Greenspan is Gone: Don’t Bet on Bernake

The chairman of the Federal Reserve Board, Alan Greenspan, will step down from his position in January, enabling President Bush to choose his replacement. Greenspan has proved overwhelmingly effective at his post because of his independence from political influence. He is consequently leading members of the economic and financial sectors to fear the market reactions to his resignation.

Greenspan’s primary job is to balance the consistent struggle between national inflation rates and unemployment rates. In the economic “Philips Curve,” inflation and unemployment are said to be two variables on opposing mathematical axes.

Lowering one variable raises the other by default. So decreasing unemployment rates will ultimately generate inflation and rising interest rates.

This is because an economy in which everyone has a job maintains excess disposable income, and overspending causes prices to rise.

Balancing between these two factors is politically strenuous because it insinuates the conflicts of interest between elitists and “everyone else.” Maintaining low inflation rates is important for elite Americans because their assets maintain value only when the value of a dollar doesn’t fluctuate.

Keeping inflation at bay is a priority for huge financial institutions including banks and investment firms. Conversely, unemployment is considered a top priority for “the rest of the country.”

The quarter percentage point change in the interest rate received on a money market account doesn’t significantly affect someone who earns $15,000 dollars a year: rather the availability of a job is much more important.

Alan Greenspan’s job to mediate unemployment and inflation rates is essentially like being the parent of two fist-fighting siblings. Allowing one child to prove victorious means the other is significantly harmed. But keeping the fighting at bay (or ensuring that neither child really beats the other) means both children will be slightly bruised, but not hurt.

If Greenspan enables unemployment and inflation to push and pull at each other, neither will conquer the other and their corresponding supporting groups will bruise.

Supporting employment at the expense of inflation, however, would entail one child hurting the other with the ultimate implication of perpetuating a familial imbalance.

Thus far, Bush’s primary candidate for the Fed chairmanship is Ben Bernanke, the current chairman of the Presidential Council of Economic Advisers. Bernanke has ample academic and policy credentials and served on the Fed’s board of governors for nearly three years before taking his White House post in June. But last week he told Congress’ Joint Economic Committee that the initial Bush tax cuts had, “increased disposable income for all taxpayers, supporting consumer confidence and spending while increasing incentives for work and entrepreneurship.”

He added that later tax cuts, “provided incentives for businesses to expand their capital investments and reduced the cost of capital by lowering tax rates on dividends and capital gains.”

While some might argue that Bernanke’s alliance with Bush’s economic policies will provide a positively heightened sense of continuity between the Federal Reserve and the American government, I argue that such an alliance is a bad thing. Financial markets respond to situations with a “lag time,” fully feeling the effects of an interest-rate change months after the change was enacted.

If Bernanke’s policies too closely resemble Bush’s ideals, the economy will be worse off. Greenspan’s political impartiality (and corresponding ability to effectively balance between inflation and unemployment) are what facilitated a prosperous economy with aggregate growth. Bernanke’s partiality towards big business might provide an economy in which interest rates are checked by growing unemployment at the expense of the middle class.