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Bernanke's the man

President Bush's nominee to succeed Greenspan is expected to be chief economic adviser.

October 24, 2005: 11:51 AM EDT

NEW YORK (CNN/Money) - President Bush was expected to announce Monday that he has picked top economic adviser Ben Bernanke to succeed Federal Reserve Chairman Alan Greenspan, a person close to the administration said Monday.

An announcement was set for 1 p.m. EDT.

Bush told reporters there would be "an announcement soon" on his choice to replace Greenspan, whose 18-year tenure at the Fed runs out on Jan. 31, Reuters news agency reported.

Bernanke is chairman of Bush's Council of Economic Advisers. He served on the Fed's board of governors for nearly three years before moving to the White House in June.

His move to the White House was watched with interest on Wall Street because of the belief that he was on the fast track to replace Greenspan.

Bernanke was considered one of the policy trend setters while at the central bank, espousing the virtues of an inflation target to guide monetary policy.

In addition to Bernanke, other candidates mentioned include Glenn Hubbard, a past adviser to Bush, Harvard economist Martin Feldstein and Fed governor Donald Kohn.

Before Bernanke moved to the White House job, many had thought Bush would nominate Feldstein, a former CEA head under President Ronald Reagan and one of the nation's leading academic economists.

But as Bernanke's odds increased, Feldstein's seemed to diminish.

Bernanke was born on December 13, 1953, in Augusta, Georgia. He received a B.A. in economics in 1975 from Harvard University and a Ph.D. in economics in 1979 from the Massachusetts Institute of Technology.

Bernanke and his wife, Anna, have two children.

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A hard act to follow

Oct 13th 2005

From The Economist print edition


Who could fill Alan Greenspan's shoes?

ON THE ground floor of the Federal Reserve building in Washington, DC, there is an electronic game which tests a visitor's skill at setting interest rates. You have to decide how to respond to events such as rising inflation or a stockmarket crash. If you get all the answers right, the machine declares you the next Fed chairman. In real life, because of huge uncertainties about data and how the economy works, there is no obviously right answer to the question of when to change interest rates. Nor is there any easy test of who will make the best Fed chairman. So who would The Economist select for the job?

Alan Greenspan will retire as Fed chairman on January 31st, after a mere 18 ½ years in the job. So George Bush needs to nominate a successor soon. Mr Bush has a penchant for picking his pals to fill top jobs: last week he nominated his personal lawyer Harriet Miers to the Supreme Court (see article). But his personal bank manager really would not cut the mustard as Fed chairman. This is the most important economic-policy job in America—indeed in the whole world. The Fed chairman sets interest rates with the aim of controlling inflation, which in turn helps determine the value of the dollar, the world's main reserve currency. It is hardly surprising that financial markets worldwide can rise or fall on his every word.

Financial markets are typically more volatile during the first year after the handover to a new chairman than during the rest of his tenure. In October 1987, barely two months after Mr Greenspan took office, the stockmarket crashed. Current conditions for a handover are hardly ideal. America's economy has never looked so unbalanced, with a negative household savings rate, a housing bubble, a hefty budget deficit, a record current-account deficit and rising inflation. Figures due on October 14th are expected to show that the 12-month rate of inflation has risen above 4%—its highest since 1991.

Monetary magic

Because Mr Greenspan is widely rated by investors as the greatest central banker ever, their confidence in his mystical powers has helped to hold down bond yields and prop up the dollar. But combine America's domestic and external financial deficits with a looming “Greenspan deficit” next year and markets could well push down the dollar and push up bond yields, thereby bursting the housing bubble. With inflationary pressures rising, the new Fed chairman will need to push short-term interest rates higher; there will be much less room to cut rates later, as Mr Greenspan did after the stockmarket bubble burst in 2001. Would any sane person want this job?

It is worth recalling that in 1987 many doubted whether Mr Greenspan could fill Paul Volcker's shoes. The skills required of a Fed chairman are indeed demanding. He or she needs to be an expert in monetary policy, have a good instinct for economic data and an insight into the big policy debates. A chairman must be respected by financial markets, able to keep a cool head in crises, and be politically independent, while well attuned to political opinion. Mere mortals need not apply.

