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Source:  http://www.knoxstudio.com/shns/story.cfm?pk=FEDPRIMER-01-02-06&cat=WW

WASHINGTON
Bernanke to become 14th Fed chair

By MARY DEIBEL
Scripps Howard News Service
January 02, 2006

WASHINGTON - Ben Bernanke will succeed the retiring Alan Greenspan as head of
 the Federal Reserve at the end of this month, becoming the 14th chairman since
 Congress created the central bank to put an end to "moneyed trusts" that
 politicians blamed for periodic financial panics.

Before Congress chartered the Fed in 1913, it fell to Wall Street financiers,
 principally J.P. Morgan, and thousands of small community banks to bankroll
 American business and territorial expansion. The economy was based on a
 constant currency supply pegged to the price of gold so that money couldn't
 expand in case of a bank run.

After a century of these panics, Congress set up the Federal Reserve System
 in hopes of maintaining an adequate supply of currency and credit and to try
 stabilizing a mushrooming industrial economy.

Meantime, the United States and other nations gradually moved away from the
 gold standard, which the U.S. severed entirely in 1971 when President Nixon
 announced the United States would no longer redeem dollars for gold.

Still, the Fed remains custodian for a quarter of the world's monetary gold
 reserves at the New York Federal Reserve Bank 80 feet below sea level on
 Manhattan bedrock in a gold vault visited by more than 20,000 tourists each
 year.

The Federal Reserve Board of Governors, led by the Fed chairman, was established
 with 12 regional Federal Reserve Banks to supply the nation with money through
 commercial banks.

The Fed also was set up to supervise nationally chartered commercial banks'
 operations, including lending practices.

It also serves as a credit regulator whose recent actions have ranged from
 requiring clearer terms for car-leasing and mortgage disclosure to new rules
 that take effect in January requiring credit-card issuers to raise minimum
 monthly payments to cover interest, fees and some outstanding balance on
 credit-card debt.

The Fed also handles check-clearing duties, although its fleet of trucks and
 airplanes got replaced with electronic fund transfers after the 9/11 terrorist
 strikes temporarily grounded check-clearing nationwide.

The Fed's policy-making Open Market Committee has charge of monetary policy and
 is made up of the chairman, the board members and a rotating group of regional
 Federal Reserve Bank chiefs.

The committee uses interest rates that it charges member banks and the banks
 charge each other for overnight borrowing to increase or contract the supply
 of currency and credit and try keeping the economy on an even keel. "Open market
 operations" are the principal tool for changing the money supply in which the
 New York Fed buys and sells U.S. Treasuries and other federal agency securities
 to change the amount of cash reserves or the cost of money as denominated in
 interest rates.

The 1970s oil shocks and the end of all ties between the greenback and gold made
 the Fed's controlling of the world supply of U.S. currency central to its role,
 says Pacific Research Institute economist Lee Hoskins, a member of the "Shadow Fed,"
 a curmudgeonly committee formed in the 1970s to keep an eye on the central bank.

Arthur Burns, the White House economic adviser Nixon made Fed chief in 1970, came
 to believe "the logic of events" dictated expansive growth of the U.S. money
 supply on his watch, according to Burns biographer Wyatt Wells.

Eventually, inflation soared to double digits as the wage-price spiral raced out
 of control, and it fell to President Jimmy Carter's choice of Paul Volcker as
 Fed chief in 1979 to break the back of inflation by ratcheting up interest
 rates, sending mortgage and car loans soaring to 20 percent.

As Volcker's successor in 1987, Greenspan stayed on the inflation-control course
 through interest rates. Inflation was targeted implicitly under Greenspan, whose
 verbal obfuscations were studied from Wall Street to Main Street for clues even
 after the Fed finally went public with announcements of interest rate decisions
 in 1994.

Historian Martin Mayer, author of "The Fed: The Inside Story of How the World's
 Most Powerful Financial Institution Drives Markets," credits Greenspan with
 realizing the Fed couldn't survive its super-secret ways in an information age
 that expects worldwide disclosure in the click of a computer mouse.

Greenspan came to enjoy mythic stature, enough so that "Maestro" was the title
 of Bob Woodward's celebrity bio that praised Greenspan's rapid response to the
 1987 stock-market crash, the '90s Mexican peso crisis and Asian "contagion."
 Fed accommodation when the tech bubble burst and the 2001 terrorist strikes only
 added to his luster.

But the concept of Fed chief as financial rock star is a recent phenomenon and a
 role Bernanke isn't likely to repeat, Fed-watchers agree.

For one thing, globalization and deregulation of financial markets, along with
 America's reliance on foreigners to finance our twin trade and government
 deficits, make it tougher for Fed actions to have the same force at home and
 abroad and for future Fed chiefs to reach Greenspan's status.

For another, Bernanke is one of a number of monetary economists to foresee
 focusing a central bank's role on fighting inflation through controlling the
 money supply. He's been "hooked" ever since he read Milton Friedman and
 Anna Schwartz' seminal 1963 tome "Monetary History of the United States" as a
 graduate student, Bernanke told a celebration of Friedman's 90th birthday.

To advance monetary policy, Bernanke has theorized in favor of
 "inflation targeting," in which the Fed sets explicit goals for inflation
 control "to anchor public expectations about inflation."

Were he to translate inflation targeting theory to fact by winning the
 consensus of the Fed's Open Market Committee, "It would make the Fed accountable
 because now there's no way to challenge what the Fed does," says Shadow Fed
 founder Schwartz, now 90 as well.

Bernanke is also a student of the Depression, the Fed's most dismal failure.

With mounting bank failures and depositor runs on banks that fought to stay open
 in the wake of the 1929 stock market crash and deepening recession, Congress
 moved to create a new array of bank, thrift, securities and insurance regulators.

Those Depression-era firewalls separating banks, brokerage houses and insurance
 companies stayed largely in place until the 1990s. In 1999, Congress and
 President Bill Clinton agreed on a financial deregulation bill that made the
 Federal Reserve the super-overseer of a U.S. financial system that now promises
 one-stop financial shopping.

It is a role and responsibility to which the Fed is still adjusting, says
 University of Pennsylvania political scientist Donald Kettl, author of
 "Leadership at the Fed."

Kettl notes that Greenspan hasn't hesitated to speak out the "significant risks"
 of the federal budget deficit, an "irrationally exuberant" stock market and
 other issues not strictly in the Fed's purview - something Bernanke says he
 doesn't plan to do.

At his Senate confirmation hearing, Bernanke promised to maintain Greenspan's
 policy of focusing on inflation and price stability "as monetary policy's
 greatest contribution to general economic prosperity and maximum employment."
 But he also pledged not to inject himself in political fights over tax cuts,
 federal spending and other policies that marked Greenspan's rule.

(Contact Mary Deibel at DeibelM(at)shns.com)