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World On Brink Of Ruin
http://www.forbes.com/business/2005...107topnews.html
Dan Ackman, 01.07.05, 9:20 AM ET

NEW YORK - Alan Greenspan, that Matador of the Money Supply, the esteemed Impresario of Interest Rates, has suffered precious few slings or arrows over his many years as chairman of the Federal Reserve. Even the White House has had to offer its critiques off the record for fear of roiling the markets or upsetting the chairman's Elvis-in-Vegas-like following. So when the chief economist of one of the world's most prestigious banks calls Greenspan a bum, that's a big deal.

And yesterday it happened. Stephen Roach, the chief economist for Morgan Stanley & Co. (nyse: MWD - news - people ), one of the most powerful investment banks and one of the 50 largest companies in the world, says Greenspan has "driven the world to the economic brink."

Writing in an upcoming issue of Foreign Policy, Roach says that when Greenspan steps down as chairman of the Federal Reserve next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Americans, Roach says, are far too dependent on the value of their assets, especially their homes, rather than on income-based savings; they are running a huge current-account deficit; and much of the resulting debt is now held by foreign countries, especially in Asia, which permits low interest rates and entices Americans into more debt.

The "economic brink" line is from the headline of a press release sent by Foreign Policy. In an interview this morning, Roach said, "That's a little extreme." He does admit the nation has prospered on Greenspan's watch. Still, he does not disavow the haymakers he directs at the chairman's chin.

"This is no way to run the global economy," Roach says. So far, the Fed has bucked the odds, Roach adds. But the longer the situation exists, the more chance there is that it will spell danger for the United States and the world.

Roach lays the blame for the peril at Greenspan's door. But first he takes out after his outsized reputation. Greenspan is not responsible for defeating inflation in the 1980s; Paul Volcker, his "tough and courageous predecessor," deserves more of the credit, Roach says. Greenspan's monetary policy deserves some accolades for the 1990s boom, but former President Bill Clinton's fiscal policy and other factors were equally responsible, Roach says. Greenspan may deserve some praise for softening the recession that followed the stock market meltdown, Roach concedes, but the chairman's cure may result in "bigger problems down the road" and "the biggest bubble of all: residential property."

Many have credited Greenspan with saving the world following the 1997-98 Asian financial crisis. Time magazine went so far as to put the gnome of Constitution Avenue on its cover, under the headline "Committee to Save the World." Though it is the case that the world did not end, "In truth, the world weathered the Asian financial storm only to chart increasingly dangerous waters in the years that followed," Roach writes. "Global economic imbalances have intensified dramatically since 1999."

A good chunk of the U.S. prosperity is owed to these imbalances, Roach says: "Asian countries holding enormous stocks of U.S. dollars recycle this cash back into the United States by buying U.S. [Treasury bills]. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars."

While the economist has nothing against DVD players, he does say, "Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia's interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life."

Roach even questions Greenspan's political independence. He does not claim the chairman is a partisan Republican, but he does fault him for being a "cheerleader for policies such as tax cuts...that could make the endgame all the more treacherous."

Greenspan is to central banking what J. Edgar Hoover was to fighting crime. He will soon surpass the fondly forgotten William McChesney Martin as the longest-serving Fed chairman. But his term as a member of the Federal Reserve Board of Governors expires in just over a year from now, and America will have to do without. Roach says, "Greenspan will be a tough act to follow." But the difficulty may not be living up to the chairman's reputation so much as cleaning up his mess.

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The Greenspan Succession
http://pkarchive.org/column/012505.html
Paul Krugman

Alan Greenspan is expected to retire next year. The Bush administration, because of its nature, will have a hard time finding a successor.

One Fed chairman famously described his job as being to "take away the punch bowl just when the party gets going." Bond and currency markets want monetary policy in the hands of someone who will say no to politicians. When a country's central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.

