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| Is Greenspan Preparing to Leave the Fed? - Apr. 8, 2004 |
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Summary
A few months ago, I raised lots of eyebrows by suggesting there was a
chance, perhaps even a decent chance, that Alan Greenspan would not serve a fifth
term as Federal Reserve chairman. In recent weeks, I've gained some company
regarding this possibility.
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How high do I rank the possibility of Alan Greenspan's departure from the
Federal Reserve during 2004? Well, I suspect the current consensus view
assigns a next-to-nothing probability to such an outcome. I could be talked into
something approaching, say, 30%, maybe even a little higher.
Granted, these certainly are not odds you would like to take to the
racetrack. Nevertheless, I don't think you can dismiss the possibility out of hand.
Before reviewing my thoughts about whether Greenspan might not, after
all, serve the fifth term as Fed chairman that many have assumed as a given,
let's examine excerpts of two recent columns on the subject. The first appeared
last week (3/30) in the NY Post and was entitled, "White House May See Greenspan
as Liability for Election." The column was authored by an old friend, John
Crudele, who I view as a very competent financial writer. Crudele wrote:
"Granted, I'm a bit early on this conjecture. The Federal Reserve
chairman's term doesn't expire until June, and the last word from the Bush
Administration is that he can stay on.
"But a few weeks ago, I started hearing a story from a very
well-connected Washington insider that the White House is peeved at Greenspan for some
stuff that appeared in 'The Price of Loyalty,' the best-selling book by former
Bush Treasury Secretary Paul O'Neill.
"...What is really tweaking the administration's cheek is the fact
that some of the other information in the book could only have come from
Greenspan. And Greenspan and the now-despised O'Neill were, and are, tight.
"'O'Neill is very friendly with Greenspan," says this source, who has
worked in previous Republican administrations. 'And the White House is [not
happy with]' the Fed chairman.
"Disloyalty is a sin in this White House. And being a friend to the
administration's enemy makes you the enemy. ..."
NOTE: John's entire piece can be accessed using the following link:
http://www.nypost.com/business/22084.htm
Appearing in the Washington Post on 2/27 was a column entitled, "Cashing
in Fed Credibility to Campaign." It was written by Post business writer,
Steven Pearlstein, and here's an excerpt.
"I now have it on good authority that Alan Greenspan has decided not
to seek reappointment as chairman of the Federal Reserve Board when his term
expires in June.
"Indeed, the unwitting source is none other than Greenspan himself.
"We know this because, over the last week, in a remarkable series of
talks, Greenspan has decided to cash in his personal credibility, as well as
the reputation of the Federal Reserve System, to push a radically conservative
agenda while serving as cheerleader for the Bush-Cheney reelection campaign.
In doing so, the politically savvy Greenspan must surely have realized he was
putting his reconfirmation in this election year into serious jeopardy. ..."
What's the old saying about beauty -- or the lack thereof -- being in the
eye of the beholder?
On one hand, we have John Crudele opining that Greenspan might be in
reappointment trouble because of disloyalty to the White House. On the other
hand, here is Steve Pearlstein suggesting something approximating just the
opposite.
For the people who have read my material for a while, it is hardly a
secret that I view Alan Greenspan with exponentially less esteem than do his Wall
Street friends and cheerleaders. In fact, I have occasionally expressed the
opinion that in the fullness of time, the time required for history to
appreciate the extent of the damage he's done, Greenspan would become one of the great
pariahs in financial-market history. Nothing recently has changed my mind!
In hindsight, Greenspan should have taken the cue from Bob Rubin, who got
out while the getting was still good. But when it was decision time for Mr.
G. about a fourth term -- the summer of 2000 -- the stock market was already
faltering badly. I think he probably felt that he had better hang around for a
better exit point regarding that old "legacy" shtick. And I suspect that
legacy considerations are something that are awfully important to Alan Greenspan.
I believe George Bush made a horrible mistake in indicating the virtual
certainty of a fifth term for the Fed head roughly fourteen months before the
end of the fourth term. There's still lots of time for it to come back to
haunt the President, even if Greenspan takes a pass on another term. But last
year, just around this time, Bush needed serious help with his tax legislation.
Therefore, the indication of another term for Greenspan was a classic marriage
of political convenience, and it's remarkable how quickly some of Greenspan's
ideas about tax cuts and the like became "pliable," shall we say, once the
fifth term as Fed chairman was strongly suggested.
The first time I began to think that something just might be up regarding
no fifth term was during last year's Jackson Hole Symposium, sponsored
annually by the Kansas City Federal Reserve Bank. And I admit that at the time, I
did not think about it in terribly serious terms.
Last year's symposium ran from 8/28 through 8/30; its general topic was
"Monetary Policy and Uncertainty: Adjusting to a Changing Economy." On 8/29,
Alan Greenspan addressed the gathering, delivering a paper entitled, "Monetary
Policy under Uncertainty." I thought the speech was highly self-serving, at
least bordering on delusional. Nevertheless, I more or less dismissed the
event, feeling that maybe the region's high altitude and majestic scenery had
overwhelmed Mr. G.
Early January rolled around, and with it, another major Greenspan speech
that again struck me as a bit "odd." The following excerpt is from my
research missive dated 1/6, which was entitled, "Potpourri."