All the main candidates commonly touted are highly respected economists who could be trusted to pursue a sound monetary policy, and yet each also has serious drawbacks (see article). President Bush said last week that he is looking for a successor to Mr Greenspan who would be seen as politically independent and who would thus inspire global confidence. Yet the leading candidates have all advised or worked for Mr Bush. Mr Greenspan, of course, also has close Republican ties, but financial markets will be less forgiving of his replacement. Any suspicion that Mr Bush has selected someone simply because he is a loyal Republican would undermine confidence in the next chairman, even before he takes office.

Expert and independent

If Mr Bush means what he says about the next chairman being politically independent, then we believe the best choice would be Don Kohn, a governor on the Federal Reserve Board, who is not affiliated to any party. Mr Kohn has another big advantage. As a staff member before being promoted to governor in 2002 on Mr Greenspan's recommendation, Mr Kohn has been attending the Fed's policy-making meetings for almost 24 years, even longer than Mr Greenspan. His vast experience of monetary-policy decisions and financial crises would be invaluable in troubled times. He is highly regarded by economists in the Fed and on Wall Street, and having worked with Mr Greenspan for so long, his thinking on interest-rate policy and financial markets is also close to the chairman's. He would offer continuity and a safe pair of hands.

Yet how can The Economist endorse Mr Greenspan's right-hand man, when we have long criticised the chairman for failing to curb the stockmarket bubble in the late 1990s, and later for propping up the economy by inflating a housing bubble? The answer is that the maestro seems to be changing his tune. In several recent speeches Mr Greenspan has expressed concern about the housing market and, in an apparent effort to talk it down, gave warning that prices could fall. There is a stronger case for restraining housing bubbles than stockmarket bubbles, because they tend to cause greater economic harm when they burst. His public view on the link between monetary policy and asset prices has also shifted. He now concedes that the Fed's success in delivering low inflation and interest rates may have made bubbles more likely, ironically, because investors are demanding less compensation for risk.

Whether central banks should respond to asset-price bubbles is one of the hottest debates in monetary policy. The Fed's failure to curb bubbles, while aggressively easing policy when they burst, is partly to blame for America's imbalances, which could give the next Fed chairman a lot of grief. Mr Kohn's experience within the Fed makes him the best man to cope with this. Mr Greenspan could help him immeasurably and enhance his own legacy by going much further, and explicitly supporting the view of many other central banks that sometimes policymakers should act to restrain asset-price booms. When you are the world's greatest central banker, after all, you should be able to admit the odd mistake.

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I lost faith in Greenspan after Bush took over. I don't know if it was pressure from the White House or what, but his economics seemed to go out the window with Bush. All of a sudden, tax cuts were a good idea in a booming economy. . . never figured that one out. Then the whole bit about ignoring the deficit, promoting short term arms last year, telling people to make riskier investments, while knowing he has to move the rate up not down. . . just a whole bunch of stuff I really questioned.

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I lost faith in Greenspan after Bush took over. I don't know if it was pressure from the White House or what, but his economics seemed to go out the window with Bush. All of a sudden, tax cuts were a good idea in a booming economy. . . never figured that one out. Then the whole bit about ignoring the deficit, promoting short term arms last year, telling people to make riskier investments, while knowing he has to move the rate up not down. . . just a whole bunch of stuff I really questioned.

He did raise Prime Rate up 2.75% over the last couple of years (low 4.00% to current rate of 6.75%). Fed Fund rate has been on the rise too. He was trying to raise rates because of inflation concerns. But the Yield curve remained flat. The 30 Year Mortgage market has been priced very close to the ARM mortgage. I think he tried to raise rates.

Today, the 10 Yr. Note that 30 Year Fixed mortgages "sorta" follows went up 6 basis points today after the announcement. What does all of this mean...I don't know! :laugh:

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Bufford and Chom are going to have problems making Bush look bad with this :D


Bernanke Seen as Safe Pick For a White House in Straits

By Jonathan Weisman

Washington Post Staff Writer

Tuesday, October 25, 2005; A04

In nominating Ben S. Bernanke as the next Federal Reserve Board chairman, President Bush turned to a candidate for the job with unassailable credentials and enough distance from the White House to blunt charges of cronyism or ideological motivations, former White House officials and economists said yesterday.

