Can Bernanke Adjust?

10/26/2005 12:05 am ET | Updated May 25, 2011

Ben Bernanke got the nod to replace Alan Greenspan on Monday because, as the Financial Times noted, Bush needed some good news this week. It's too bad Bush hasn't seen similar troubles before; they're good for his score.

Bernanke is a capable, professional economist. He's also the first modern academic to rise to the top job at the Fed, and discounting the antediluvian Arthur F. Burns he's the only one. Plus, a guy who would hire Paul Krugman (to Princeton) can't be all bad.

If there's a problem, it lies more with the academy of which Bernanke's a part. Obsessed with inflation, afraid of high growth, perplexed over productivity, devoted to deregulation, largely neglectful of corporate and banking fraud, academic money-and-banking economists can point to very little in their recent record to be proud of.

A few years ago, Bernanke and some colleagues cooked up "inflation targeting" as a new goal for monetary policy, something they prefer to the "full employment, balanced growth and reasonable price stability" of the actual law. My not-very-favorable review of their book, which appeared in Foreign Affairs in 1999, can be found here.

It's true Bernanke used his idea two years ago to argue for easier policy, to prevent deflation. That was constructive, even though deflation wasn't really much of a risk. But now we have actual inflation, mainly due to war, weather, and other shocks to the price of oil. Hiking interest rates to fight this type of inflation will lead first to stagflation, then possibly to recession. Fighting this type of inflation successfully will require other policies, such as tapping the Strategic Reserve (as Clinton did in 2000). That's heresy among monetary economists these days.

Can Bernanke adjust? Does he understand that the Federal Reserve can't do everything with interest rates alone? Or will he be trapped by the logic of his own model and the power of his own ideas? Will he follow the goals for the Federal Reserve set forth by law, and work to get the rest of the government to follow suit? Or will he legislate his own theories, so to speak, from the bench? These are among the questions Senators should ask at his hearings.

That said, I'd love to see a professor shine in a real job. It doesn't happen often enough.