Milton Friedman, whom we have mentioned on several occasions (here, here and here, for example), warned that an indecisive Fed was like a “fool in the shower.” The NYT discusses the issue of Ben Bernanke:

On virtually every topic of significance — how to prevent deflationary panics, for instance, or to gauge the effect of Fed moves on stock-market prices — Bernanke wrote one of the seminal papers. He championed ideas for improving communications between the Fed — whose previous chairman, Alan Greenspan, spoke in riddles — and the public, believing that clearer guidance about the Fed’s aims would help the economy run more smoothly. And having devoted much of his career to studying the causes of the Great Depression, Bernanke was the academic expert on how to prevent financial crises from spinning out of control and threatening the general economy. One line from his “Essays on the Great Depression” sounds especially prescient today: “To the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy.”

Bernanke, who came to the job with a refreshing humility — a desire to be less an oracle like Greenspan than a plain-speaking technocrat — faces exactly this sort of crisis now. Ever since last summer, a meltdown in financial markets has led to daunting losses in the banking industry and throughout Wall Street. Despite having written extensively on how to deal with such episodes, Bernanke has thus far been unable to reinstill a sense of confidence. His faith in modern forecasting models notwithstanding, he failed to foresee that the sudden rise in homeowner defaults, which triggered the crisis, would have such far-reaching effects. And the monetary medicine that he has prescribed, including some of the very tools that he lovingly detailed in his research, have yet to produce a turnaround.

At the same time, Bernanke’s attempt to improve the way the Fed communicates has misfired and often left investors confused, partly because he has repeatedly shifted course over the future direction of interest rates. His hero, Milton Friedman, is said to have warned against an indecisive Fed acting like a “fool in the shower” fumbling with first the hot water and then the cold. Bernanke has gotten close. Perhaps worst of all, he has failed to persuade investors that the Federal Reserve, which was formed in 1913 for the very purpose of halting market panics, is up to the job. “Bernanke is seriously behind the curve”…

His academic research was steeped in the increasingly sophisticated discipline of econometrics, which uses computer models to simulate (and predict) the economy. By contrast, Greenspan often relied on his hunches. The difference is partly generational, but Bernanke is clearly more comfortable working with mathematical formulas than with anecdotal examples. (One looks in vain in his Depression writings for stories of banks that failed or of workers who lost their jobs.)

At Princeton, as a self-deprecating, tweedy professor, he discovered a talent for leadership and became department chairman…The Open Market Committee has eight regularly scheduled meetings a year. The week before the members gather, they are sent the “green book,” with the staff’s economic outlook, and also the “blue book,” with a menu of policy options…After briefings from the staff, the members go around the table as if it were a Princeton seminar, each expounding on his or her view of the economy (transcripts of Bernanke meetings are running much longer than those under Greenspan). The bank presidents give an idea of conditions around the country, and the governors tend to coalesce around Bernanke’s view.

In Greenspan’s era, the chairman led off by giving a lengthy disquisition of his outlook and policy recommendations. Every member had a chance to speak after him, but the pressure to agree with the maestro was daunting. In a profound switch, Bernanke now presents his views last. The committee also consults academic formulas that derive the theoretically “correct” fed funds rate according to the level of inflation and other economic indicators.

Note the italicized paragraph. It is not comforting.

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