Today it's even more crucial than usual that the Fed chairman have the markets' trust. The United States is running record budget and trade deficits, and the foreigners we depend on to cover those deficits are losing faith. According to yesterday's Financial Times, central banks around the world have already started shifting into euros. If Mr. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.

Yet President Bush, as you may have noticed, only appoints yes-men (or yes-women). This is most obvious on the national security front, but it's equally true with regard to economic policy. The current Treasury secretary has no obvious qualifications other than loyalty. The new head of the National Economic Council apparently got the job because he is a Bush classmate and fund-raiser.

Of course, Mr. Greenspan himself has become a Bush yes-man. The chairman acted as a stern father figure, demanding fiscal rectitude, when Democrats held the White House. But he turned into an indulgent uncle when Mr. Bush took office. First, he urged Congress to cut taxes in order, he said, to prevent an excessively large budget surplus. Then, when surpluses were replaced by huge deficits, he supported a highly irresponsible second round of tax cuts.

Nonetheless, Mr. Greenspan retains considerable credibility with the markets. Who else can satisfy both Mr. Bush and foreign investors?

For a while, the presumed front-runner to succeed Mr. Greenspan was Martin Feldstein of Harvard. Mr. Feldstein, like Mr. Greenspan, has a reputation built over a long, distinguished career. Also like Mr. Greenspan, he is a former crusader for fiscal responsibility who became an apologist for budget deficits once Mr. Bush took office.

I've known Mr. Feldstein a long time, and worked for him at Ronald Reagan's Council of Economic Advisers. He used to be a deficit hawk; now, out of what may be sincere conviction but looks from the outside like an effort to demonstrate political loyalty, he endorses tax cuts in the face of large budget gaps and gigantic borrowing to privatize Social Security.

But it's reportedly not enough, because right-wingers have never forgiven Mr. Feldstein for his finest hour - the time when, as a member of the Reagan administration, he spoke out against deficits. It's not just vindictiveness on their part: a man who once took a stand on principle while holding office might do so again once ensconced at the Fed.

Glenn Hubbard of Columbia, who served in the administrations of both Bushes, is also frequently mentioned. He's a smart economist, but everything in his policy career suggests that when the party really got going, he would say: "More punch? Yes, sir, whatever you want."

The last name one often hears is Ben Bernanke, currently a member of the Fed's Board of Governors. (Before going to the Fed, Mr. Bernanke was chairman of the Princeton economics department, where I'm on the faculty.) If Mr. Bernanke were appointed directly from his current Fed position to the chairmanship, there would be general acclaim. But he may soon move to the Council of Economic Advisers. Why?

Surely it's not because this administration, with its disdain for technical expertise in all fields, wants his advice. I hope I'm wrong, but my guess is that what's intended for Mr. Bernanke is a form of hazing: he will be expected to prove his loyalty by defending the indefensible and saying things he knows aren't true.

That might seem a tolerable price to pay for the Fed chairmanship - but a year of it might well make Mr. Bernanke damaged goods from the point of view of the markets.

It's a dilemma. I don't have any sympathy for the administration's perplexity. But I do wish Mr. Bernanke the best of luck, and hope he knows what he's doing.

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Bush nominates Bernanke as next Fed chief
Top White House adviser to succeed Greenspan at central bank

http://www.msnbc.msn.com/id/9803463

By Martin Wolk
Chief economics correspondent
MSNBC
Updated: 6:11 p.m. ET Oct. 24, 2005


Martin Wolk
Chief economics correspondent


President Bush Monday nominated Ben Bernanke, head of his Council of Economic Advisers, to succeed Alan Greenspan as chairman of the Federal Reserve, often described as the nation’s second-most powerful job.

Bernanke, 51, a former Fed governor and Princeton University economics professor who only took over his current White House job in June, long had been considered the favorite for the central bank post.

“He has earned a reputation for intellectual rigor and integrity, he commands deep respect in the global financial community and he will be an outstanding chairman of the Federal Reserve,” Bush said at an afternoon White House ceremony, where he was flanked by Bernanke and Greenspan.

