Bush to nominate Bernanke to replace Greenspan

[Marcus Bryant]

Bush to Name Bernanke
As New Fed Chairman

The Wall Street Journal
October 24, 2005 11:45 a.m.

WASHINGTON -- President Bush plans to name Ben Bernanke, the current chairman of his Council of Economic Advisers, to succeed Alan Greenspan as chairman of the Federal Reserve.

Mr. Greenspan has held the post since 1987. The announcement of his replacement is expected at 1 p.m.

The White House hadn't indicated previously when the announcement would come, but Mr. Greenspan has made clear he plans to leave office when his term is up at the end of January. Naming a successor to Mr. Greenspan now gives the Senate time to hold confirmation hearings and act on the nomination before January.

For months, the three candidates cited most frequently had been Mr. Bernanke, along with economists Martin Feldstein of Harvard University, and Glenn Hubbard of Columbia University.

Mr. Bernanke served three years as a Fed governor before joining the administration in June. Before that, he taught economics at Princeton University. Mr. Feldstein, who has been on Harvard's faculty since 1969, was chairman of President Reagan's Council of Economic Advisers from 1982 to 1984 and an adviser to the 2000 Bush campaign. Mr. Hubbard, who served two years as chairman of Mr. Bush's Council of Economic Advisers, has been at Columbia since 1994 and currently is dean of its business school.

Choosing a successor to Mr. Greenspan, 79 years old, is one of Mr. Bush's most important economic decisions. The Fed chairman wields unequaled influence over U.S. and world economic growth. The Fed's independence also frees its chairman to stake out policy positions different from those of the president or Congress, and Mr. Greenspan has used that independence to acquire considerable sway on nonmonetary policy issues such as the budget, taxes and Social Security.

The nomination of a new Fed chairman comes at a time when the Bush administration is navigating some difficult political straits. Special prosecutor Patrick Fitzgerald appears close to indicting top White House officials in the CIA leak investigation, and the president has faced his resistance from conservatives on his decision to nominate White House counsel Harriett Miers to the Supreme Court.

[Marcus Bryant]

I found this to be a rather fitting, and timely, article to review...



The Dollar's Long Dive

Money is primarily a symbol of promise, and its worth is always questionable

By THOMAS G. DONLAN
Barron's

THE IDEA THAT ONE PICTURE CAN BE WORTH even a small fraction of a thousand words is alien to a writer's mind. But we were partially convinced recently when we happened upon the chart below that takes up the space for several hundred words normally found on this page.

The dollar has almost evaporated as a store of value. We see it here as the flip side of inflation. In this view, prices don't rise, the dollar falls. Either way, the lesson is the same: Put not your faith in princes, even during the reigns of monetary royalists like Alan Greenspan. Paper money is first and foremost paper.

We reiterate the caution in the chart's caption that the vertical scale is a log scale: Equal distances along the vertical scale indicate equal percentage changes, not equal units. On this scale, we see that the loss of purchasing power is the same when a dollar erodes to 50 cents as when a 50-cent "dollar" erodes to a 25-cent "dollar."

Observe the erratic course of the purchasing power of the dollar during the periods when the currency was tied to gold. Not so consistently or thoroughly devalued, it's true, but the dollar swung from strength to weakness, along with the fortunes of the nation's gold miners. And the supply of gold, let us remember, is tied only to the luck of miners. In no way can it respond to the needs of a large economy. When the supply of gold could not grow as fast as the economy, deflation was the result, need it or not. And when random discoveries of new lodes brought new gold to the Treasury, inflation was the result, want it or not.

Nowadays, the dollar price of gold has been swinging again, from a low of $255 an ounce in 2001 to a recent $462 an ounce, a price rarely seen since the early 1980s.

Barron's has always stood for the ideal of a dollar "good as gold," but in reality, even gold is not good enough. Economists with theories as varied as those of John Maynard Keynes and Milton Friedman have concluded that gold alone does not maximize the utility of the dollar as a means of exchange and a store of value.


http://online.barrons.com/public/resources/images/b-edit_c10212005155211.gif

Keynes believed, simply put, that a little bit of inflation would fool the working class into thinking that they were constantly getting richer. Thus fooled, they would spend more enthusiastically, and thus spending, they would heat up the economy and make it grow faster, to the benefit of all.

Friedman, again simply put, despaired of central bankers and miners. Neither could ever create the right amount of money at the right time to accommodate economic growth, so he advised that the use of paper money, inflated by a firmly fixed few percentage points a year, would come the closest to the moving target.

These theories have been taken up and distorted by American political leaders of left and right. Their practical application may be seen in the near-vertical line that depicts the cumulative effect of a little bit of inflation every year since World War II, punctuated by a little more inflation occasionally. It shows that the damage to the dollar's purchasing power in the post-war period came not in the onslaught of historically high inflation during the 1970s, but in the continuous drip-drip of compounding some inflation every year.

That's how a loaf of bread that sold for a quarter in the early 1950s gets to cost $2.50. That's how a gentleman's haircut made its way to $20 from the boy's $2 trim.

Looking at the decline of the dollar is apt to make any old codger long for the money of his youth. It's tempting to recall the example of Charles de Gaulle, who lopped two zeros off the French franc to make it have a respectable exchange rate with the currencies of the Anglo-Saxons. If America knocked a zero off the dollar today, there would be a sentimental appeal to doing the week's grocery shopping with a $20 bill -- offset by the frightening thought of losing 90% of one's nominal savings. Of course, it would make little or no difference economically, unless the U.S. also brought back gold and silver coinage, halted in 1933 and 1965, respectively. Paper is paper, ink is ink, electrons are electrons. The absolute size of the numbers makes little if any difference.

Money is a symbol of a promise to provide something of real value to its holder. Indirectly, your paycheck contains a promise that your employer will provide all the things you want, up to a total value of X. It also should be a promise by the government and banking system that X will not move.

Holders of gold have one advantage: they know there's no promise backing them up, just the experience that gold holds its value in the marketplace. Considering the value of the political and financial promises illustrated in the chart, we ought to demand similar market security for our money.


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Editorial Page Editor THOMAS G. DONLAN receives e-mail at [email protected].

[Extra Stout]

Bernanke seems like a well-qualified choice.

Many of us were afraid Bush was going to nominate his personal accountant, a loyal female who used to run a Bank of America branch in Dallas, his dog, or Neil Bush.

[Marcus Bryant]

Well, Bernanke was working in the administration...

[scott]

Bernanke is a great choice. His C.V. can be found on his Princeton webpage, for anyone interested. He has done some great work in the area of monetary economics. The first difference you'll see between him and Greenspan is Bernanke is an advocate of inflation targeting. We'll see how it goes.