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July 24, 2005
David Warsh, Proprietor


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Front-Runner for the Fed?

Events last week shed some light on the way George Bush makes decisions about appointments.  For an opening on the Supreme Court, he interviewed five candidates, asking them about everything from the hardest decision they ever made to their exercise regimes. (To one jogger he recommended more cross-training.) And in the end, he chose John Roberts — a Midwesterner, a Washington insider, and a devout Catholic father of two.

What light does that cast on the way he will choose the next chairman of the Federal Reserve Board?

Three names always come up in this discussion: Martin Feldstein of Harvard University, Ben Bernanke of Princeton University (who until leaving to becoming chair of the Council of Economic Advisers last spring had been a member of the Fed’s Board of Governors) and R. Glenn Hubbard, dean of Columbia University’s Business School. When the time comes, there will be a markets candidate in the running, too, of course — there always is.

But so greatly has knowledge about management of the system of money and banking advanced during the last 25 years that, for only the second time in history, the job may very well go to a policy-oriented university-based economist instead of a practitioner (Arthur Burns having been the first).

Alan Greenspan must step down sometime next year.  Technically his 14-year term expires Jan. 31, 2006. (Greenspan became chairman in 1987, having served his first five years as a statutory “temp,” rounding out the term of a governor who had resigned.) The Washington Post has reported that the president may ask Congress to wait patiently a little longer for him to name a successor (a chairman serves until he is replaced), so that the highly popular Greenspan might surpass William McChesney Martin’s record of 18 years and nearly ten months in office — a moment that would occur next May 11.

Based on the criteria that Bush employed to choose a justice, one of the candidates to replace him may be more attractive than the others.

If gravitas were the sole consideration, the job would go almost automatically to Feldstein.  He has been the leading exponent of conservative economics of his generation since 1978, when he produced the arguments for a Republican-engineered capital gains tax cut that led to a huge venture capital boom.  

He served as Chairman of the Council of Economic Advisers under Ronald Reagan, counseled George H.W. Bush, and devised the broad outlines of the attempt to “personalize” the Social Security retirement system that George W. Bush has adopted as the domestic centerpiece of his second term.

Recently, Feldstein’s prospects at the Fed have been said to have been imperiled by his membership on the board of directors of American International Group, an insurance company that has come under regulators’ scrutiny.  But the real reasons that Feldstein is a long-shot for the nomination are generational and temperamental.

Born in 1939, Feldstein is seven years older than Bush.  That is no automatic disqualifier, of course, though there are signs — of which the nomination of the 50-year-old John Roberts to the Supreme Court is only the most recent — that the president, with his eye on the future, prefers to appoint younger men and women.

But it was Feldstein’s willingness in 1983 and 1984 to disagree publicly with his White House bosses on the significance of growing US budget deficits in that, in all likelihood,  ultimately will have cost him the nomination to the Fed. That expressional of professional sovereignty greatly enhanced his standing among economists — but it is not the sort of principled opposition that George W. Bush is thought to admire.

What about Ben Bernanke?   He was born in 1953, which makes him the right age.  He grew up in South Carolina, has two small children and follows the Boston Red Sox which gives him plenty to talk about with President Bush, an avid baseball fan who once was managing partner of the Texas Rangers and aspired to succeed Fay Vincent as commissioner of Major League baseball. (Like Feldstein, Bernanke attended Harvard College.) His willingness to take on the job as chair of the CEA in a tough time for the administration should count for much.

But as a  leading advocate of the practice known as inflation targeting — that is, publicly committing to raise interest rates under certain conditions no matter what the political cost — Bernanke may be espousing more central bank independence than the president is willing to grant an MIT-trained economist, especially with a series of important elections coming up.

That leaves R. Glenn Hubbard, who was born in 1958, and in the right state — Florida, where the President’s brother Jeb is governor today.  Hubbard graduated as an engineer from the University of Central Florida, then got his PhD from Harvard, where his mentor was none other than Marty Feldstein.

For the first two years of Bush’s first term, Hubbard served as chair of the Council of Economic Advisers, preparing briefs for the president’s two big tax cuts, while campaign economist Lawrence Lindsey ran the National Economic Council. (In the early 1990s, Hubbard had been deputy assistant secretary for tax policy in the Treasury Department under the first President Bush.) Even after returning to Columbia, Hubbard continued to consult extensively to the administration, preparing its arguments for comprehensive consumption taxation.

But the grounds on which he ultimately might be most appealing to the president may have less to do with economic doctrines or political pliability than with the light his other affiliations sheds on the content of his character. He is a trustee of the Fifth Avenue Presbyterian Church in New York City and a member of the Big Apple District Committee of the Boy Scouts of America.

And in Manhattan, the most densely schooled community in the United States, where the race for status begins for some with the application to nursery school, his two sons have been (according to friends)  home-schooled by their mother, Constance Pond Hubbard.

Could a 48-year-old Hubbard be confirmed as chairman of the Fed, despite his complete lack of training and experience in money and markets?  (His AIG directorship notwithstanding, Feldstein has scarcely more. The real expert, at least in monetary economics, is Bernanke.) The answer is probably yes.  George Bush may be a lame duck, but, at least for another year, he will have a comfortable majority in the Senate.

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