Bernanke said that if confirmed by the Senate his “first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.”

Although Greenspan said nothing at the brief White House appearance, his shadow looms large after an 18-year tenure in which he has come to embody the powerful central bank, moving financial markets with his comments and actions and serving as the top interpreter of the nation’s economic condition.

President Bush called Greenspan, 79, a “legend” who has “dominated his age like no central banker in history.”

In choosing the widespread favorite, Bush has taken a more conventional path after a series of recent stumbles including the poorly received nomination of Harriet Miers for the Supreme Court.

“The Harriet Miers fiasco really prompted them to go with the safest choice, the one the markets were expecting,” said Greg Valliere, chief strategist for Stanford Washington Research Group Stanford Washington Research Group. “He couldn’t get too exotic with this pick.”

Financial markets and Bush’s other constituencies should be satisfied with the choice of Bernanke. A registered Republican who has advocated for President Bush’s economic policies over the past four months, Bernanke has a reputation as more of a technocrat than ideologue.

“In my opinion you can’t call Bernanke a crony” of President Bush’s, Valliere said. “There is little doubt in my mind that Greenspan has approved this.”

“The President has made a distinguished appointment in Ben Bernanke,” Greenspan said in a written statement. “Ben comes with superb academic credentials and important insights into the ways our economy functions. I have no doubt that he will be a credit to the nation as chairman of the Federal Reserve Board.”

Senate Banking Committee Chairman Richard Shelby said he was confident Bernanke would be well-received by the committee, which will consider the nomination.

“I look forward to a rigorous discussion of a variety of economic issues during Dr. Bernanke’s confirmation hearing,” the Alabama Republican said in a statement. “I am confident that this nominee will be thoroughly questioned but also well-received by all members of our committee.”

In a conference call with reporters, Shelby predicted the committee would hold a confirmation hearing before Thanksgiving.

Bernanke, of course, has large shoes to fill. In his 18 years as Fed chief, Greenspan established himself as possibly the most powerful chairman in history, guiding the U.S. economy through the nation's longest postwar expansion as well as two recessions. He helped restore calm to financial markets after the terrorist attacks of 9/11, the stock market crash of 1987 and the international crisis triggered by Russia's default on its debt in 1998.

Bernanke always voted with Greenspan while he was at the Fed, although the two men differ on at least one key issue of monetary policy. Bernanke favors an explicit inflation "target," while Greenspan has pursued a more flexible policy with no stated target.

If approved by the Senate, Bernanke would be only the 14th chairman since Congress created the central bank system in 1913 in response to a series of financially devastating bank panics.

The appointment as chairman runs four years, although Bernanke could serve 14 years if he is reappointed by future presidents. He would be required to step down from the Fed board when his single term as governor expires Jan. 31, 2020.

Born in Augusta, Ga., Bernanke got his undergraduate degree from Harvard and his Ph.D. in economics from the Massachusetts Institute of Technology.

In his two and a half years as a Fed governor, Bernanke was best known for raising the novel concern that the U.S. economy could be devastated by the type of deflation that crippled Japan for many years.

In a November 2002 address to the National Economics Club in Washington, Bernanke raised the issue and outlined a series of tools at the Fed's disposal for "making sure 'it' doesn't happen here," as he subtitled his speech.

The “Bernanke option,” as it was described, would be used in the event that short-term interest rates fell to near zero and the central bank needed other ways to stimulate the economy.

In mid-2003 the Fed cut the benchmark federal funds rate to a 46-year low of 1 percent and the Fed warned that inflation was getting dangerously low, but deflation never emerged.

Since mid-2004, the Fed has steadily been raising rates to head off the possibility of inflation. And with energy prices soaring, so-called core inflation has risen to the top of the Fed’s “comfort level,” according to policy-makers.

The fed funds rate is currently at 3.75 percent and probably will be raised to 4 percent when Greenspan and other Fed leaders hold their next scheduled meeting next week.

