A highly qualified runner-up

Martin S. Feldstein had many things going for him as Fed chairman, but also some drawbacks

October 26, 2005|By BLOOMBERG NEWS

New York -- Martin S. Feldstein had all the qualifications to become the next chairman of the Federal Reserve.

A conservative Republican, the internationally renowned Harvard University economics professor was an adviser to George W. Bush's first presidential campaign and led President Ronald Reagan's Council of Economic Advisers.

Feldstein, 65, was passed over Monday in favor of Ben Bernanke, 51, Bush's top economic adviser and a former Fed governor.

Feldstein's ties to troubled insurance giant American International Group Inc., his outspoken advocacy of Bush's plan to overhaul Social Security and his support for a tax increase as Reagan's adviser meant he would likely face a tough nomination battle at a time Bush is looking for a smooth confirmation.

"Feldstein is one of the best economists on the face of the earth," said Pete Davis, who was an economist for the Senate Budget Committee when Feldstein was appointed to head the Council of Economic Advisers in 1982.

At the same time, Feldstein "demonstrated a political tin ear that got him in trouble with the White House," said Davis, who now advises investors about politics and policy through his Washington-based Davis Capital Investment Ideas. "I don't think it helped being on the AIG board, either."

Less than a year ago, Feldstein was considered the leading contender to replace Alan Greenspan, who will step down Jan. 31 as Fed chairman. In April, Bush named Bernanke as his Council of Economic Advisers chairman, a steppingstone to the chairmanship.

Bernanke's appointment came two weeks after AIG Chief Executive Officer Maurice R. "Hank" Greenberg stepped down in response to an investigation by New York Attorney General Eliot Spitzer. Spitzer filed a securities fraud suit against New York-based AIG, the world's largest insurance company, and federal authorities also are investigating.

Feldstein, a director of AIG for 17 years, hasn't been implicated in the investigations and wasn't on the AIG board's committees that could be faulted.

AIG likely faces shareholder litigation; it said in May that it inflated its profit by $3.9 billion. Such lawsuits, which could name AIG directors including Feldstein, were considered a problem by analysts.

"Obviously, AIG played some part in the decision not to choose Feldstein," said Tom Schlesinger, president of Financial Markets Center Inc., a Philomont, Va.-based research organization.

Feldstein also is on the board of HCA Inc., the biggest U.S. hospital chain, which is involved in a Securities and Exchange Commission investigation into whether U.S. Senate Majority Leader Bill Frist received insider information before selling his company stock.

Feldstein forged early ties with the Bush administration. When then-Texas Gov. George W. Bush was running for president in 2000, Feldstein was part of the economic team that hammered out his plans for budget- and tax-cutting programs, and influenced the candidate's proposals for overhauling Social Security.

Still, he may not have been welcomed by Republicans because, as Council of Economic Advisers chairman under Reagan, he spoke out against soaring budget deficits and publicly argued with then-Treasury Secretary Donald T. Regan, who said tax cuts would spur enough new economic growth to close the budget gap.

For most of the past three decades, Feldstein has headed the National Bureau of Economic Research, a Cambridge, Mass.-based group that officially dates economic recessions and expansions, and he has earned a worldwide reputation as an expert on public finance.

Most of his academic writings focused on fiscal policy rather than the money and credit policies that are the province of the Fed. In the early 1970s, he pioneered studies showing that changes in tax law provided incentives that altered the spending and saving patterns of individuals and corporations, and so had a large economic impact.

He criticized the Social Security payroll tax for discouraging saving and was among the first advocates of the personal retirement accounts promoted by Bush. The administration has shelved its proposal to restructure Social Security, which was almost universally opposed by Democrats and proved unpopular with a majority of the public in polls.

Feldstein wanted to be Fed chairman. Last week, he urged fellow members of the Council of Foreign Relations board of directors to lobby the administration on his behalf, several participants said.

In a brief telephone interview yesterday, Feldstein declined to comment on being passed over. "I've known Ben for many years," he said. "He has done a great deal of research at the Fed. He will do an excellent job."

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