Greenspan Is Leaving Office €  '¶ Who Will Be His Replacement?
Be prepared - in less than 250 days, on January 31, 2006 to be
exact, we will probably see one of the most monumental changes to
financial market history in over 18 years. For almost two full
decades, Alan Greenspan has held the top post at the Federal
Reserve, one of the most, if not the most important central banks in
the world. For a whole generation of traders who sprouted during
the tech boom, Greenspan is the only Fed Chairman that they know.
By Kathy Lien, Chief Strategist
Daily FX |June 16, 2005
http://www.dailyfx.com/index.php?option==com_content&task==view&id=10&Itemid=9
Be prepared - in less than 250 days, on January 31, 2006 to be
exact, we will probably see one of the most monumental changes to
financial market history in over 18 years. For almost two full
decades, Alan Greenspan has held the top post at the Federal
Reserve, one of the most, if not the most important central banks in
the world. For a whole generation of traders who sprouted during
the tech boom, Greenspan is the only Fed Chairman that they know.
Greenspan's decisions impact not only Americans, but also
every single person or corporation that is invested in dollar
denominated assets. In the FX market, $1.9 trillion changes hands
every day with 89% of all of those transactions involving the US
dollar, illustrating the influence that Greenspan has on the global
financial markets. The market has scrutinized and analyzed
everything from the size of his briefcase to every word that he uses
and doesn€  '²t use in his speeches. Since taking the top job,
Greenspan has managed to navigate the US economy through the 1987
stock market crash, the 1991 Gulf War oil spike, the collapse of
Long Term Capital Management, the burst of the Nasdaq bubble and
9/11 with only minimal setbacks for the economy. His ability to
get us over these tough hurdles with his characteristically calm and
logical demeanor has granted him a semi-divine status amongst both
investors- large and small, as well as international
political figures. During his tenure as Chairman, the US economy
grew 16 out of 17 years. There is probably no other person who
commands as much respect in the financial markets today as
Greenspan. What this means is that there are big shoes to fill and
at this point, there are three front-running contenders for his post.
Current President Picks The Chairman -Independence Will Be
Difficult To Achieve
Before going into the individual candidates, one point that needs
mentioning is that the President is the person that will determine
the appointment of the Fed Chairman. This is actually very
important because the Federal Reserve is suppose to be an
independent body that is not subject to political influence. For the
most part, since Greenspan has served under four different
Presidents, independence has been easier to achieve. However, this
time around, many believe that given the opportunity, any President,
including the current one will pick someone who is willing to
collaborate with him and avoid choosing a person who openly
criticizes his economic policies. This could hurt the US and the
dollar's credibility abroad since no other job needs
requires a higher level of distance from politics. The US Treasury
has already lost credibility and is typically seen as nothing more
than apart of the President's grand plan. With such massive
deficits,the Administration will have a vested interest in keeping
interest rates low to make sure that their cost of servicing the
debt does not become astronomical. According to former FOMC member
Susan Phillips, "Politicians like low interest rates.
That's a fact of life." Yet this could be dangerous for the US
economy and the US dollar since artificially low rates could cause
bubbles that may burst over the long run.
Who Are The Contenders?
The top three contenders for the job are Fed Governor Ben Bernanke,
Columbia Business school Dean R. Glen Hubbard and Harvard economist
Martin Feldstein. All three are economists with a firm
understanding of how things are run in Washington and with Ben
Bernanke slated to be the next chairman of the president's
Council of Economic Advisers (CEA), each of the candidates would
eventually have advised the President to some degree. This may be
seen as a potential risk to the independence of the Federal Reserve.
The job qualifications as listed by the Associated Press are "must
have credibility with Wall Street and the ability to deal deftly
with financial turmoil, anytime, anywhere. Politically adept. A
consensus builder. Unflappable. Business experience welcome, but
not required." Best said by former FOMC member Laurence
Meyer, the chairman needs to be "willing to play by the rules in
normal times, but does not hesitate to depart from them in unusual
circumstances." With that, lets look at how each of the
candidates fare:
Ben Bernanke
Starting his career with a Ph.D. from MIT and a long time teaching
stint in economics and public affairs at Princeton University, Ben
Bernanke is probably best known for his term on the Federal Reserve
Board of Governors, which he served since August 5, 2002. As a
member of the board, he has quickly risen in recognition over the
short span of his term as his speeches are now essentially the
second most analyzed by Fed watchers after Greenspan. His most well-
known stances include an unwavering devotion to inflation-targeting,
which Greenspan opposes. He is also known as "printing-press" Ben,
a title that he has been criticized for, because it means that he
has explicitly promised to print money as a manner of increasing
liquidity to generate inflation, if necessary. Bernanke has been
credited with shaping the policy debate on deflation and helping to
spur the decision of lowering interest rates to 45 year lows of 1%.
