From the Economist‘s Global Agenda Watch, “Betting on Bernanke”:

The Federal Reserve has raised its key interest rate by another quarter of a percentage point, to 4.5%, at Alan Greenspan’s last meeting in charge. His successor, Ben Bernanke, is taking over at or near the end of a cycle of monetary tightening, and thus may sit on his hands for a while. But his first big challenge is not far away.

Sitting on his hands.  I like that idea, actually.

After leading the Federal Reserve for over 18 years, Alan Greenspan, often called “The Maestro”, is bowing out. On Tuesday January 31st he presided over his last meeting of the Fed’s interest-rate-setting committee. The result was a reprise of recent moves: another quarter-point increase in the target interest rate, to 4.5%. Having brought the current cycle of monetary tightening near to a close, Mr Greenspan can claim to be ending things on a note of triumph: inflation and unemployment are low and the Dow Jones share index, which stood at 2,680 when he took office, is flirting with 11,000. When Ben Bernanke, his successor, takes office on Wednesday, Mr Greenspan will leave the stage to heartfelt applause.

Though Mr Bernanke is well regarded, markets are still a touch nervous about this changing of the guard. Mr Greenspan, though not loved by all, is at least a known quantity; his successor is, in the eyes of many, a strange and unpredictable new creature who will struggle to ensure a continuation of the good times seen during Mr Greenspan’s reign: a productivity boom, America’s longest postwar economic expansion and, until the most recent quarter, an extremely strong recovery from the 2001 downturn. This has been more than enough to win forgiveness for the bad times, even though those include two stockmarket crashes and—many believe—a housing bubble ripe to burst.

One of the knocks I’ve heard on Bernanke is that he is, ironically, too plainspoken—that is, too easily understood.  Much of Greenspan’s success can be attributed to his foggy, quasi-Zen-like pronouncements which, to me at least, often recalled Peter Sellers’ Chauncey Gardiner in Being There.  There was a soothing potentially deep confusion to them—as if Yoda had taken a dose of LSD and suddenly whipped out an abacus.

Market confidence is a central banker’s greatest asset, and Mr Bernanke will have to work hard to establish his credibility as both an inflation hawk and a recession-fighter — as did Mr Greenspan when the stockmarket crashed in October 1987, a mere two months into his first term. Though markets have, overall, been happy with Mr Bernanke’s appointment, he needs to dispel worries that he may be too soft on the risks of loose money.

Of particular concern to some is his attitude towards bubbles in the price of assets, such as securities and housing. Thanks to easily available credit, these may have replaced consumer-price surges as the main risk of excessively loose monetary supply. Though Mr Greenspan warned of “irrational exuberance”, he did not raise interest rates high enough to wring the speculation out of the market, a choice which has brought harsh criticism from many quarters, including The Economist. Mr Greenspan has argued that it was better to do as he did, stepping in after the bubble popped with plenty of liquidity to prevent it from doing too much damage to the underlying economy. But many blame the current frothiness of the housing market, particularly in dense coastal areas, on this policy.

Mr Bernanke is also against intervening to deflate asset-price bubbles. In 1999, at the height of the bull market, he co-wrote a paper arguing that targeting asset prices when consumer inflation was low would tend to increase, not decrease, economic instability. He will probably have the opportunity to rethink this stance early in his term. There is evidence that house prices have already softened in many of the frothiest markets. A broader, steeper fall may be in the offing. Given that rising house prices have been one of the pillars of the current economic expansion, this could present Mr Bernanke with a slow-motion crisis early in his term.

Just so long as any long-term interest rate hikes wait until after I’ve signed up at 5.6%.  Then he can dress them in leotard and take out to a swingers’ club, for all I care…

[…]

Another worry is the current-account deficit, which is large and growing. Mr Bernanke is famous for having argued that the deficit is so big because of a “savings glut” in other parts of the world. According to him, other countries’ miserly consumers and institutions, faced with a dearth of good investment opportunities at home, are pouring their savings into American credit markets, providing ultra-cheap funds for the government, and American consumers, to borrow. If something triggers the flight of those funds, Mr Bernanke will be called upon to stem the flow without tipping the economy into recession—a difficult task, as central bankers in countries like Argentina can attest.

Unfortunately for him, Mr Bernanke will not have the opportunity to establish his inflation-fighting credibility the easiest way: by continuing the widely applauded policies of his predecessor. Most analysts think that the current cycle of monetary tightening is at or near its end, particularly since the latest GDP figures were so disappointing. Mr Bernanke may be forced to sit on his hands until he is confronted with a crisis. He probably won’t have long to wait.

Unless, of course, he does.  In which case, he’s going to have some mighty numb hands.

God bless America.