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Greenspan: The Gift That Keeps on Giving


President Bush surprised just about everyone, including Alan Greenspan, when he let slip on Apr. 22 that he would renominate the 77-year-old Federal Reserve chairman -- even though his term isn't up for 14 months. Among the shocked Beltway insiders were supply-side conservatives still fuming that Greenspan hadn't wholeheartedly backed Bush's $726 billion tax-cut plan.

But Bush's preemptive decision shouldn't be much of a surprise. It already looks like a shrewd economic move that may pay increasing dividends in the form of a stronger economy and more stable financial markets. And that will give a political boost to a President whose reelection could be jeopardized by a troubled economy.

While Greenspan doesn't enjoy the same mythic status in the markets that he did during the Roaring '90s, his credibility as an inflation-fighting monetary manager remains high. At least initially, Wall Street won't have the same confidence and comfort level with his successor -- no matter who it is. "His replacement's performance will be judged less generously by the markets," says Louis Crandall, chief economist at Wall Street consultants Wrightson ICAP LLC. That means the new boss will be more prone to raise interest rates to rein in economic growth and contain inflation, just as Greenspan did when he took over the Fed from Paul Volcker in 1987. And in an election year, that would be bad news for Bush.

In contrast to the tendency of any new Fed chairman to tighten policy, Greenspan in 2003 is likely to tilt toward keeping rates low, says former Fed Governor Laurence H. Meyer. That's because Greenspan, who is widely expected to retire in 2006 when his separate term as a board member expires, is more concerned about his legacy, Meyer says. And that legacy rests on his ability to revive the still-sputtering economy. So Greenspan is likely to hold off on aggressively raising rates until the economy is charging ahead. Given his stature with his Fed colleagues and the markets, he'll be able to do that without fanning inflation fears.

More important, the President's decision headed off what was shaping up to be a fractious election-year fight within his party over Greenspan's successor. A hard core of conservative Republicans argues that the Fed chief is largely responsible for the troubles the U.S. economy now finds itself in. "It's a Greenspan recession," says Senator Jim Bunning (R-Ky.). The conservatives, who say Greenspan tightened monetary policy prematurely in 1999 and didn't cut rates fast enough when the stock bubble burst a year later, want to replace the central bank chief with someone like Dallas Fed President Robert D. McTeer, who's perceived as less of an inflation hawk.

Mainstream Republicans, on the other hand, think Greenspan on the whole has done a good job. They're pushing for someone like Harvard University Professor Martin S. Feldstein, a respected academic and Bush campaign adviser, to take over when Greenspan steps down.

By opting to appoint Greenspan to another term, Bush also avoided the type of jockeying for power that inevitably goes on when a new chief takes office. With the Fed leadership already in a bit of flux -- New York Fed President William J. McDonough is leaving to head up the Public Company Accounting Oversight Board -- such internal wrangling could have unnerved the financial markets.

Bush's father reappointed Greenspan to a second term in 1991 and later came to regret it as the Fed chairman failed to deliver the rip-roaring recovery needed to win reelection. By choosing Greenspan for a fifth and final term, George W. is laying down a big bet that this time will be different. Talks to create a massive asbestos trust fund are getting bogged down by corporate bickering. In a closed Apr. 29 meeting of businesses facing liability for workers' asbestos-related health problems, a proposal to allocate payments among them deteriorated into dissension, with smaller companies accusing bigger ones of offering to pay less than their fair share.

According to documents obtained by BusinessWeek, an initial plan would create a six-tiered fund, with contributions dictated by revenue and the amount a company already has paid out in claims. The fund would collect $2.5 billion in its first year, with companies paying $100,000 to $25 million a year for 10 more years. In addition, insurers are expected to fund half of the proposed $90 billion trust. Sources say midsize companies complain that under the proposal, a company with $5 billion in annual revenue might be forced to pay as much as a company with $100 billion in revenue.

Even then, there's a risk that the fund -- meant to relieve the courts of about 200,000 asbestos liability cases and protect some defendant companies from bankruptcy -- won't live up to its promises. Plaintiff lawyers are already looking for ways to sidestep the fund. One plan: sue over asbestos-like ailments while blaming dust and silica.

If business can iron out its differences, there is still the problem of labor: It wants at least $120 billion in the account, with payouts of up to $1 million per victim. Should the money run out, unions want either business or government to step in.


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