Monetary Policy: Man or Machine
Congratulations to Ben Bernanke, and Workers of the World Relax wishes for him many peaceful nights of sleep! Filling the shoes of Alan Greenspan will be no cake-walk. Greenspan is a hero. He has ignored politicians and short-term blips and has kept inflation down over the past almost 20 years. This stability has helped create growth (alleviate poverty) and integration (an alignment of interests) in the world economy and has set the example for other central bankers the world-over.
There are some that might say that he has kept the US dollar too strong in that it has allowed the profligate US Government and its military machine to borrow money more cheaply than it deserves, but, that is another story.
Greenspan is/was to use a term I dont like all that much, cool. He worked with Ayn Rand and married beautiful strong independent women. When he speaks people listen, he is charisma personified. Some say your name is your destiny, just look at his name "greenspan"; can you think of a better one for the world's most important banker?
The establishment discussion around Bernanke is that the new Chairman has promoted using a computer to set monetary policy, keeping the growth of the money supply at between 1 and 2% as opposed to the Fed setting rates as it sees fit according to economic situation at any given moment in time. (Under Greenspan economic growth and the money supply have both increased 3% annually.) Bernanke's approach is a 'monetarist' one, one that has been espoused by Milton Friedman, another wise, famous and charismatic economist.
My problem with pre-stated monetary growth targets and computer-based adjustments is what happens when the economy doesnt follow the models? Then the Central Bank has to step-in and adjust, creating more chaos and risk, making the whole idea of pre-set targets self-defeating and worse than overt incremental adjustments by the Bank. Good in theory, bad in practice.
It should be noted that Bernanke simulated his model against Greenspan's actual performance and Greenspan "won", eg econ growth was the same under both scenarios but the computer-controlled monetary policy created larger unemployment.
However, like cheap sovereign money this is also another story, one that involves the nature of mankind. Some say if there is not full-employment the government needs to step-in and do something about it. Others say all want to work but government intervention prevents this opportunity. Others say get government out of the money business altogether.
Monetary policy is complex and reaches deep into all of our lives. Best of luck Chairman, slow and steady man but no doubt you know this.