The president had considered nominees who may have left a deeper conservative stamp on the Fed. Conversely, he had the opportunity to bridge the partisan divide by nominating internal Fed candidates highly regarded by retiring Chairman Alan Greenspan who happened to be either Democratic or politically independent.

But the uproar that followed Bush's nomination of White House counsel Harriet Miers to the Supreme Court limited Bush's options, former White House economists said. The president could not antagonize his conservative base with a nominee far from the Republican camp, but he had to be careful not to inflame other opponents with a choice deemed too ideologically wedded to the White House. Above all, they said, Bush did not want another confirmation battle on his hands.

"I don't think there's any question that [the Miers fight] had a lot to do with" the Bernanke choice, said Bruce Bartlett, a conservative economic commentator. "It made them go with the safe appointment rather than take any risks."

"This one does thread all those needles," said Phillip L. Swagel, a former chief of staff at Bush's Council of Economic Advisers.

If Miers's defenders have dismissed her critics as elitists, they showed no reticence yesterday in extolling Bernanke's elite credentials. Bush boasted of Bernanke's Harvard University record, his doctorate from the Massachusetts Institute of Technology and his chairmanship of the Princeton University Economics Department. In his nine-paragraph announcement, the president was almost dismissive of Bernanke's White House experience, mentioning only in passing, "Since June he has served as chairman of the Council of Economic Advisers."

When Bernanke joined the White House in June, his appointment as a top Bush economic adviser was seen as something of a tryout to succeed Greenspan at the Fed. But in recent months, strong competition had emerged.

R. Glenn Hubbard, a predecessor of Bernanke's at the Council of Economic Advisers, had long been seen as a candidate for the Fed job, but as Bernanke's star rose, so did the voices of Hubbard advocates, who saw him as a stronger conservative. Hubbard's role as architect of Bush's drive to all but eliminate taxes on dividends won him strong allies among supply-side economists, who view tax cuts as the surest path to economic growth.

Then in July, some White House officials began floating the name of Lawrence B. Lindsey, Bush's first National Economic Council director and the driving force behind the president's 2001 tax law, which cut taxes by $1.35 trillion over 10 years. Some conservative economists saw Lindsey as too ideologically brash and outspoken for the sensitive Fed post, but he had powerful advocates, especially National Economic Council director and old Bush friend Allan B. Hubbard.

In July, Marc Sumerlin, who worked with Lindsey at the White House and later joined Lindsey's consulting firm, penned an opinion piece in the Wall Street Journal, warning against the naming of a Fed chairman who would adopt strict rules to determine when inflation is looming. The piece never mentioned Bernanke by name, but it was widely seen as a slam on Bernanke, an advocate of "inflation targeting."

The conservative National Review published a piece on Aug. 11 warning of "the scary side of Ben Bernanke."

If such sentiments pushed some in the White House toward Lindsey and Hubbard, others were suggesting a different tack. According to three former White House officials, senior voices at the Fed -- including Greenspan -- were encouraging Bush to look at Roger W. Ferguson Jr., the Fed's vice chairman, or Fed governor Donald L. Kohn. The officials spoke on condition of anonymity, not wanting to jeopardize ongoing contacts with the White House.

Ferguson, a black Democrat, would ensure continuity in Fed monetary policy, while winning political chits that could be cashed during Supreme Court confirmation fights. Kohn, a political independent, would likewise sidestep a partisan battle.

Then came Miers's Oct. 3 nomination. Angry conservatives denounced her as insufficiently committed to their cause, while politicians from both major political parties questioned the Supreme Court credentials of a nominee who had never served as a judge or worked as a lawyer on constitutional issues.

Former White House officials said conservative backlash wiped out whatever small chance Ferguson had. But it also knocked out Lindsey and Hubbard, who might be seen as too cozy with the president's political agenda.

Bernanke aides had been furious about the shots taken at their boss by conservatives in the Lindsey camp, but they were willing to make a case for Bernanke. On Oct. 11, Bernanke delivered a speech on economic opportunity to the National Economists Club in which he waxed at length on the power of Bush's economic policies, especially his tax cuts.

In the end, Bush turned to "the John Roberts of the economic profession," a conservative with a quick mind and unassailable credentials, said Cesar V. Conda, a former White House domestic policy aide.

"When your team is on a losing streak, you schedule a game with a cream-puff opponent," Bartlett said. "Then you go with the hot hand."

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