One year in the hot seat

Many students may not remember economics professor Ben Bernanke, but Fed-watchers know him as the Chairman of the Federal Reserve. Appointed in February 2006, Bernanke has kept the economy relatively stable, but storms may be brewing on the horizon.

Economics professor Alan Krueger cautioned the Fed to be "vigilant." "Problems like sub-prime interest loans or hedge funds failures can creep up," he said in an email. "The next problem might come completely from left field."

Bernanke may have to grapple with the falling value of the dollar and rising national debt. "The rest of the world is lending a lot of money to the U.S. ... [but] is earning low returns," economics professor Lars Svensson said. If international monetary policymakers "wake up and realize that it isn't such a good investment ... they may demand higher rates."

The convergence of a slowing economy and rising inflation may present Bernanke with his greatest challenge yet. "Greenspan had this tailwind that he didn't have any situations like [that convergence]. There's no clear path as to what the Fed should do [now]," said Justin Fox '87, business and economics columnist for Time magazine.

In a report to the Joint Economic Committee last month, Bernanke cited increased consumer spending as the main factor propping up a slowing economy. He added that inflation was on the rise, while housing markets were slowing down.

Though falling housing prices may cause problems, the larger fear is that the contraction might spill over into other sectors of the U.S. economy, his report concluded.

"If housing prices decrease, people have a lot of debt, and asset worth will decrease. This impacts consumption and happiness," economics professor Nobuhiro Kiyotaki said. "This feeds back into the inflation rate and the aggregate economy."

Past to present

On Oct. 24, 2005, President Bush nominated Bernanke, who was then the chairman of the President's Council of Economic Advisors, to succeed Alan Greenspan as Fed Chairman when Greenspan retired in January 2006. Bernanke then vowed to continue the process of increasing the transparency of the Fed begun by Greenspan in an effort to create more understanding between investors and the Fed.

"There was amazingly little angst and volatility [in the transition between Greenspan and Bernanke]," economics professor Alan Blinder '67 said. Blinder is the former vice-chairman of the Board of Governors of the Federal Reserve System.

Economics professor Elizabeth Bogan called Bernanke "the best appointment President Bush has ever made."

"He leads quietly. He lets everyone tell him what they're thinking, and then he puts it together. He's all listening and has the brains to come to the right conclusion," Bogan said.

Investors needed a few months to adapt to the new Chairman's style. "I think Wall Street was skeptical because he's an academic," Bogan said. "It took a while for them to realize that he was a good leader and able to do what he was supposed to do," she added.

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Bernanke's most infamous faux pas came at an April 2006 dinner party, where he told CNBC anchor Maria Bartiromo that the markets had misinterpreted his comments on interest rates. When Bartiromo reported this conversation on television a few days later, investors interpreted it as a sign the Fed would stop raising rates soon; stock prices fell quickly in response.

Soon after, Bernanke said he regretted talking to Bartiromo, and observers began to doubt Bernanke's abilities as a communicator. Bernanke has exercised greater caution when speaking to members of the press since then.

"Ben's hope in running the Fed was that he could be so transparent that he would simply say things consistent with what he was doing," Bogan said. "The only surprise was that no matter how transparent and consistent he is ... the public still dies at every word he says. He has to be so careful."

Whereas Greenspan insisted on speaking first at Federal Open Market Committee meetings, Bernanke tends to speak last. "It may be that he doesn't want to influence others, but I think he also wants it to be open. I think that it's a sign of the measure of the transparency we've reached," economics professor Per Krusell said.

Bernanke has long supported the idea that the Fed should announce a longterm target inflation rate and explain any deviations to the public. But he has yet to set such a rate, though some suspect that he may gradually implement it.

While Greenspan would not have worried if the inflation rate sat 0.3 to 0.4 percent above the unannounced target rate, "if you're an inflation targeter and two percent is the optimal rate, then you do want to be serious about it," Blinder said.

Another distinguishing characterisitic Bernanke's style is his desire to build consensus within the Federal Reserve Board before making policy decisions.

"His viewpoints are correct, but he's been very hesitant to push those views on the recalcitrant members of the board," Blinder said. "I'd like to see him do it more."

At Princeton

Bernanke left an impact on the Princeton community during his two-time stint as chair of the economics department from 1996 to 1999 and then from 2000 to 2002. Economics faculty and students fondly recall the traits that Bernanke currently displays at the Fed.

"He's very patient," Stanley Watt '00 said. Bernanke agreed to advise Watt on his senior thesis even though he was not an available adviser at the time. "He used to have an office in Robertson and made things a lot easier [for me]," Watt said.

Bogan said that Bernanke always tried to be transparent with colleagues in the department. "Ben tries to be as clear as he can so everyone knows what he's doing," she said.

"I think Ben used to get nervous during faculty meetings," Krueger said, adding that that Bernanke sometimes had a "shaky" voice. "Remarkably, I don't detect any sense that he is nervous when he talks to Congress or gives public speeches. I think it must be harder to deal with my colleagues than with Senators, Congressmen and reporters."

During his time at Princeton, Bernanke was known for his casual outfit of "a polo shirt and slacks," Bogan said. "I never saw him in a tie and jacket until he had to go to Washington."

Bernanke kept his casual style when he left the University in 2002 to serve on the Board of Governors of the Federal Reserve.

At a presidential briefing in the summer of 2005, Bernanke came in wearing tan socks. Bush joked with him that he was in Washington now, and tan socks were not part of the standard dress code. At the next meeting, Bernanke joked that he had heard there was a new fashion in Washington and pulled out a bag full of tan socks for everyone to wear.

Bernanke has also brought his extensive knowledge of American economic history to Washington. Bogan praised Bernanke's expertise on the Great Depression, noting that a good Fed chairman must be well-versed in American economic history as well as monetary policy.

Despite his knowledge and acumen, colleagues said Bernanke remains humble.

"Like many academics, he has an I.Q. in the stratosphere, but unlike many academics, he doesn't show it off. He has a low ratio of ego to brains," Blinder said.

Professors argue that Bernanke's character and economic knowledge will make him a much different chairman than Greenspan.

"Those of us who worked with him here know him as a man of integrity not given to political correctness or opportunism in professional matters, such as his current job," economics professor Uwe Reinhardt said in an email. "His predecessor seemed far more driven by politics than Bernanke is." Reinhardt is also a columnist for The Daily Princetonian.

Blinder said he had eaten over a thousand lunches with Bernanke before he realized that the latter was a Republican. "He doesn't wear his ideology on his sleeve," he said. "It never infected his scholarly work." Bernanke steers clear from partisan opinions that Greenspan was frequently chastised for making, Blinder added.

"I hope that the politics of Washington, D.C., don't [change] him," Bogan said. "I wonder how he can give such respect to someone [senators] who doesn't know one-tenth of what he does."