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Greenspan’s successor could be a dark horse

With just over three months left in Federal Reserve Chairman Alan Greenspan's 18-year term, a growing number of analysts believe President Bush might nominate a surprise dark-horse candidate.
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There are only a few names generally mentioned as likely successors to Federal Reserve Chairman Alan Greenspan, and the roster has remained remarkably stable since White House economic adviser Ben Bernanke emerged as the odds-on favorite last spring.

But as the selection process heats up at the highest levels of the Bush administration, there is growing suspicion among many economists that the nomination will go to a lesser-known or surprise candidate, possibly one with more business experience than the academics who are mentioned most often.

President Bush’s choice of his virtually unknown White counsel Harriet Miers for the Supreme Court — a candidate who was on nobody’s short list — set off alarm bells among some close observers of the Fed.

“That appointment got people scurrying back to their probability tables for the next Fed chairman, thinking the net might be wider and the person picked might be less credentialed, and that got people nervous,” said Laurence Meyer, vice chairman of Macroeconomic Advisers and a former Fed governor.

But Meyer and others said the uproar over the Miers nomination made it more likely than ever that Bush and his team will choose someone with iron-clad economic credentials who can quickly step into a leadership role when Greenspan departs in January after 18 years as a Fed chairman.

“I don’t think the administration is going to go way out in left field for somebody,” said Greg Valliere, chief strategist for Stanford Washington Research group. “It’s not going to be a Harriet Miers.”

While the appointment of a new Fed chief is not necessarily more important than filling a seat on the Supreme Court, Greenspan’s successor will have a singular role in shepherding the world’s largest economy and influencing financial markets for at least the next four years and possibly the next decade or more, depending on reappointments.

And given the recent stumbling the White House in its response to Hurricane Katrina and the Supreme Court appointment, and the weakened state of the Republican Party in Congress,  Bush presumably wants to choose a candidate who will quickly win broad approval. Vice President Dick Cheney, senior adviser Karl Rove and probably Greenspan himself all will likely have a voice in the selection process.

“(Bush) has got to be even more careful today,” said Diane Swonk, chief economist for Mesirow Financial in Chicago. “He has burned through a lot of political capital. He’s got to put someone in who is going to be a slam dunk.”

Still, she said there is a growing possibility Bush will nominate “none of the above,” referring to someone other than the three candidates most likely mentioned: Bernanke, Harvard economist Martin Feldstein and former White House adviser R. Glenn Hubbard.

All three are respected Ivy League economists with Republican credentials, and Bernanke is a monetary policy specialist who served nearly three years  as Fed governor before assuming his current post as chairman of the Council of Economic Advisers.

While all three front-runners have been widely discussed over the past year, Bush said Oct. 4 that he had not “personally” seen any names on the list of potential nominees, saying the process of gathering outside opinion was “ongoing.”

"It's important that whomever I pick is viewed as an independent person from politics," Bush said at a news conference. "It's this independence of the Fed that gives people not only here in America, but the world, confidence."

While Bush's comments were not a dismissal of the current short list of candidates, analysts say the frequent rumblings out the White House about casting a “wide net” makes a dark horse scenario highly credible.

“If it was going to be one of them, you would have thought they would just move forward,” said Swonk.

Ethan Harris, chief U.S. economist for Lehman Bros. and a former Fed staffer, said Bernanke is still the most likely option, but Harris rates Bernanke’s chances at only 30 percent. He said there is a 40 percent chance the post goes to somebody other than the three names most frequently mentioned.

But neither he nor anybody else following the process closely has come up with the name of a business person or Wall Street executive who seems like a feasible candidate. Occasionally analysts mention Citigroup executive and former Treasury Secretary Robert Rubin, but his role as a top adviser to Democrat John Kerry's presidential campaign makes him a highly unlikely prospect.

One long-shot candidate who is being discussed with increasing frequency is Donald Kohn, a career Federal Reserve staffer who is a protégé of Greenspan and was named to the Fed’s board of governors by President Bush in 2002, although he is politically independent.

Kohn, 62, is a favorite of many bond market specialists and economists because of his 35 years of experience at the Federal Reserve and ties to Greenspan that are so close some analysts call him a "clone" of the chairman.

“I would not rule him out,” said Valliere. “He is just really solid and he is not an ideologue at all.”

Kohn is handicapped by the fact that he is relatively unknown on Capitol Hill and Wall Street, and the Bush administration may prefer to choose someone who has a more established record of sharing its views on tax policy.

“He is kind of the ideal candidate on paper because he has all the technical elements you want in a Fed chairman,” said James Glassman, senior economist at J.P. Morgan Chase and another former Fed staffer. But he said Kohn may not have the “political stature” needed for someone who will in effect become the chief interpreter of economic and monetary policy for Congress and the public at large.

Other names floated recently include those of Manuel Johnson, a Reagan-era Treasury official and former Fed governor, and Robert McTeer, longtime president of the Dallas Fed who is now chancellor of the Texas A&M University system.

White House spokesman Scott McClellan said last week the nomination was a “priority” for Bush, but he declined to speculate on timing.

With a busy agenda dominated by the Supreme Court vacancy and recovery from Katrina, analysts are divided over whether Bush will make his nomination soon enough for the Senate to consider before its December holiday recess.

If not, the Senate would have only a few days after it reconvenes in January to approve a new chairman before Greenspan’s term expires Jan. 31. While Greenspan is not eligible for reappointment, he would remain in office until a new chairman is confirmed, so it would technically be possible for him to continue beyond his retirement date.

But Greenspan has signaled he intends to retire on time, shortening a scheduled two-day meeting in January to make way for his presumed successor.

Glassman said he did not expect a major controversy around the nomination of a new Fed chief, noting that monetary policy is not an issue that typically inflames strong political passions.

“The divisiveness over social issues really does not come into play with the Fed,” he said. “There is no Republican or Democratic monetary policy.”

But Meyer said it was important for Bush to name a successor to Greenspan soon to ensure a smooth transition.

“It is a very important appointment,” Meyer said. “Whoever it is, Congress should be given sufficient time for a very serious vetting process.”