Bush’s man takes over Fed’s reins

Date: 26/01/06

Next week (31 January) the world's financial markets will witness the end of an era. After more than 18 years, Alan Greenspan will retire as chairman of the United States' central bank, the Federal Reserve.

When the then president Ronald Reagan announced in June 1987 Greenspan's appointment to succeed another Fed giant, Paul Volcker, it was hard to miss the frisson of anxiety about how the new man would measure up. But that unease is nothing when compared to the worries surrounding Ben Bernanke's appointment.

President George W. Bush has a track record of failure so far as economic policy appointments are concerned. Not one of his first-time selections has had a lasting impact on Washington or US economic policy.

His two treasury secretaries, Paul O'Neill and John Snow, will leave no mark on history. Senior Republicans in Washington back this view. One puts this down to the president's penchant for choosing people whom he finds personally agreeable and feels able to dominate. Others believe that, with Greenspan at the Fed , the president and his top aides, especially Vice-President Dick Cheney, never wanted a strong economy policymaker within the administration.

Bernanke only emerged as front-runner for the Fed succession after his appointment in June last year as chairman of the president's Council of Economic Advisers.

In the view of some Fed experts at that time, to appoint him Fed chairman directly after he had chaired the Council would risk the perception of politicisation of the independent central bank. But this is precisely what has happened.

Greenspan was a known Republican (although he was reappointed by a Democrat president Bill Clinton). But the scrutiny to which he was subjected in search of signs of political bias will be tepid compared to that facing Bernanke.

Europe's policymakers, meanwhile, have their own concerns about the appointment.

Unlike his two most recent predecessors, Bernanke is new to government - his first senior policy appointment was as a member of the Fed Board of Governors in 2002.

Bernanke is certainly learned. A professor of economics at Princeton University since 1985, the 52-year old has had a brilliant academic career. But deep intellectual experience in economics is just the minimum qualification for success running the central bank of the world's dominant reserve asset currency.

Bernanke's two predecessors had considerable top-level Washington and financial-market experience before coming to the Fed. They quickly needed to call on it. Volcker (1979-87) first had to deal with a dollar crisis and get US inflation down from double-digit levels. Along with Jacques de Larosiere, managing director of the International Monetary Fund, he then rescued the world economy from the potentially crippling Latin American debt crisis.

Only two months after taking office, Greenspan was called on to deal with the stock market crash of October 1987. Then came the Mexican debt crisis of 1994, the collapse of the Long Term Capital Management hedge fund and the Asian and Russian debt crisis of 1997-98. After that Greenspan too lost his nerve, cheering on the biggest asset price bubble in modern history, the dot.com stock market boom.

Bernanke does not have such crisis management experience and has no special expertise in financial markets, likely to be vital in the months and years ahead. Nor has he, as Volcker and Greenspan did before getting to the Fed, built up those close personal relations which enable policymakers from around the globe to co-operate effectively when a crisis strikes.

His recent public speeches have done little to reassure European policymakers. "He has been wrong on all the big monetary policy issues of the day, inflation targeting, deflation and how to manage asset price bubbles," was the reaction of one top non-eurozone economic policy official on 18 January.

Bernanke has said that central banks should not try to restrain asset market 'bubbles'. He has argued, implausibly, that a "savings glut", rather than excessively loose monetary and fiscal policies, is the main reason for the US's $800 billion (EUR 651bn) current account deficit and the worrying global economic imbalances. He has backed Bank of England style 'inflation targeting' at a time when even the Bank has had to ignore its own rules in order to curb the British housing market.

No wonder the markets are asking: "At a time of such potential financial market instability will this man be tough enough to stand up to the most ideologically driven president of modern times?" They may get the answer sooner than they would wish.

Article anticipates the changeover at the top of the US Central Bank, the Federal Reserve. After eighteen years, Alan Greenspan was to retire. The new chairman, appointed by President Bush, was to be Ben Bernanke, professor of economics at Princeton University since 1985.