Question

What are the fundamental differences between the styles of Greenspan and Bernanke and Yellen as chairs of the Fed? Short answer

Answer 1

Bernanke has championed the team’s work since becoming Fed chairman in 2006 because he wants to sift through models, projections and anecdotes before coming to conclusions. His approach contrasts with that of predecessor Alan Greenspan, who relied more on his own reading of conditions — and as a result probably would have cut rates to insure against a recession long before the Sept. 18 Federal Open Market Committee gathering.

“Greenspan emphasized that, in response to a low- probability but high-cost outcome, the Fed should move aggressively,” said Mickey Levy, chief economist at Bank of America Corp. in New York. “This Fed under Bernanke is more disciplined.”

The distinction between Bernanke and Greenspan, 81, has roots in their different resumes and competing views about managing risk and uncertainty. Greenspan was a business economist before he became Fed chairman in 1987 — one of his offices was on Wall Street — and he read the economy like an income statement. His decisions were often based on close readings of disparate data, and his methods defied quantification. Greenspan’s memoirs of his years at the Fed will be released on Sept. 17, the eve of the rate decision.

Bernanke, a former head of the economics department at Princeton University, has spent most of his career in academia. His analysis is based on models, and he has greater confidence in forecasts and statistical methods.

Over time, Greenspan’s “confidence in making snap judgments on less convincing evidence increased,” said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. “Bernanke has a more balanced approach to decision making, which means you combine business-economist skills with anecdotes, high-frequency indicators, with models and simulation exercises.

Both approaches have risks. Greenspan cited uncertainty as “the defining characteristic” of the monetary policy landscape in an August 2003 speech. “Only a limited number of risks can be quantified with any confidence,” he said. Greenspan’s preference for insurance was most visible in the third rate cut of 1998, and the aggressive easing from 2001 to 2003 to offset a “minor” probability of deflation.” They’ve managed to focus the debate on their tsarist, not the what is in the long term best interest of the economy. The Fed needs, indirectly, to discredit what they are saying, and talking about MAQS and their analytical rigor suggests that all those other guys don’t necessarily know what they are talking about.

That’s the real difference between Greenspan and Bernanke. Greenspan wasn’t a very good Fed chairman (, but he had the media eating out of his hand. He may have stumbled into his Wizard of Oz act, but the impenetrable statements and the aura he created that he alone could read the economic tea leaves was a brilliant bit of showmanship. I can’t help but think that his girlfriend, later wife Andrea Mitchell was instrumental in his success. Bernanke, by contrast, is concerned with the substance of his role, and less attentive to the theatrics. That will impair his effectiveness, particularly if he takes an unpopular course.

Even if Bernanke has concluded that the risk of perpetuating the bubble is at least as serious as the risk of a recession, he has much weaker public support than Volcker did to create short-term pain in the interest of long-term health. And despite general agreement in 1980 that inflation was sapping the economy, Volcker’s moves were still highly unpopular at the time.

So Bernanke has an extremely difficult political course to chart, on top of having a very tough set of economic circumstances to try to ameliorate. I misread the Bloomberg article as a hopeful sign that he had upped his political game.