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Nervous Eyes on Greenspan's Big Shoes
In all probability, the rumors are wrong. Greenspan clearly still relishes his powerful position, and he shows no sign of leaving anytime soon, according to colleagues at the Fed, Bush administration officials and others who see him, most of whom spoke on the condition that they not be identified. But given Greenspan's age and other factors, including the current turmoil in world financial markets, there is a slowly growing sense of unease in the markets and among policymakers over the fact that at some point someone else will Early this year senior administration officials began assembling have to take over his role. lists of possible candidates, but the process has gone no further, an official said. And while economists have speculated publicly about the chances of several possibilities -- including Treasury Undersecretary for International Affairs John B. Taylor, New York Federal Reserve Bank President William J. McDonough and White House economic adviser Lawrence B. Lindsey -- none of these figures has emerged as a likely choice, for now. Among the reasons for unease is that there's no script for a successor to follow. Greenspan's leadership of the Fed has been highly personal, like that of many of his predecessors. Several books and countless articles have been written about him, the way he has operated, and the success or failure of his actions. But there's no "Greenspan method," no ready formula for a successor to apply. That has caused some economists and one or two Fed officials to argue that the central bank should adopt some type of rule, such as setting an explicit inflation target, to guide its policy in the future. "Will Greenspan's tenure as Fed chairman leave a legacy for future monetary policymakers, or will the successful policy of the Greenspan era leave office with the man himself?" Harvard University economics professor N. Gregory Mankiw asks in a recent book, "American Economic Policy in the 1990s." If a successor wanted to continue that policy, "how would he do it? The policy has never been fully explained. . . . The only consistent policy seems to be: Study all the data carefully, and then set interest rates at the right level. Beyond that, there are no clearly stated guidelines," Mankiw said. Treasury Undersecretary for International Affairs John B. Taylor has been touted as a possible successor. AP/File Photo A few Fed officials are confident a successor will be appointed who will do as good a job as Greenspan. But some others have trouble visualizing anyone else with Greenspan's experience, flexibility and credibility with financial markets. Among other things, Greenspan's leadership of the Fed helped calm financial markets after the stock market crash of 1987, the Russian debt default in 1998 and the stock plunge that followed the Sept. 11 terrorist attacks. He was way ahead of other economists in spotting the acceleration of U.S. productivity growth in the 1990s, a shift that allowed the economy to grow faster and the unemployment rate to fall further without causing more inflation than virtually anyone else believed possible. As a result, the Greenspan-led Fed held off squeezing the economy with higher interest rates, and the country enjoyed some of the highest noninflationary growth in a generation. And Greenspan's decision to make the central bank more open in the way it publicly communicates its actions, views and plans has helped soften congressional criticism of the Fed's traditional secrecy and gained the Fed new power to influence the markets and the economy in the process. None of the candidates mentioned as possible successors has similar credibility or influence. At best, they would have to achieve it over time. But then, so did Greenspan. In 1987, when White House officials made it clear they wanted to dump Greenspan's predecessor, Paul A. Volcker, there were plenty of skeptics in financial markets and in the top echelon at the Fed itself who doubted that Greenspan could be up to the task. After all, in the early 1980s, Volcker had led the difficult but successful fight against the nation's most virulent inflation since the Civil War. Greenspan, unlike Volcker, had not been a public servant for most of his working life. While he had been chairman of the Council of Economic Advisers in the Ford administration and chairman of a commission on Social Security reform in the early 1980s, he was known primarily as the head of Townsend-Greenspan & Co., a New York-based economic consulting and forecasting firm. As chairman, Greenspan has hardly operated in the Volcker mold. He has proved to be much more deliberate in his decisions, basing them on detailed analyses. And at least on the surface, Greenspan has been more collegial in dealing with his Fed colleagues. Volcker was far more freewheeling, by all accounts. "It's like trying to judge Beethoven and Mozart," said Robert V. DiClemente, an economist at Salomon Smith Barney in New York. "It's a matter of taste." By law, the Fed has two main responsibilities, to achieve stable prices and maximum employment -- and, as a sort of afterthought, moderate interest rates. Sometimes, of course, it's hard for all three of these conditions to coexist, and with only a single tool -- changes in interest rates -- the central bank often can't move all of them in the desired direction at once. Greenspan and other Fed officials maintain that the best way for the central bank to maximize sustainable economic growth -- and therefore maximize employment -- is to keep inflation very low. Importantly, that argument is no longer challenged, as it was repeatedly until roughly the late 1980s, by many members of Congress and executive branch officials. Perhaps the overriding concern among those worrying about Greenspan's successor is whether he -- there are no women on any of the published