"...The dynamic duo of Alan Greenspan and Fed Governor Ben Bernanke
were on a speech-giving binge last weekend in San Diego, at a gathering of the
American Economic Association. The respective speeches, Greenspan on 1/3,
Bernanke on 1/4, got a fair amount of media attention, but only in excerpted form.
"I am going to request something of readers bordering on cruel and
unusual punishment, which is something I certainly try to do sparingly.
Nevertheless, in this case, I believe it is warranted. Use the link below to access
, then please
read [it] in its entirety. Just when you think Mr. G. has reached the zenith
of delusional, self-serving behavior, something new comes along to top it!"
NOTE: The speech remains posted on the Fed's website at:
http://www.federalreserve.gov/boarddocs/speeches/2004/20040103/default.htm
Then, along came my missive of 1/22 ("State of Union Address/Stock
Market"):
"Many months ago, I identified Alan Greenspan as someone who would
put a second Bush Presidency in jeopardy, mainly on the assumption that once
Greenspan had been bought with the nod on a fifth term as Fed chairman, Mr. G.
would probably begin creating new bubbles and exacerbating old ones. And he did!
(I have a face-saving way out for him as well as the President. More on
this in a moment.)
"A blowup in stock prices coming too close to the election has
obvious and certainly not pleasant potential political implications. And we already
are closing in on the end of January, so time is running out for what could
be a pretty nasty but nevertheless healthy correction. 'Healthy' in the sense
it would help deflate some of the new bubble, and it would allow some time for
the market to bottom and begin a nice rise into election time.
"Of course, with the arrogance displayed by Greenspan in his recent
speech in San Diego, he has likely used back channels to assure the White House
the Fed can and will keep everything glued together until after the election.
Good luck!
"Considering the increasingly exponential look of a number of items,
the possibility of a sidewall blowout grows. And the equity market overall
has now reached a critical area ... The DJIA and the S&P 500 are nearing the
highs they set in the rally that began after the lows which followed 9/11. ..."
(NOTE: The respective 2002 closing highs set by the DJIA and the S&P 500
after the lows following 9/11 were 10,635 and 1,173. The 2004 closing highs,
both set on 2/11, were 10,738 and 1,158. Versus the 2002 highs, these work
out to +1.0% and minus 1.3%, respectively.)
Continuing from the 1/22 missive:
"The Greenspan 'Solution'"
"In a piece I published on 1/6, I said the following about a recent
Greenspan speech in San Diego (on 1/3, before the American Economic
Association):
"'...Just when you think Mr. G. has reached the zenith of delusional,
self-serving behavior, something new comes along to top it!'
"The Fed had not really had a hand in creating any bubbles, nor could
it have stopped them anyway. Nevertheless, it had handled them beautifully
-- after the fact. Moreover, there is no sign at present of a new bubble.
This was the gist of what Mr. G. had to say. It was really scary, scary stuff!
"However, how about this? With the great rise in stock prices over
recent months, why doesn't Greenspan use this speech as the basis of pulling a
Bob Rubin -- of getting out of town while the getting is good? Amplify on the
points he made in San Diego to declare victory, then inform the President he
no longer wishes a fifth term as Fed chairman. (Greenspan's current term
expires in June.)
"When the announcement is made, the large number of Greenspan
sycophants remaining on Wall Street will put the stock market into a dive --
initially, at least. In turn, this will give Greenspan an ego rush, and it will give
Bush the sell-off he needs now, to avoid potentially far worse problems later
in the year."
A Concluding Thought or Two
Since I authored the 1/22 piece, Mr. G. has been strutting around some
more. At times, he actually has sounded like the head of a major central bank.
He has let Congress in on the fact there could be problems from chronic
federal budget deficits, not to mention that Social Security has some serious
problems. Brave stuff in a Presidential election year from someone awaiting
reappointment by a President running for reelection. Among some other items of
potential import, he also has brought to Congress' attention that some of the
Government Sponsored Enterprises might have unsound financial practices. What
a mensch!
My point here and earlier is that through actions of the last several
months, it appears that Alan Greenspan has stepped up materially the attempt at
enhancing his legacy. In turn, I would associate this more with someone who
was leaving rather than someone who was signing on for another four years.
Practically speaking, there's not a lot of time left to learn of
Greenspan's fate -- of whomever's volition.
Alan Greenspan joined the Federal Reserve Board on 8/11/87, appointed by
Ronald Reagan as its chairman, as well as to serve an unexpired term as
governor. Greenspan was reappointed to and began serving a full 14-year term as a
governor on 2/1/92. He was last appointed chairman by Bill Clinton in 2000, and
his current term as chairman expires on 6/20 of this year.
Were Bush not to reappointed him as chairman, Greenspan would still have
more than a year left to run on his 14-year term as a governor. If not
reappointed chairman, it seems inconceivable, though, he would remain on the board.
Thus, Bush would most likely be given the opportunity to choose a new
chairman from the outside, if he wished to do so.
If not reappointed, I'm not sure whether Greenspan would be permitted to
stay on as acting chairman until a successor was confirmed by the Senate. If
not, Roger Ferguson, the Fed's current vice chairman, would likely assume the
role on an interim basis. Bush might even appoint Ferguson (who is an
African-American) to step into the higher slot, then seek a new vice chairman.
Under any circumstances, word that Greenspan was departing the Federal
Reserve would roil the financial markets, at least initially. Therefore, if he
is going to leave -- either of his choice or Bush's -- I would expect an
announcement to be made pretty soon. June 20 is no longer too far down the road.
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