Ben Bernanke, the nominee to replace Alan Greenspan this month as Chairman of the US Federal Reserve Board, is a highly capable economist who has devoted his professional life to understanding the historical role of central banks and the problems that they have faced. His views represent, as much as can be expected, a consensus among those who have studied the issues carefully.
But that does not mean that Bernanke is prepared to ensure that healthy economic growth continues in the US in the coming years and provide the kind of leadership that the world needs. By the standards of what is generally understood today, he will do a good job. Unfortunately, that may not be enough.
John Maynard Keynes once said that monetary policy may work like a string. A central bank can pull the string (raise interest rates) to rein in an economy that is galloping ahead unsustainably. But it cannot push the string up: if economic growth stalls, as when confidence is seriously damaged, lowering interest rates may not be enough to stimulate demand. In that case, a recession can occur despite the central bank’s best efforts.
Bernanke made his name as an economist by analyzing the worldwide Great Depression of the 1930’s – good expertise to have, since preventing such disasters is a central bank head’s most important job. The Great Depression, which followed the stock market crash of 1929, saw unemployment rise sharply in many countries, accompanied by severe deflation. In the US, consumer prices fell 27% between 1929 and 1933, and the unemployment rate topped out in 1933 at 23%.