An anti-Greenspan must head the fed
Monetary policy is hardly a science, so a good central banker must be humble. He must appreciate the limits of his understanding and of the efficacy of the tools at his disposal. Yet he cannot afford to be perceived as indecisive, which would only invite destabilising financial speculation.
Indeed, as important as their functions are, in recent decades central banks have become even more significant as a consequence of the development of financial markets. Even when not formally designated as such, central banks have become the guardians of financial-market sanity. The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle. Under Obama’s proposed new rules, the Fed will have even larger responsibilities, and will be charged with averting financial crises and ensuring that banks are not taking on too much risk.
This is a job at which former Fed Chairman Alan Greenspan proved to be a spectacular failure. His blind spot on financial-market excesses – the little “flaw” in his thinking, as he later termed – left him oblivious to the dangers of Wall Street titans’ financial innovations. As a member of the Fed’s Board of Governors under Greenspan during 2002-2005, Bernanke can also be faulted for having played along.
The Fed chairman exerts global influence not only through monetary policy, but also through his words. He sets the tone for policy discussions and helps shape the belief system within which policymakers around the world operate.
What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street and what it does. They operated under the assumption that what is good for Wall Street is good for Main Street. This will no doubt change as a result of the crisis, even if Bernanke remains at the helm. But what the world needs is a Fed chairman who is instinctively sceptical of financial markets and their social value.
