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October 24, 2005
Alan Greenspan "got"innovation. Does Ben Bernanke?
The announcement that fed chairman Alan Greenspan will be replaced by Ben Bernanke, the chief economist to President Bush, has enormous implications for CEOs, managers and consultants trying to foster innovation in America. The worlds of finance, design and creativity don't overlap in an obvious way but they most certainly do. The ability to finance new startups, take risks on new technologies and innovate is a direct function of lots of money being available at reasonably modest rates.
Greenspan is often criticized for bubbles--first the telecom bubble and now the housing bubble. I would argue that he should be remembered for his focus on productivity and growth. Greenspan was the first Fed chairman to recognize that new technologie can sharply raise the growth rate of productivity and thus limit the rise of inflation. That meant the economy could grow faster without increasing inflation. And that meant more jobs, more startups, more wealth, more homes for people, more of just about everything--including, alas, bubbles.
In the past, each time the economy picked up steam, the fed would "take away the punch bowl" by raising rates and triggering a recession. We forget now but a roaring debate in the 90s over this issue was won by Greenspan who kept rates low as the economy grew very fast because he believed technology would boost productivity. He was right. And when the telecom bubble burst, the recession that did follow was mild by historical standards.
Will Bernanke be so wise? Maybe. Bernanke is known for wanting to have a formal inflation rate target, 1% to 2%, that the fed would enforce automatically. He pushed for it while he was at the Fed. Without engaging in partisan polemic, a world of vast changes, new technologies and great uncertainties probably cries out for flexibility on policy, not rigidity. Greenspan's genius was to take in new information and adapt policy. Hopefully, Bernake will not be chained to any orthodoxy in his pursuit of growth and stability for the economy.
Bernanke is a sophisticated economist and has suggested a number of interesting theories that show him to be an adaptable person. He was one of the first people to deal with the issue of why long-term rates continue to be relatively low even though the fed is raising short-term rates to fight the inflationary surge caused by higher energy prices. Bernanke suggested China's huge savings were being recycled into the US by the trade deficit and Beijing's buying of billions of dollars worth of Treasury bonds. It was a novel idea and possibly true. I don't really know. But the argument reflects the kind of open mind that Greenspan has shown in his many years at the helm of the fed. If he uses that creative approach to problems, Bernanke will be a champion of innovation--just Greenspan.
Fed and innovation
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