lists of possible appointees -- will be willing to take timely action to keep inflation low. That's why some concerned economists would like to see the Fed adopt a formal inflation target -- that is, that the Fed seek to steer the economy so the annual rate of inflation stays in a specific range, for example, between 1 percent and 3 percent. Even internally, the Fed has no specific inflation goal, Fed officials said. Its top policymaking group, the Federal Open Market Committee, last had a detailed discussion of whether setting such a goal would be useful -- and if so, what the goal should be -- in 1996. According to transcripts of that year's FOMC meetings, there was a consensus that inflation should not be allowed to rise above 3 percent and probably should be lower than that. But there was no broad agreement on how much lower, or even which inflation measure should be used. Only one participant, J. Alfred Broaddus Jr., president of the Richmond Federal Reserve Bank, strongly advocated setting a formal inflation target. Recent interviews showed that there's still little appetite for a formal target among Fed officials, most of whom are quite happy to use Greenspan's often-expressed general goal: an inflation rate low enough that households and businesses do not take inflation into account in making their economic decisions. When pressed, the chairman refuses to be tied down to any specific number or range, which his colleagues believe gives the Fed greater flexibility to respond to any inflation threat. Aided by increased competition in many sectors of the economy and an unexpected surge in economic efficiency in the late 1990s, Greenspan and his Fed colleagues have managed to achieve what many of them regard as price stability. For the past four years, inflation has averaged just over 1.6 percent a year, according to the Fed's preferred measure of consumer prices -- the personal consumption expenditure price index, excluding food and energy items. At 1.6 percent, inflation is less than half the roughly 4 percent rate that greeted Greenspan, and vastly less than the 9 percent demon that President Jimmy Carter appointed Volcker to tame in 1979. Among the Fed's key actions in recent years was to raise interest rates aggressively in 1994 when the economy threatened to overheat. As a result, inflation remained subdued, and the Fed gained credibility that, in the years since, has helped keep inflation expectations low and allowed the Fed more leeway to let unemployment rates fall to 40-year lows. Strong economic growth pushed unemployment down to just under 4 percent in late 2000 before joblessness began to rise again during last year's recession. It stood at 5.9 percent in July. Nevertheless, Greenspan and the Fed have their critics. Some currently complain that the central bank should have begun to raise interest rates in early 1999 to cool off both the economy and the overheated stock market. Higher rates sooner would have prevented the late stages of the high-tech boom and made last year's slump milder, they argue. Others complain that the Fed left rates too high too long after the stock market bubble burst in the spring of 2000, contributing to the economic slump late that year and in 2001. The debate about inflation targeting and even speculation about possible Greenspan successors remains premature because a variety of considerations suggest that Greenspan, assuming he remains in good health, will stay as chairman well into 2005 and perhaps beyond. Greenspan still dominates the Fed's policymaking apparatus. Interviews with numerous Fed officials indicate that he has the unanimous respect of the other board members and the presidents of the dozen regional Federal Reserve Banks who participate in policymaking. Nevertheless, rumors abound in financial markets here and abroad that Greenspan plans to resign for one reason or another, such as giving President Bush a chance to appoint a Republican successor before the onset of the 2004 presidential election contest. At his confirmation hearing for his current four-year term as Fed chairman, which expires June 20, 2004, Greenspan indicated to the Senate Banking Committee that he planned to serve the full term. In the past he has said that he regards such indications as a commitment, and that argues against a resignation. Rather than a foreshortened term, some Fed watchers and administration officials expect the opposite. They believe Bush will do what President Clinton did in January 2000: keep the chairmanship out of election-year politics by announcing a Greenspan reappointment months in advance of the end of his term. Furthermore, if the Senate remains under Democratic control after this year's election, no Bush appointee for the chairmanship other than Greenspan would be likely to even get a confirmation hearing because of the possible election of a Democrat to the White House in 2004. Under law, when a chairmanship term expires without a successor confirmed, the chairman can retain his powers if the board or the president designates him as chairman pro tempore, which has happened twice with Greenspan. That means Greenspan could continue as chairman conceivably beyond the expiration of his separate 14-year term as a member of the board, which expires Jan. 31, 2006. A board member cannot be reappointed once he has served a full term, which at that point Greenspan will have done. But should Bush want Greenspan to stick around past early 2006, and the chairman were willing, the president could simply refrain from appointing someone else. If Greenspan were to remain in office until mid-May 2006, he would become not only the oldest Fed chairman in history but also the longest-serving, eclipsing the 18 years, 9 months and 29 days served by William McChesney Martin Jr. beginning in April 1951. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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