable of making policy decisions, I think he’s indicated already by his professional record that he is in fact capable of doing so.”
Economics professor William Brainard said he thinks Greenspan will be a tough act to follow. During his tenure as Fed chairman between 1987 and 2006, Greenspan earned plaudits for his management of the American economic boom and the surge in stock prices that lasted through much of the 1990s. Greenspan also was noted for his ability to quiet investor and consumer concerns.
“One reason for the Fed’s, and Greenspan’s, excellent reputation is the quick and effective way it has navigated through events, like 9/11, that could have become major financial crises,” said Brainard, who specializes in monetary policy.
Increased openness in the Fed has been one of Greenspan’s key innovations. After his last meeting with the Federal Open Market Committee on Tuesday, Greenspan not only announced that short-term interest rates would rise, but indicated that further rate hikes were likely to follow.
“The Fed is much more transparent today in communicating its intentions and economic view than it was at the beginning of Greenspan’s term,” Brainard said. “Communication has definitely become an important element.”
But certain aspects of the national economy may be more troubling. Bernanke’s Fed faces a trade deficit of unprecedented size as well as a substantial federal deficit.
“The puzzle to many economists is that we’ve managed to go on so long with our large [current account] deficit, and there is general concern that an adjustment to near balance could be quite disruptive,” Brainard said. “A rapid depreciation of the dollar would create problems for the Fed and policy makers at central banks in many countries.”
The main problem in contending with the twin deficits from a policy perspective is that in some sense the sustainability of the deficits defies economic experience thus far, experts said.
“One of the main open questions is that we don’t know if this situation will gradually improve or lead to greater problems,” Fair said. “We don’t even know what those problems might be, much less how to efficiently prepare for them.”
As for Bernanke’s next move, Fair said there is no pattern for what to expect from a new Fed chairman.
“Bernanke has said he’ll more or less have business as usual,” Fair said. “I think he was a fine choice, but you never know until you’ve seen a few years of behavior.”