Bernanke a better Fed chair than Greenspan but he may be the last academician to head the central bank
Sam Adelton
Jul. 20, 2007

Greensspan and Bernanke are both academicians. Bernanke is a far better Federal Reserve head because of his extra compassion for those who need help and transparency in his way of dealing.

Federal Reserve Chairman Ben S. Bernanke's appearance before Congress marked his clearest break yet with predecessor Alan Greenspan.

In two days of testimony this week, Bernanke emphasized the Fed's predictions for growth and inflation and devoted about half his time to discussing consumer protection. In doing so, he shunned the practice of Greenspan, who distrusted forecasts and was suspicious of regulation.

However, this may be the last academician Fed chair for a long time. The Princeton Economics Guru is a superb theoretical economist. However, the economy is the most challenging and fast changing ‘laboratory’ of the world. It is more complex than any engineering modeling because it self adjusts to the smartness of the participants.

The market, stocks or futures, is similar. No model works for a long time. When too many people start doing the same, the model eventually fails.

Similarly, new economic theories evolve all the time. Sticking to the classical economy creates a death trap for the economy and the central bank.

Greenspan and Bernanke are classical economist – theoreticians with a tilt towards quantitative modeling and mathematical analysis.

The problem is that the economy has its own personality and it tends to fool all those who believe in a set of classic economic principles.

Let us take an example: the economy faces a new kind of economic challenge that never happened before in recorded history. Global imbalance in the standard of living gives rise to differential wages. That drives jobs in one direction across the borders. Those who are affected adversely borrow and try to maintain their superior standard by borrowing against their homes and credit cards.

The net result is a strange stagflation. The loan-burdened economy stagnates while those who enjoy low wage jobs increase demands of commodities and energy. The result is an inflation-deflation combination. Inflation from commodities, energy, and deflation is everywhere else. Now try to find a single textbook which talks about anything like this.

That is the reason why academic economists will not be chosen as central bank chiefs after next ten years when we all realize what a blunder Greenspan and Bernanke made.

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