While the Fed chief technically sets policy together with a committee of central bank governors and regional Fed presidents, Greenspan has rarely faced much opposition in recent years. But analysts say it will take some time for the new Fed chief to achieve the same kind of consensus acceptance from fellow policy-makers.

Bernanke is married with two children.

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I don't understand the warrants in that first article. Why on earth would Greenspan's policies have been responsible for an increase in private debt? If anything, a generally tight money policy would have meant LESS debt, I'd think. There's a lot more plausible conservative villains on this one than Greenspan (and plenty of non-conservative ones too, but I doubt that would interest thimbles as much).

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One might say that Greenspan has been insufficiently tough on criticising the federal deficit (he's been more in favour of the tax cuts than against the deficit) and also that he hasn't raised interest rates fast enough (that's not my opinion, but people do make that claim). The new guy is a little more hawkish on inflation that Greenspan (the news today has been touting him as in favour, broadly speaking, of targeting inflation, which has been the norm in some of Europe, including, now, the Bank of England).

The indebtedness of Americans, though, seems more like a collective psychosis than anything else.

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Incidentally, there are plans afoot (that Bush may agree to) to cap the amount of mortgage from which tax deductions can be claimed (to about 350 000 dollars, I think).

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And the problem with that is?

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I don't have a particular opinion on it either way, although they'd have to, I think, change the amount for different areas, because housing costs vary so widely. Anyone with an expensive house, of course (even if they don't have a mortgage) will suffer as it will probably drive the price of their house down, but that's not the end of the world, I guess. You can't raise money without people suffering to some degree or other, anyhow; that's the nature of taxation.

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quote:

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White House Gamble Pays for a Princeton Professor
By LOUIS UCHITELLE and EDUARDO PORTER

Even before President Bush named Ben S. Bernanke as chairman of the Council of Economic Advisers this spring, Mr. Bernanke decided to gamble. He sold his home in New Jersey last year and told friends that, instead of returning to a tenured professorship at Princeton University, he was taking a chance that President Bush would elevate him from obscurity as a Federal Reserve governor to a top political appointment.

The gamble paid off. If the Senate confirms him, Mr. Bernanke will arguably become the most powerful economic leader in the world. Not since Arthur Burns, the Federal Reserve chairman from 1970 to 1978, has a university professor run the nation's central bank.

But while Washington policy making may be Mr. Bernanke's newly chosen field, no one seems to have a clear idea what his political views are, other than the fact that he is a registered Republican. Mr. Greenspan took strong political positions, using his pulpit at the Fed to promote Social Security private accounts and to sell the president's tax cuts. Mr. Bernanke, in contrast, has been muted on such political hot potatoes even as the president's chief economic adviser.

Now, as he moves to the Fed, he is likely to steer the central bank away from the broader political debate. "One can expect Bernanke to adhere strictly to a more silent stance regarding issues outside of monetary policy," said Kevin A. Hassett, director of Economic Policy Studies at the American Enterprise Institute.

Mr. Bernanke, 51, is more like a "Mr. Smith Goes to Washington" than the political figure that Mr. Greenspan already was when he became Fed chairman in 1987. Appointed a Fed governor in August 2002, Mr. Bernanke from the start considered his term in Washington as a time-out from academia.

But Washington grew on him. His friend, Gene M. Grossman, another Princeton economist, said that Mr. Bernanke "thought it would be informative and interesting to actually work on policy."

"And then he found he was enjoying it and he was good at it," he said.

Hooked as he was, Mr. Bernanke nevertheless bridled at Washington's customs, including its dress code. "The biggest downside of my current job is that I have to wear a suit to work," he told fellow economists in a speech last January. He likes tan socks and was once chided by President Bush for wearing them with a dark suit. His puckish response was to buy a dozen tan socks and distribute them at the next White House gathering.