Other work Bernanke has done indicates his advocacy of combining
even more indicators into the models used to determine monetary
policy in order to achieve more effective economic stabilization. He
has studied this possibility over the years and penned papers
describing possible implementation methods. As he prepares to take
on the role of President of the CEA, many see this as a preliminary
trial position before Bush names him as the top choice to follow
Greenspan, who was head of the CEA under President Ford. Of the top
3 contenders for the position, Bernanke is the last one to come into
this role. Having Bernanke as Fed Chairman would mean that we would
probably be moving to an inflation targeting policy similar to the
ones followed by the European Central Bank and the Bank of England.
This would be more restrictive and less flexible than the current
policy, but having Bernanke would also mean bringing about greater
disclosure to the public and hopefully the credibility to the Fed.
Martin Feldstein
The oldest of the three candidates, Martin Feldstein was one of
Hubbard's supervisors for his PhD dissertation at Harvard.
He served as the Chairman of the CEA during President
Reagan€  '²s
term and is seen as the most controversial candidate due to his
stance on some economically and politically important issues. His
support for private accounts for Social Security would certainly
turn off some Democrats, but his criticism of running large budget
deficits doesn't sit very well with some Republicans. Bush, however,
has reasons to favor him since he's had ties with Bush Sr. and
was also an adviser on George W€  '²s presidential campaign.
Feldstein is currently a professor at Harvard and the President and
CEO of the National Bureau of Economic Research, a private non-
profit research organization.
Aside from the political arena, Feldstein is also very popular on
Wall Street and he sits on the board of three corporations (Eli
Lilly, American International Group, and HCA). He also does
consulting work for a number of companies and writes commentary for
the Wall Street Journal. Aside from business leaders, Feldstein is a
solid choice and could also be more accepted by the community of
global leaders and the central bankers since he has the most
distance from the current Bush administration.
R. Glenn Hubbard
The youngest of the three candidates, R. Glenn Hubbard is the
current Dean of the Columbia Business School and was head of the CEA
under George W between 2001 and 2003. At one time, he was referred
to as the "most influential chairman of the Council of
Economic Advisers in two decades." In his run, he was a strong
proponent of Bush's tax cuts and has always been a free-market
economist.As far as the rest of his actions go, many have seen him
stray from the traditional CEA role of ignoring politics and simply
going on what is good for the economy. Just opposite of Feldstein,
he has never criticized Bush's glutinous spending habits. Hubbard is
also quite adept at weaving both fiscal and monetary policy, and
with his pro-Bush leanings, he could turn out to be a very strong
candidate.
The Curse of the First Year
Despite how qualified these prospective candidates are, the curse of
the first year as Fed Chairman could haunt any of the nominees.
Since 1970, every Fed Chairman that assumed the top job has faced a
major crisis shortly after entering office. According to Toni
Straka of Prudent Investor, "Arthur F. Burns, chairman from
February 1, 1970, climbed the top chair only to oversee the
beginning of the 1970's bear market, the closing of the gold window
and the first oil shock 1973. When he stepped down on August 6,
1979, his successor Paul A. Volcker had to fight double digit
inflation with the highest Fed Funds rates seen ever and managed
that the economic downturn through his tightening only became an on-
and-off recession from 1979 to 1982 with GDP never declining more
than a quarter in a row." Greenspan himself had to deal with the
stock market crash of 1987. With current long-term yields at such
low levels, budget deficits extraordinarily high and the economic
outlook uncertain, it wouldn't surprise us if the next Chairman was
faced with a similar fate. Yet for the dollar, a crisis
domestically would have dire consequences.
Greenspan Could Stay on for Longer
Yet the market could be spared the uncertainty for a few more months
as Greenspan may be compelled to stay on until at least May 11, 2006
because by then he would earn the title of the longest-serving Fed
Chairman ever. The current longest serving Fed Chairman is William
McChesney Martin Jr., who held the job from 1951 to 1970. Like the
markets, President Bush is quite fond of Greenspan and could
encourage him to extend his post. This would allow the
Administration to put further thought into each candidate or look
for other possible successors. The process would be easy, but that
also means the markets would have to hold its breath for a while
longer. Each new Fed Chairman needs to be confirmed by the Senate,
so if Greenspan was convinced to stay on, all Bush would need to do
is put off nominating a replacement. According to Bloomberg News,
Karl Rove, Bush's chief of staff was quoted last month as
saying that it would be "premature" to announce a replacement this
year.
Dollar and Other Market Responses
Finding someone to fill Greenspan's shoes seems like a
daunting task, but the same was said when the government was looking
for someone to fill Greenspan's predecessor Paul A.
Volcker's shoes. On the day that Greenspan was announced as the
replacement for Volcker, the trade-weighted dollar index fell 1.7
percent, the S&P 500 index slid 0.5% while Treasury yields increased
25 to 35 basis points. The effect was did not last long though, as
Greenspan managed to maintain the reputation of the Federal Reserve
throughout his tenure. When the new Fed Chairman is announced, the
dollar could see a similar fate as initial uncertainty for a new
Chairman, especially following in the footsteps of Greenspan, causes
some traders to think about whether this person will be competent
enough to take on such an important role.
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