With inflation concerns growing in the US, and taking flak for alleged cronyism, President Bush has nominated a competent, non-political academic to be the next chairman of the US central bank. Paul Wulfsberg reports from Washington On 24 October, United States President George W Bush formally nominated Ben Bernanke to be chairman of the Federal Reserve Board, the most powerful economic position in the US. Alan Greenspan, the current chairman of the fed, will retire on 31 January after serving for 18 years and overseeing a generally strong US economic performance. For observers across the political spectrum, Bernanke is a welcome respite from growing accusations of cronyism within the Bush administration. Supreme Court nominee Harriet Miers rose from being a prominent Texas lawyer to the position of White House legal counsel after a decade of loyal service to Bush, but her credentials came under heavy attack during the confirmation politics as right-wing Republicans expressed their disapproval that she had not proven her conservative credentials. Miers, who has never served as a judge, withdraw her nomination on 27 October, more than three weeks into the confirmation process. The Bush administration has had more than its share of controversy lately. In the brewing controversy over the disclosure of a CIA agent's identity in a newspaper column, Vice- President Dick Cheney's Chief of Staff I Lewis Libby received an indictment on Friday, while Bush's senior adviser Karl Rove was expected to follow as Al-Ahram Weekly went to press. As if that were not enough, Bush's popularity ratings have continued their slide after the number of American military deaths in Iraq since the invasion reached 2,000 last week. The market responded positively to the respected economist's nomination, with the Dow Jones industrials recording a rise of 1.7 per cent on 24 October, the largest one-day gain since April. While he is a registered Republican, Bernanke's colleagues reportedly consider him to be non-political, which was also the feeling on Wall Street. Before being appointed by Bush to the Federal Reserve Board in 2002, and later to be the chairman of the president's Council of Economic Advisers, Bernanke had been a professor of economics at Princeton University. He was considered the most likely choice before the official announcement on 24 October, though other leading economists such as Glenn Hubbard of Columbia University and Martin Feldstein of Harvard University were also possible candidates. Although there is not a consensus on the subject, Bernanke is expected by many to continue, if not intensify, the anti-inflation measures of his predecessors Greenspan and Paul Volcker. Bernanke is an expert on inflation and managing the money supply, much of his work focussing on the Great Depression and the era of stagflation in the late 1970s. Since experiencing this debilitating stagflation, which was triggered by an exogenous shock in oil prices, the fed has taken care to avoid high levels of inflation, typically curbing overly robust economic growth by raising the interest rate. Now, however, soaring oil prices and the quick economic recovery have revived the spectre of inflation once more -- government figures put annual inflation currently at 4.7 per cent, while the month of September alone saw 1.2 per cent inflation for consumer prices and 1.9 per cent for wholesale prices, the highest monthly rates since 1980. Bernanke pointed out that the inflation "is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations" -- inflation indexes which exclude food and energy recorded only a very modest 1.3 per cent annual rate during the last quarter. Inflation is far from the only economic problem awaiting Bernanke when he assumes office on 1 February -- rounding out the list are the ongoing real estate bubble, unprecedented levels of consumer debt with net household savings in the red, expenditures in the tens of billions for hurricane relief and waging the war in Iraq and finally a huge trade deficit. Bernanke made waves on this last subject with his theory that the lopsided US current account balance was not so much due to the huge budget deficit as it was because of the flow of capital from developing countries to the more stable investments available in the US. "For the developing world to be lending large sums on net to the mature industrial economies is quite undesirable as a long- run proposition," said Bernanke in a speech last March. In his speech accepting the nomination, Bernanke sought to downplay any ideological differences between himself and his widely respected predecessor, saying "my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years." Tareq Youssef, professor of economics at Georgetown University, told the Weekly that he thinks Bernanke will follow this path, while instituting "measured increases in interest rates, reflecting the view that the economy is healthy and inflation should be kept in check." However, there is speculation that Bernanke might substantially deviate from Greenspan's policy of allowing the fed a good deal of flexibility in its monetary policy, such as through adopting inflation targeting. In places in most of the developed world, inflation targeting means that a country's central bank openly adopts a target for inflation, and sticks to it, with the justification that this reduces business uncertainty and stimulates economic growth. In his writings, Bernanke has suggested this target rate be between one and two per cent, below the annual average of three per cent during Greenspan's terms in office. "This however may reduce the flexibility the fed has in dealing with economic uncertainty, something that the US economy may see more of in the future due to existing global imbalances and the expanding budget deficit and their potential effects on prices, the dollar and even economic stability," said Youssef. He added that Bernanke "will not stand idle in the face of negative economic shocks and would use the instruments of the monetary policy to stabilise economic conditions when necessary." In a 2001 paper, Bernanke and co-author Mark Gertler argued that the fed should aim for long-run macro-economic stability by providing the market with a stable inflation rate, rather than responding to rising individual asset prices, in this case that of the housing bubble. "The macro-economic stability associated with inflation targeting is likely to reduce the incidence of panic-driven financial distress that could destabilise the economy," wrote the authors. Other than this disagreement over inflation targeting, Bernanke's views seem remarkably similar to those of Greenspan. Students and colleagues have noted, however, that Bernanke possesses the ability to express complex economic ideas in plain English, a style change from the cryptic pronouncements of his predecessor.