Less than three years into the Fed job, Mr. Bernanke's name went to the top of the list of candidates for the chairmanship of the Council of Economic Advisers. By then he had sold his home for $630,000 in Montgomery Township, N.J., where he had served for a while as president of the board of education, and purchased a house in Washington, paying $839,000 for it.

As a professor he wrote dozens of papers on economics and was the co-author with Robert H. Frank of Cornell University of an economics textbook for beginners. At the Fed, his heavily footnoted speeches had a scholarly twist. He is credited with coining the term "savings glut" to help explain the huge American trade deficit that is largely financed by the savings of foreigners.

A diffident, unassuming man, he nevertheless is often playful. He regularly wrote songs and skits for Christmas gatherings of faculty and students, and sometimes performed in them. While Mr. Bernanke was working on a textbook with Mr. Frank in the late 1990's, a competitor, N. Gregory Mankiw, a Harvard professor and Mr. Bernanke's predecessor at the council, published his own textbook.

Mr. Mankiw, in his book, made a point about the value of time, and posed the hypothetical question: Should the basketball superstar Michael Jordan mow his own lawn? The Mankiw textbook was a best seller. According to Mr. Frank, Mr. Bernanke insisted that their book ask the question: Should N. Gregory Mankiw mow his own lawn?

Mr. Frank, a liberal professor at Cornell, and Mr. Bernanke were an odd couple as authors of "Principles of Economics," published in 2001. While Mr. Frank wears his politics on his sleeve, Mr. Bernanke does not.

"When the news first came that he was a candidate to be named a Fed governor, I thought it was interesting that the Bush administration would nominate a Democrat," Mr. Frank said. "I was surprised. I worked with him and did not know he was a Republican."

As chairman of the Princeton economics department for six years, Mr. Bernanke gained a reputation as a good manager of a diverse group of academics with healthy egos. His style in handling them was self-deprecating. He described himself as "primus inter pares" or first among equals. "We're all the same rank," he told The Daily Princetonian, the campus newspaper. "I'm just the one sitting in the chair."

As chairman of the Fed, he will be more than first among equals. The Fed chairman is the final arbiter of monetary policy, but more than Mr. Greenspan, Mr. Bernanke is likely to seek consensus on Fed policy. "He was a good listener at Princeton," Mr. Grossman said. "He never felt that he had an agenda."

Ben Shalom Bernanke was born on Dec. 13, 1953, in Augusta, Ga., the son of a pharmacist and a schoolteacher. He grew up in Dillon, N.C., and earned his bachelor's degree at Harvard, graduating summa cum laude in 1975. Four years later, he received a doctorate in economics at the Massachusetts Institute of Technology.

As a student and professional economist, he focused on the Depression, arguing in effect that the central bank helped to bring on the deflation of that era by raising interest rates too much. In 2002, as a Fed governor, that became a special concern when inflation seemed to be moving toward zero. In his speeches, he spoke out about this risk.

"When inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more pre-emptively and more aggressively than usual in cutting rates," he said in a speech in November 2002.

Mr. Bernanke taught at Stanford from 1979 until 1985, and then moved to Princeton where he remained until his Fed appointment, having come to the attention of the Bush administration as one of the nation's top monetary economists.

He and his wife, Anna, a Spanish teacher, have two college-age children: a daughter, Alyssa, and a son, Joel.

Like Mr. Greenspan, he is a baseball fan, and an enthusiast about sports, often disputing the methods used in the major leagues in calculating player statistics. "He's got a very sharp mind for things that don't add up," said Dwight Jaffee, a former Princeton economist and squash partner.

Mr. Bernanke reported last year on a financial disclosure form that he had $1.1 million to $5.6 million in assets like retirement accounts, mutual funds and government bonds. By comparison, Mr. Greenspan, reported that his assets were $4.3 million to $9.4 million.

Stephen Labaton contributed reporting from Washington for this article and David Leonhardt fromNew York.

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LINK


Ayup, sometimes hunches pay off, don't they Paint?

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