How Alan Blinder Handicaps the Fed Race

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The New York Sun

Alan Blinder does not know who the next chairman of the Federal Reserve is going to be. But Princeton’s highly regarded economics professor, who is a former vice chairman of the Fed, is pretty sure he’s not on the list. “I’m a Democrat. You can eliminate Democrats,” Mr. Blinder says, and he’s probably right.


Mr. Blinder thinks there are several possible candidates, but warns that none will easily replace Alan Greenspan. Given the near-legendary status of the incumbent and the economic problems that may quickly confront the new chairman, both the selection and confirmation process could disturb markets in the months ahead.


Who does Mr. Blinder put on the short list? He highlights three candidates: his Princeton colleague Ben Bernanke, Martin Feldstein, and Glenn Hubbard. Mr. Bernanke has the advantage of being in the Bush White House, where he is chairman of the Council of Economic Advisers. Not only does this mean Mr. Bush personally knows him, which appears to matter greatly to this president, but it also means Mr. Bernanke has been vetted recently, which might make for a fairly nontoxic confirmation process.


Messrs. Feldstein and Hubbard are similarly well known to Mr. Bush, and both have worked in Republican administrations. Mr. Feldstein’s stint in the Reagan administration as chairman of the CEA and Mr. Hubbard’s tenure in the same role for Mr. Bush suggest that both are wise to Washington ways. Their academic qualifications are weighty as well.


The former chief economist for Merrill Lynch and current head of Lavery Consulting Group, Jack Lavery, picks Mr. Bernanke, but also considers a current Fed governor, Donald Kohn, a strong candidate. The long list, in Mr. Lavery’s view, includes Roger Ferguson, the vice chairman of the Federal Reserve Board, and John Taylor, an economics professor at Stanford University. He also thinks Mr. Blinder is in the running but a long shot.


The folks at International Strategy & Investment give the nod to Mr. Feldstein. They cite his experience, his worldwide Rolodex, and his political acumen.


Jim Grant, publisher of Grant’s Interest Rate Observer and a self-professed “independent voice on Wall Street,” takes a different tack. He maintains that the Fed chairman is nothing more than a bureaucrat charged with pricefixing. “Mr. Greenspan, for reasons unknown to me, is honored as a monetary statesman, not as a government employee who overrides the market’s judgment by setting the wholesale dollar interest rate. His successor, probably, will be clothed with no such prestige, meaning that his successor will be seen as a fallible human being who is sooner or later going to set the wrong rate.”


While many may have a soft spot for Mr. Grant’s iconoclasm, Mr. Blinder probably disagrees vehemently with Mr. Grant (on nearly every topic). An exception might be the implicit expectation that replacing Mr. Greenspan will be difficult, if not impossible. “No one is going to match Alan Greenspan’s blend of credentials,” Mr. Blinder said. As proof, he lists at least six qualities that would be desirable, if not necessary, in any candidate. Mr. Greenspan has them all.


First and foremost, the individual must have a deep understanding of monetary policy and macroeconomics. Second, he must also have a substantial grasp of the banking industry, which the Fed regulates.


Third, the candidate must be politically independent. This is, Mr. Blinder acknowledges, a tall order. He points out that Mr. Greenspan himself did not necessarily fit that bill when he was nominated. His academic reputation was not notable, and he had worked with both the Ford and Reagan administrations.


Mr. Blinder also thinks the candidate needs to be market savvy. “The behavior of markets is a strange combination of psychology and economics; you can’t just focus on the latter.” Again, when nominated, Mr. Greenspan’s credentials on this front were sketchy. However, shortly upon taking over in 1987, the markets were hit by the Long Term Capital Management meltdown. His management of the crisis immediately established him as a formidable talent.


Further, the Fed chairman needs to have leadership capabilities. Not only does he need to guide the Fed governors toward a coherent policy, he needs to run a sizable organization. Once again, in retrospect, it was not clear that Mr. Greenspan passed this test. His largest management post had been running the Council of Economic Advisers, which has a modest staff. The Fed, by contrast, is a huge and entrenched bureaucracy. Mr. Blinder likens it to a British ministry. Every now and then, the top fellow moves on; the staff is permanent.


Finally, the nominee should be Washington-smart. “One of the most gratifying things about being a Fed governor was realizing that the Fed is not political,” Mr. Blinder said. “When a member made a political remark, everyone acted as though he had just slurped his soup.” Even so, Mr. Blinder said, the Fed chairman needs to be able to handle Congress, which can all too energetically decide to get involved with Fed policy when it is not comfortable with its direction.


If this sounds like a tall order, it is. Moreover, whoever becomes chairman of the Fed is likely to confront many challenges, including what Mr. Blinder calls the “Greenspan conundrum.” This is the refusal of long-term rates to rise, in spite of now significant boosts to short-term rates. The new chairman could be faced with a sudden downdraft in fixed-income markets, which could unnerve the investment community.


Also, Mr. Blinder expects an eventual downward move in the dollar, which, he believes, has staged a remarkable “levitation” and is overdue for adjustment. He is also not certain that the upward movement in rates, predicted by many to conclude with Mr. Greenspan’s tenure, will end as soon as expected. The feisty economy may continue to outpace expectations and need more taming. This, again, could unsettle markets.


Mr. Blinder expects a nomination between today and Thanksgiving. Others see the issue being resolved more quickly. Whoever the nominee turns out to be, he will likely face tough assessment from Day 1.Who would want this job?


peek10021@aol.com


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