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Who Will Replace Greenspan? When?

One way to evaluate Alan Greenspan's speech last month in Jackson Hole, Wyoming, in which he disclaimed responsibility for the dot.com bubble, is to see the chairman as a lame duck, and ask who might succeed him at the Fed.

The search still is in its preliminary stages. The usual deep divisions exist within the administration.

But the name that has begun to be heard is that of Martin Feldstein, a Harvard University professor and adviser to three Republican presidents, who has served for a quarter century as president of the bipartisan, policy-oriented National Bureau of Economic Research as well.

What would change as a result? That's the question worth thinking about.

Consider: America has had only two Fed chairmen in 23 years. First was Paul Volcker, nominated by President Jimmy Carter and reappointed by Ronald Reagan in 1983. Then came Greenspan, nominated by Reagan in 1987 and reappointed by Presidents Bush in 1991 and Clinton in 1996 and 2000.

Both men were central figures in a great drama -- what Greenspan correctly described as that "remarkable turnaround" of the American economy during the past two decades.

"…Rather that accept the role of a once-great but diminishing economic force, for reasons that doubtless will be debated for years to come, we resurrected the dynamism of previous generations of Americans," Greenspan said in Wyoming. Innovation, deregulation, trade liberalization, fiscal and monetary housekeeping measures together ushered in a powerful wave of competitive vigor and growth.

It was Volcker who in 1979 adopted the artifice of "targeting monetary aggregates" in order to run interest rates up to unprecedented levels to stem inflation. He succeeded, but at considerable cost. He toughed out nearly three years of on-and-off recession, which laid the foundations for the long boom that followed.

Greenspan will be best remembered for having steadied global markets in two highly dangerous financial crises (1987 and 1997-98) and for having adroitly engineered the 20-year boom which they threatened to interrupt. Despite a brief and mild recession in 1990-91, it was the longest expansion in American history.

The problem is that the landing that Greenspan contrived seems, at the moment at least, to have been anything but soft, despite the fact that the recession of 2001-02 was shallow and quickly over. For all the jargon surrounding the use of the word "bubble" -- meaning nothing more than a surge in asset prices to unsustainable levels -- central bankers' task remains the same today as fifty years ago, when Fed chairman William McChesney Martin defined his job as "taking away the punch bowl just when the party starts to get good."

This chairman Greenspan failed to do. In fact he got a little carried away himself. And the result is a substantial mess. It was described in some detail last week in "The Trouble with Bubbles," an article by Stephen Cecchetti, who is now professor of economics at Ohio State University but for a couple of crucial years between 1997 and 1999 served director of research at the Federal Reserve Bank of New York.

We all know about the misallocation of resources to high-tech companies that took place, Cecchetti wrote in the Financial Times, not to mention the run-up in stock prices. But less obvious concomitants of the bubble may have been more serious, he said. Federal, state and local tax policy and the corporate pension system were damaged as well.

Lulled by capital gains receipts, governments overspent, while many companies drained their pension funds' supposed "over-funding" in order to report higher profits. Deficits all around were the results -- shortfalls amounting to hundreds of billions of dollars, now being painfully made up. "I believe we are now paying the price for the Fed's failure to contemplate (interest rate increases) in the spring of 1997," Cecchetti concludes.

But such arguments give short shrift to the extraordinary balancing act performed by Greenspan during the 1990s -- coping with the Asian financial crisis and the approach of the 2000 presidential election. They may overstate the damage done as well. The Fed chairman said at Jackson Hole that "The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion." He is probably right.

Nevertheless, he could have warned in late 1999 against the market trend, much as he did he 1996 when he ascribed markets' buoyant tendencies to "irrational exuberance." Had he done so, his reputation in the history books would have fared better.

Taken as a whole, Greenspan's mild euphoria near the end of his reign was no worse than Paul Volcker's failure to call attention to the savings and loan crisis that was developing under his bank examiners' noses. That was another expensive surprise largely forgiven by posterity of a man who had done a hard job well. As has been said in a slightly different connection, the future is all about surprises. That's why they call it the future.

Once the next expansion is firmly underway, Greenspan is likely to be remembered mainly as the most successful party-giver since Bill Martin, who served a record 20 years as chairman of the Fed, from 1951 to 1970. And the end of the 76-year-old's epoch may come sooner than you think.

When Greenspan took office for his fourth term as chairman in June 2000, it was bruited that he might resign well before his four year term was done. The idea was that the next president might have the opportunity to choose his own chairman, not too deep into his own time in office. Events have only underscored the wisdom of that possibility.

Feldstein is at least triply qualified to succeed Greenspan. For one thing, he is a true conservative, a product of the same developments in the late 1960s and early 1970s that caused young George Bush to move to the right.

For another, he routinely has been tested, first in Washington as chairman of the Council of Economic Advisers during Ronald Reagan's first term, when he stood up to the president's deficits-don't-matter advisers, then in a series of behind-the-scenes policy debates, including the first Bush administration's decision to address the budget deficit on the eve of the Gulf War in 1990. His stewardship of the mostly non-partisan National Bureau of Economic Research, with its tripartite governance (business, labor, universities) and its broad sampling of university-based research has helped too.

But most important is his loyalty to the Bush family over a period of twenty years -- from initial conversations with presidential aspirant George H.W. Bush in 1980 to the choice of Feldstein's protégé and former head teaching assistant, Lawrence Lindsey, to serve as the administration's top economist in 2001.

His one problem is what is viewed by some in the Bush camp as occasionally excessive independence. He was memorably off the reservation during the 2000 campaign, for example, when he promoted his program for the privatization of Social Security at the expense of the candidate's in-house advisers.

But a certain amount of independence is a virtue in a Fed chief. It has everything to do with the stakes for which the game is played. Paul Volcker and Alan Greenspan are tough acts to follow. Perhaps alone among the president's advisers, Marty Feldstein has the necessary stature to try.