The Real Difference Between Greenspan and Bernanke

Bloomberg has a good piece today contrasting Bernanke’s and Greenspan’s problem solving styles. But reading it set off a flash as to where their real difference lie. We’ll review Bloomberg’s take and then mine.

The Bloomberg piece, “Bernanke Spurns Greenspan Quick Fix, Seeking Data, Deliberation,” is a flattering bit of reporting. It tells us that Bernanke is having the Fed’s Macroeconomic and Quantitative Studies unit run various scenarios on possible economic outcomes and they will serve as a key building block in the September 18 interest rate discussions. The story notes:

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 MAQS are in charge of the quantitative model of the U.S. economy known as FRB/US or “Ferbus.” By adjusting for such things as higher financing rates for American companies or a sharp decline in home prices, the team provides policy makers a glimpse of possible outcomes….

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.

The speech was critical of models, and elevated the role of judgment. He invoked theories of Frank Knight, a University of Chicago economist from 1927 to 1955, to explain his ideas of risk management.

Knight distinguished between risk and uncertainty: Risk is quantifiable, uncertainty is random. Managers “would try to turn those uncertainties into knowable costs,” said Ross Emmett, a professor at James Madison College at Michigan State who has edited a collection of Knight’s essays. “They would purchase insurance.”

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.”….

Speeches suggest that members of the current FOMC are aware of the danger of overpaying for insurance again.

The piece is worth reading in its entirety.

Now I imagine some readers cringed at the use of models, but suspend judgment. Greenspan had a model too, but it was in his brain and he couldn’t explain how it worked.

My reaction when I read the piece was that it was a public relations plant, and I thought it was brilliant. It positions Bernanke as taking the analytical high ground. He is using more not only rigorous but also relying on expert consensus. (Studies of decision processes have repeatedly found that groups of experts make better decisions than single experts).

I was pleased at the thought that the Fed was orchestrating this sort of coverage because it would help Bernanke fend off the pleas for intervention by the housing industry and Wall Street. If he can cultivate the image of having a better grip on current and prospective conditions, it should help him hold his ground (not matter what he does, the sectors that are hurting will howl for more).

So then I went to the Wall Street Journal and the New York Times to look for their version of this piece. I found nothing. Zero. Zip. Nada. Nothing on the lovely MAQS.

I then realized this wasn’t media outreach at all. Bloomberg had found a new angle and run a story, nothing more.

But this article is precisely the sort of coverage that the Fed could use now, and not in Bloomberg, but in the Journal or the Times or a news service, like the Associated Press or Reuters. The discussion of the rate cut has become badly politicized and even the speeches by Fed officials this week aren’t enough to counteract all the clamor from market participants and the housing industry. They’ve managed to focus the debate on their tsuris, 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 (I am permitted to say that, since I first publicly got on his case in 2000), 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.

My advice to Bernanke? Give the markets a quarter point Fed funds rate cut next week. Go through your models and tell them the economy is much more resilient than many believe (mind numbing detail should accompany this discussion, listeners need to be overwhelmed by Expert Power).

If you give the financial community nothing, you will spend so much time dealing with attacks on all fronts that you will be badly distracted and probably make worse decisions going forward. And even if you give the markets what they think they want, the half point cut, there will be euphoria for three hours and then they will focus on the information content of the cut, that the Fed must agree than things are bad, and that really isn’t good at all.

Now personally, assuming there was nothing in all that MAQS data to alter my prejudices, I’d hold my ground and not lower target rates for at least another month. But Volcker was my hero and he was willing to drive the economy into recession to tame inflation. Most of us forget is that inflation was so bad that it was clearly undermining the functioning of the economy.

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 extemely 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 poltical game.

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  1. dug

    Comparing this post with your previous one, couldn’t one equally conclude that the Fed would love to get this message out beyond Bloomberg, but the other media outlets aren’t interested? I don’t imagine the Fed would see the need to get the message into the FT; the WSJ won’t touch it because it goes against their own line; so the only one to explain is the NYT.

    I can’t distiguish between your concerned explanation that it’s a story Bloomberg just ferretted out, and that the Fed is still getting the hang of planting this kind of story, so NYT didn’t bit.

  2. Yves Smith


    You are correct that I can’t prove that there wasn’t an effort by the Fed to tell this story. However, I know people who run PR/corporate communication firms. The Fed is very much in the press these days, and there aren’t a lot of other hot business stories (the state of the housing market is the only other one and that is tired).

    It should not have been hard to get this story picked up if that was what the Fed wanted. The result, of only one news outlet running it, and that the one least read by the highest priority target, the mass audience, is not consistent with a professional media campaign.

    And remember, in the Greenspan era it was Greenspan who was the focus of media attention. It seemed to be largely the result of his interest in being well liked (people I know who knew the Fed than said that was his biggest weakness) , perhaps having some good coaching, and having a long tenure in a less media savvy era (ie Greenspan could also experiment a bit. My dim recollection is he didn’t get really fawming coverage until the mid-late 1990s). Greenspan’s position with the media was not the result of an institutional effort.

  3. Anonymous

    Buiter argues that exports are offsetting housing and that inflation credibility is on the line and at minumum that this justifies holding

    At the FT (CBS) the Maestro backs Ben.

    Some musings…

    Does a month make that much difference in staving off a recession? I think one might argue not. Does it avoid being lured into problems King has indentified?
    I think it might. Does it get you fingered for any problems in financial markets… probably. But not convincingly. But they seem to have subsided.

    Does it get you fingered for a housing driven recession? Not if you play your cards right. Does it get you fingered for a financial markets driven recession? Not if it is housing driven and not unless I get the credit for the expansion… in which case….

  4. Anonymous

    So far, Mr Bernanke is clueless from what I’ve seen.

    My guess is that Chairman Ben won’t serve out his full term.


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