Bernanke author defends the Fed chief

Jasmin Aline Persch • E-mail

While Alan Greenspan remains a household name, most Americans don’t know the name of the current Federal Reserve chairman, whose job grows more important as the economy weakens.

The author of “Ben Bernanke’s Fed,” the first book written about Bernanke, which was released on Tuesday; says the Great Depression guru may actually be better equipped at reversing the economic downturn than his legendary predecessor.

“Bernanke certainly has a deeper understanding of the academic research and tends to rely more on the views of other economists and the Federal Reserve,” Ethan Harris, the author and chief economist at Lehman Bros., said in an interview. “In the long run, you're better off having a broader reliance on different people’s work and views.”

Although the economy has slumped since Bernanke was sworn in as head of the Fed on Feb. 1, 2006, Harris says that’s mostly because he inherited near-bursting bubbles in both the housing and credit markets from Greenspan.

Harris, who backed Bernanke since he was first tapped for chairman, does offer criticism for the Fed chief, saying that he lagged in realizing the scope of the housing slowdown and credit crisis.

“Ben Bernanke’s Fed” sheds light on the man who has been living in the shadow of his legendary predecessor. The man who is said to hold the second most powerful position in America. The man whose decisions are tied to the fate of the economy.

“I wrote the book because I felt people need to know how Bernanke is different from Greenspan,” Harris said. “People are confused about who he is. People view him as Greenspan’s younger brother.”

Here are excerpts of an interview with the author of “Ben Bernanke’s Fed.”

In order to fight inflation, interest rates must be raised, to spur economic growth, rates must be lowered. This country is facing both rising inflation and slowing economic growth. Most recently, the Federal Reserve left the federal funds rate unchanged at 2 percent. What will the Fed tackle in its next move?

Well, I think the Fed is facing the toughest economic climate you can have as a central bank. You have an inflation and a recession problem. You can't raise and cut interest rates at the same time. You have to decide: Which war are you fighting? Which problem is bigger? What the Fed is doing right now is waiting to see which problem dominates. My view is that by the end of the year, it will be clear that the inflation problem is going away. The weakness in the economy eventually kills inflation. When that happens, the Fed can turn its focus to economic growth. They're likely to cut interest rates by next year.

Bernanke knew the economy was shifting down in 2006, but he underestimated the extent of the housing and credit crises. Are you and other economists concerned about this Fed’s ability to predict what turmoil lurks ahead?

The last two years has illustrated the limits of all economic forecasting, not just at the Federal Reserve but in the economics profession. My own forecast underestimated the housing recession. In the beginning of the credit crisis, our view and the Fed and many economists, was that this would last three to six months and then the markets would stabilize and improve. It's now been over a year of ongoing credit problems and difficulties at financial institutions. Banks are pulling back from their lending. The Fed was surprised by the credit crisis, but it had a lot of company in being surprised.

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