Who Will Be The Next

Greenspan?

3 in running to oversee U.S. economy's health as next chairman of Federal Reserve Board

September 01, 2005|By KNIGHT RIDDER/TRIBUNE

WASHINGTON - Whoever replaces Alan Greenspan as Fed chief will have to navigate the economy through so many uncharted and dangerous waters, it's a wonder anyone wants the job.

For starters, economic expansions become more fragile with age, and this one has never seemed very healthy from the start.

In addition, housing prices are certainly inflated, if not in a bubble, and will be a headache whether they keep rising or fall.

And no Fed chief can rest easy with energy prices at current high levels because "stagflation" - high inflation mixed with stagnant growth - is certainly a possibility.

Finally, looming over the economic landscape are the low U.S. savings rate and large current account deficit that are forcing economists to rewrite the textbooks.

"It could be that we have a soft landing and the new chairman comes in and says `wonderful' and has a quiet period to work with," said former Fed Gov. Lawrence Meyer. "But there are many other alternatives here," he said.

"A big stack of issues could pop up," agreed Ethan Harris, chief economist for Lehman Brothers.

At the moment, the economy appears quite healthy with strong job growth. The Fed has raised rates steadily from 1 percent in June 2004 to the current 3.5 percent and has signaled that it plans to continue with a measured pace of increases.

According to the conventional wisdom on Wall Street and in Washington, the main contenders include:

R. Glenn Hubbard, dean of the Columbia University Business School. Hubbard, who worked at Disney World while growing up in Florida, 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, he left the Fed to become chairman of Bush's Council of Economic Advisers.

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

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

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

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

Analysts note that most of Hubbard's research has been concentrated in tax policy, not 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 on the Council of Economic Advisers.

One political problem for Feldstein may be that he is on the board of directors of American International Group, which has been beset by multiple accounting investigations this year. The probes precipitated the departure of its longtime chief executive, Maurice R. "Hank" Greenberg, and forced AIG to restate more than five years of earnings in May after an internal accounting review.

The first tough question for the new chairman could be how much more to tighten in the current cycle and, more fundamentally, what is the acceptable rate of inflation. The risks increase if the new chairman focuses on inflation like a laser beam to establish his or her inflation-fighting credibility.

"On the tightening cycle, they have a real decision to make," said Wachovia's Silvia.

Will the Fed allow the economy to continue to grow at its current 3.75 percent rate, or would that engender inflation over time?

There is a chance the Fed's steady rate increases this year could trigger a severe slowdown in housing prices, leading to a quite "significant slowdown" next year, Meyer said.

Another pressing concern is oil prices, which have stayed higher for longer than economists had forecast. They worry that it might eventually disrupt economic growth and fuel inflation - a period of so-called stagflation, a troubling condition that defies easy solutions.

What happens next in the housing market also is seen as uncharted territory.

Outright property depreciation is rare unless there is general economic decline, said Richard DeKaser, chief economist at National City.

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