|
|
Get Four
|  | MAY 26, 2005
By Michael Wallace Who Will Fill Greenspan's Shoes?Barring the outside chance the Fed chairman will stay past his 2006 retirement date, the race will likely come down to three candidatesAu revoir, Maestro? Federal Reserve Chairman Alan Greenspan is due to retire on Jan. 31, 2006. His eventual departure from the Washington limelight has everyone wondering: Who will be his successor? Technically, the chairman could still get a request to stay on for a spell by the Bush Administration, which is searching not only for his replacement but also candidates to fill two other vacant seats on the Federal Reserve Board. Notably, while Greenspan's 14-year board membership expires at the beginning of next year, his fifth four-year term as chairman does not expire until June 16, 2008 -- potentially extending his tenure another 2.5 years -- if no replacement is put forward. FELDSTEIN IN FRONT. Greenspan will be just over a month from his 80th birthday when his board term expires, after having served the Fed and the public faithfully for nearly 19 years, his first term having begun on Aug. 11, 1987. A Washington Post report speculated that his incentive to stay may involve claiming the crown of the longest-serving Fed chief, currently held by William McChesney Martin Jr. -- 18 years, 9 months, and 29 days. It may be up to Greenspan whether to rise to that challenge, but he should consider the alternatives if he wishes to retire on schedule. In fact, the Fed chief recently joked with Wharton Business School graduates that he would soon join their ranks, looking for a job. Most discussions about Greenspan's succession begin with acclaimed Harvard economist Martin Feldstein, 14 years Greenspan's junior. But the seeming rush to get former Fed Governor Ben Bernanke installed as head of the President's Council of Economic Advisers (CEA) -- even as the Fed board's ranks grow depleted -- has sparked rumors of his possible candidacy for chairman. Glenn Hubbard, who served as head of the CEA from 2001 through 2003, probably ranks as the third-leading candidate for the Fed post, thereby cementing a CEA link to all three top candidates (Feldstein served as CEA chief from 1982 to 1984). "OUTSPOKEN DOVISHNESS." If Bernanke can stake a claim for the position based on his performance during his May 25 confirmation hearings for the top job at the CEA, then he would seem to move into the pole position -- to replace not only Greg Mankiw at the CEA but also Greenspan. Indeed, his statements that the "independence of the Fed is paramount" and that he strongly believes the Fed should keep the Administration at arm's length suggest that he may be thinking beyond the CEA job. At a relatively youthful 51, Bernanke is senior only to Hubbard, age 47. Bernanke began his career at the Fed by assuming an unexpired term on Aug. 5, 2002. As an academic economist and monetarist, he shaped the policy debate on deflation risks that helped spur the decision to slash benchmark interest rates to 1% -- the lowest level since World War II. His outspoken dovishness on inflation during this period would qualify as a feather in his cap insofar as his backers are concerned. Yet his stated preference for inflation targeting -- or shooting for an identifiable target range on inflation, as do the Bank of England and European Central Bank -- risks asserting hard numbers over rationality, rendering him a risky choice for the Administration. His relatively vocal prior policy positions could potentially limit his flexibility in steering the Fed's more progressive risk-management approach, as was seen under Greenspan, and might reduce his internal bargaining power over policy choices. RISKY REMEDY. Bernanke came to the Fed Board via Princeton University, where he served as the chairman of the economics department. Independence is his greatest strength, and perhaps his greatest liability. This is best illustrated by his appointment of Paul Krugman to the faculty at Princeton, given the controversial economist and New York Times columnist's predilection to publicly skewer the Bush Administration at any opportunity. Though a sense of humor would almost seem a requirement of the job -- no Fed chief could endure congressional Q&A sessions without one -- Bernanke, a Republican, will have to abandon his preference for "Hawaiian shirts and Bermuda shorts" over business suits, lest he wish to betray that his heart is still in academia. Feldstein and Hubbard have liabilities that may overshadow their considerable qualifications as well. Though endorsed by former Dallas Fed maverick Robert McTeer, Feldstein, as CEA chairman under President Reagan, has consistently reminded Congress and the White House that fiscal deficits are unsustainable -- but has committed the politically treacherous act of proposing a dual remedy of raising taxes and cutting spending. Feldstein has since fallen back to the position that the present deficit is a much smaller percentage of GDP than was the case in the Reagan years. Still, his previous outspokenness and membership on the board of troubled insurer AIG (AIG ) may mark him as a risky candidate. Hubbard appears to have acted as a staunch defender of Bush tax cuts and downplayed fiscal risks, which will not endear him to Democrats. HONORABLE MENTIONS. Fed Governor Donald Kohn has also received honorable mention as a potential Greenspan replacement, but his status as a longtime Fed insider and right-hand assistant of the chairman perhaps makes him too much his own man at the Fed. He was moderately hawkish on inflation risks in the late 1980s and early 1990s, but in recent years he converted to the new productivity paradigm and migrated to the dovish camp. Conveniently, his full term will not expire until Jan. 31, 2016. Other honorable mentions go to former Fed Governor Larry Lindsey and John Taylor of the Treasury, though these worthies, along with a potential wild-card outsider, are likely the darkest horses in this race. Then again, some observers saw Greenspan himself as something of a long shot before his first appointment to the top Fed post. Whether Greenspan decides to go or linger, he certainly has nothing left to prove in terms of longevity or loyalty. To hand over the reins of the world's preeminent central bank, with the Fed's dual mandates of the highest sustainable growth and price stability in place, would be his greatest legacy.  Wallace is global market strategist for Action Economics
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
