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Archive for Sunday, September 4, 2005

Three emerge as contenders for Greenspan’s position

September 4, 2005

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— One of them worked at Disney World. Another was so apolitical that his colleagues were shocked to discover he was a Republican. And the third stormed out of Washington more than 20 years ago.

One of these three men may soon replace Federal Reserve Chairman Alan Greenspan, according to the conventional wisdom on Wall Street and in Washington.

Glenn Hubbard, who worked at Disney World while growing up in Florida, is currently the dean of the Columbia University Business School. Hubbard was President Bush's top economic adviser during his first term and helped shepherd his prized tax cuts through Congress.

Ben Bernanke, the apolitical economist, worked at Princeton University for 17 years before joining the Federal Reserve board in 2002. At the board, Bernanke tackled some of the toughest questions facing monetary policy, including the threat of deflation. Earlier this year, Bernanke left the Fed to become chairman of Bush's Council of Economic Advisors.

And the last of the three is Martin Feldstein, the president of the National Bureau of Economic Research and a Harvard University economics professor who served as President Reagan's top economist before making a famous break with his administration in 1984 over the size of the federal deficit.

The financial markets are comfortable with all three candidates, Wall Street economists said.

The decision is Bush's to make, subject to confirmation by the U.S. Senate. Whoever is picked could serve as long as 14 years.

"They are all pretty well known. They have all played in Washington circles," said John Silvia, chief economist at Wachovia Securities.

"They don't have Greenspan's practical edge to them, but they all have academic and government policy experience," agreed Mark Zandi, chief economist for Economy.com. "I hesitate to say they won't live up to Greenspan, but that would be hoping for an awful lot," he said.

One difference is that Bernanke is expected to push the Fed to adopt an explicit inflation target if he is appointed to run the Fed.

An inflation target would set the acceptable range for year-over-year increase in prices, creating a set of rules for Fed policy-makers to follow when setting interest rates.

Such formal targets have been put in place in many countries, and many academics argue that the U.S. central bank should adopt such a formal system. There also is some pressure for targets from financial markets, especially now that Greenspan is getting set to retire.

However, most economists said it would not be a big change because, they said, the Fed already has an informal inflation target.

Lately, Bernanke and Hubbard's stars seem to be rising compared with Feldstein, but observers say it is still too close to call. The White House has been very tight-lipped about its search.

"It is going to be a close race. No obvious candidate stands out," said James Dorn, a monetary policy expert at the Cato Institute.

Analysts note that most of Hubbard's research has been concentrated in tax policy, not on monetary policy. But he is said to be extremely close to Bush.

Others say that the job is Bernanke's to lose depending on his performance at the Council of Economic Advisors.

One political problem for Feldstein may be that he is on the board of directors of American International Group.

AIG has been plagued by multiple accounting investigations this year.

Other names that have been floated to replace Greenspan are Fed Vice Chairman Roger Ferguson, Treasury Secretary John Snow, his former deputy John Taylor, Fed Gov. Donald Kohn and Lawrence Lindsey, another former Bush advisor who was on the Fed board.

In any case, the Bush administration does not seem to be in a rush to make any decision. Greenspan's term at the Fed expires on Jan. 31, 2006.

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