A New Money Man

When Ben Bernanke left his post at the Federal Reserve last spring to become President George W. Bush's top economic adviser, his work pals didn't give him much of a send-off. Only a month ago did his Fed colleagues get around to throwing him a lunchtime goodbye party. In keeping with Fed tradition, Bernanke's favorite food--Necco candy wafers--was served, and the going-away gifts included a Steuben crystal eagle, a framed set of dollar bills and the chair Bernanke sat in during Fed meetings. This winter, however, Bernanke will need to deliver that chair back to the Fed--and perhaps return the going-away presents, too. After months of oddsmaking from Washington to Wall Street about who would succeed Federal Reserve chairman Alan Greenspan, 79, when his term expires in January, last week Greenspan and Bernanke strode into the Oval Office for the announcement. After 18 years leading the Fed, the man known as the Maestro will finally turn over his baton.

Economists applauded the choice, the stock market rose, and even in partisan Washington, it was hard to find anyone who disapproved. That's partly because of Bernanke's stellar credentials, which drew immediate comparisons to the choice of John Roberts for the Supreme Court. In academic circles, Bernanke is regarded as a superstar; at the White House, he won favor by not talking down to the president, as economists sometimes do. Bernanke's other advantages: he's been confirmed by the Senate for three prior jobs, and he's so moderate politically (or discreet) that close colleagues claimed to have no idea whether he's a Democrat or, as it turned out, a Republican.

The chairman-designate was raised in rural South Carolina. As a teenager he worked briefly as a waiter at the South of the Border tourist trap on Interstate 95. Early on, says his father, Philip, the town's pharmacist, it was clear "he was destined for something greater than a small-town drugstore." At Harvard he discovered economics and spent hours at a mainframe computer, tinkering with natural-gas pricing models for his senior thesis. His adviser, Harvard economist Dale Jorgenson, notes the irony: when Jorgenson visited the Fed last month, natural-gas pricing was again a hot topic. As a doctoral student at MIT in the late 1970s, Bernanke became focused on the causes of the Great Depression. After earning his Ph.D., he continued that research for a decade. "I guess I am a Great Depression buff, the way some people are Civil War buffs," he later wrote. "To understand the Great Depression is the Holy Grail of macroeconomics."

It's also great preparation for running a central bank. That's partly why, after long stints as a professor at Stanford and Princeton, he was tapped in 2002 by the Bush administration to serve as one of seven Federal Reserve governors. There, as Greenspan & Co. furiously cut interest rates in the wake of the dot-com crash, Bernanke began speaking out about a different concern: deflation. As the Fed moved short-term rates toward 1 percent--a historic low--Bernanke worried that if the economy slowed and prices began falling, the United States might encounter the stagnation faced by Japan in the 1990s. "He's been treated somewhat unfairly by people who have accused him of creating a deflation scare that was unwarranted," says Michael Prell, a former top Fed economist. Though the threat never materialized, Bernanke's boosters say he was doing exactly what a Fed official should: scanning the horizon, assessing threats to the economy and devising pre-emptive solutions.

That doesn't mean he needs to give speeches about those risks, however. The deflation episode illustrates what may become a key distinction between Greenspan and his successor: while Greenspan obfuscated, Bernanke has a reputation for speaking clearly and espousing openness. "Some academics find it hard to leave academia and talk more broadly, but Ben is so tremendously articulate," says N. Gregory Mankiw, the Harvard professor who preceded Bernanke as Bush's top economic adviser. Aside from speeches, Bernanke has supported other measures to make the Fed's workings less secretive, including a policy of "inflation targeting" that makes it clearer how much prices can rise before the Fed will raise rates to constrain them. Greenspan, a former jazz clarinetist, prefers a more flexible approach that allows for improvisation, as do other Fed officials. Most observers expect Bernanke to move cautiously in trying to implement such measures. Unlike Greenspan, he's also expected to avoid commenting on matters of broader policy--Social Security reform, tax cuts--for the foreseeable future.

When it comes to monetary policy, Fed watchers expect Bernanke to behave like Greenspan. By the time he takes his seat at the Fed's mammoth mahogany table in late March, the bank will have likely raised rates at 14 consecutive meetings. It's hard to say if the new chairman will continue that tightening: the economy can change a lot in five months, as Katrina and America's recent brush with $3-a-gallon gas have reminded us. For now, despite rising energy costs, early signs of a softening housing market and falling consumer confidence, talk of recession remains negligible.

Before Bernanke can take command, however, Greenspan will take his final curtain call. If the Fed were a sports arena, his trademark dark suit would soon hang from the rafters; this being Washington, his retirement will probably be marked instead by his own Fed party, where he'll take his chair home too. When the applause stops, Greenspan's legacy--presiding over the 1990s boom and responding deftly to assorted crises--will likely only grow larger. "I think Greenspan will go down in the history books as the greatest central banker up until this time," says MIT Nobel laureate Paul Samuelson. As his successor prepares to sit at his desk, we can only hope Greenspan has the good sense to preprogram his own home phone number into the speed dial.

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