US looks for the new Greenspan

Alan Greenspan. Picture / Reuters

The White House may want to look to the business community in its quest for a successor for Alan Greenspan at the Federal Reserve, but analysts say it should take care not to shake market confidence.

Cesar Conda, a former domestic policy adviser to Vice-President Dick Cheney, said the Bush administration saw business experience as an important attribute and wanted someone with "a real-world sense" to take over when Greenspan steps down early next year.

"Part of the thinking is that, at times, a Fed chairman might have to look beyond the economic theory and statistics in order to guide monetary policy," he said.

Business experience may be an asset, but some White House officials say the paramount consideration as the search gets under way is still knowledge of monetary policy.

That should offer solace to economists who have bitter memories of the short and unsuccessful tenure of the last Fed chief to hail from the boardroom, former Textron chief executive G. William Miller, in the late 1970s.

President George W. Bush has admitted it will be hard to find someone with Greenspan's unique mix of skills.

The 79-year-old central bank chief, who is set to depart at the end of January after 18 years at the Fed's helm, is widely credited with both a deep understanding of the economy and an ability to think outside the box on interest rate policy.

Greenspan also spent decades as an economic consultant to businesses, unlike the heavily academic trio most often cited as his potential heirs: Bush adviser and ex-Fed Governor Ben Bernanke, former Bush adviser Glenn Hubbard and Harvard University economist Martin Feldstein.

Economist Richard Yamarone of Argus Research said none of the three met the "real world" test.

"The most important thing you have to do is, you have to be flexible with your policy prescriptions and I think that that can't be done in an effective manner by an academic," he said.

"You want someone who has a daily observation of the economy when they come into this office, and I don't know that any of those three have this detail-oriented observation of the economy that Greenspan has," Yamarone said.

Bush, a former Texas oilman, has already shown a penchant for picking businessmen for top economic posts. Both his current Treasury secretary, John Snow, and predecessor Paul O'Neill, were CEOs at big industrial companies.

But many economists, both in academia and on Wall Street, say the CEO mould may not fit the modern-day Fed, particularly if expertise in financial markets is lacking.

"Financial markets are very, very complicated and the learning curve, even for someone who has been a big-name CEO for a long time, is too steep," said W. Bowman Cutter, an economic adviser to President Bill Clinton now at the private equity firm Warburg Pincus. "There's almost no overlap between what a CEO does every day and what you have to do every day to understand the financial markets."

Discussion of a business world successor leads many Fed observers to hark back uncomfortably to the runaway inflation of the late 1970s and Miller's brief Fed reign, which was widely seen as feckless at a time when resolve was needed.

"I think people with long memories in this town remember that there was somebody from the business community, a CEO type, back in the Carter administration," American Bankers Association regulatory affairs director Jim McLaughlin said in reference to Miller. "Boy, he sure didn't go over well."

McLaughlin said the White House would need to gingerly lay some groundwork if it was thinking of turning to a dark horse.

"Everybody keeps hearing the same three names, so if it's not one of them and it comes as a surprise, that's going to make some waves, as good as that person may be," he said.

Former Fed vice chairman Alan Blinder said his biggest fear was that the White House might turn to "Mr X."

"In the eyes of the markets, the Fed is going to be turned over from the hands of a demigod to the hands of a human - no matter who it is. That's unsettling enough," he said. "If the human elicits the reaction on Wall Street, 'Who's that?,' then I think you're looking for trouble.

"The name Feldstein, the name Hubbard, the name Bernanke will not elicit that reaction. The market will take comfort in that they're in some sense known quantities," Blinder said.

Cutter shares that sentiment.

"They strike me as a pretty reasonable set of people," he said. "When I think about the field the administration has to choose from, I wonder, 'Why would they bother going anywhere else?"'

But some economists think the White House should cast a wider net.

"They're all very able people," said Anna Schwartz, who co-authored a number of books with noted monetarist Milton Friedman, including the seminal "A Monetary History of the United States." Still, in her view, they all end up somewhat lacking.

"That's what's so depressing; that there are so few names being raised," she said.



Alan Greenspan Job: Chairman of the Federal Reserve, the United States central bank

Age: 79

Due to exit: End of January

Tenure so far: 17 years

Education: New York and Columbia universities

Salary (2004): US$170,000

Source: Bloomberg

- REUTERS