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Bernanke nominated for reserve chairman

Oct. 25, 2005

by ANALIZ GONZALEZ, staff writer

President Bush nominated White House Economic Adviser Ben S. Bernanke as Federal Reserve Chairman on Monday -- a move that led to a 170-point rise in stocks, economics professor David VanHoose said.

Greenspan & Bernanke
"Today, the market seemed to react favorably," VanHoose said. "I think they would've reacted less favorably with (the nomination of Harvard Professor Martin) Feldstein who supported higher taxes."

VanHoose said when Alan Greenspan succeeded Paul Volcker as chairman, the stock market dropped.

The drop upon Greenspan's nomination may have been "due to a sense that Volcker felt somewhat forced out, whereas in this situation, it was clear Greenspan was leaving and that Bernanke was a known commodity," he said.

Bernanke, whose nomination is still subject to Senate confirmation, said Monday his first priority as chairman would be "to maintain continuity with the policy and policy strategies under the Greenspan era."

Despite Bernanke's pledge to follow in Greenspan's footsteps, Bernanke is a supporter of inflation targeting, a practice not followed by Greenspan, VanHoose said.

"That might be the biggest change we will see in Bernanke," he added.

VanHoose said inflation targeting is when the Federal Reserve announces target inflation rates, causing stress to maintain the targeted rate.

"Adhering to an inflation target could help maintain the Fed's credibility," VanHoose said. "Some economists, including me, would prefer a price-level target to an inflation target, for a number of reasons, most obvious of which is that adhering to a price-level target means that on average there is zero inflation."

Bush said his choice as the nation's new central banker "commands deep respect in the financial community." And he lavished praise on Greenspan, 79, calling him a legend who "has shepherded our economy through its highs and its lows."

It was the third time in as many years Bush has turned to the 51-year-old Bernanke for a sensitive economic post. The president named him to the Fed board in 2002, then made him chairman of the president's Council of Economic Advisers earlier this year.

"If I am confirmed by the Senate I will do everything in my power, in collaboration with by Fed colleagues to help assure the continued prosperity and stability of the American economy," said Bernanke, who holds degrees from Harvard and the Massachusetts Institute of Technology and was chairman of Princeton's Department of Economics.

Greenspan, now 79, became chairman in 1987. He will complete term on Jan. 31.

For two decades, it has been his voice that has mattered most in Washington and many capitals around the world when it comes to key economy matters. His pronouncements, famously opaque, are scrutinized carefully for signs of future policy direction.

He issued a statement after the announcement, praising Bush for a "distinguished appointment," and adding he has no doubt that Bernanke will "be a credit to the nation as chairman of the Federal Reserve Board."

"Over the course of a career marked by great accomplishment, Ben has done path-breaking work in the field of monetary policy, taught advanced economics at some of our top universities, and served with distinction on the Fed's Board of Governors," Bush said.

Bernanke has "earned a reputation for intellectual rigor and integrity," Bush said. "He commands deep respect in the global financial community. And he will be an outstanding chairman of the Federal Reserve."

Bush praised Greenspan, as well, calling him a legend. "Under his steady chairmanship, the United States economy has come through a stock market crash, financial crises, from Mexico to Asia, two recessions, corporate scandals, and shocks ranging from devastating natural disasters to a terrorist attack in the heart of America's financial center," he said.

Bernanke is a summa cum laude graduate of Harvard University in 1975, he received his doctorate from the Massachusetts Institute of Technology in 1979. During his years in Boston, he focused on the economic underpinnings of the Great Depression and the losing track record of the city's beloved baseball team, the Red Sox.

"Economics is a very difficult subject," Bernanke once said. "I've compared it to trying to learn how to repair a car when the engine is running."

Senate Democratic Leader Harry Reid issued a statement signaling the type of questions Bernanke might expect at his confirmation hearings.

"I look forward to the confirmation hearings to learn more about Mr. Bernanke's views on how the Federal Reserve should steer our economy free from political influence and interference," he said.

Reid, who has been sharply critical of Greenspan for supporting Bush's tax cuts, added, "It will be important that Mr. Bernanke demonstrate that he is committed to guiding the economy to produce results for all Americans rather than promoting partisan policies that benefit special interests and an elite few."

Greenspan was 61 when President Ronald Reagan named him Fed chairman.

The first President Bush named him to a second term, although some Republicans later complained he had not done enough to revitalize the economy during the 1992 campaign that resulted in Bill Clinton's victory in the presidential race.

Clinton named Greenspan to two terms. So highly was Greenspan regarded that Vice President Al Gore indicated during the 2-000 presidential campaign that he was prepared to offer Greenspan another term.

Bush won instead, soon reinstalled Greenspan, and won his endorsement for first-term tax cuts.

The economy suffered two recessions during Greenspan's long tenure at the Fed, a 1990-91 downturn that occurred in part because of a huge spike in oil prices following Iraq's invasion of Kuwait, and a 2001 downturn that was worsened by the deadly terrorist attacks on the World Trade Center and the Pentagon.

It was under Greenspan that the central bank began in 1996 for the first time to announce on the day of its meeting whether it had made any changes to the short-term interest rates the Fed controls.

While technically Greenspan only had one vote on the 12-member Federal Open Market Committee, the Fed chairman was exceptionally adept at building consensus among the Fed board members and regional bank presidents who make up the panel that meets eight times a year to set interest rates.