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Bush prolongs the Greenspan agony
By Peter Eavis 5/27/2004
People often look back and wonder what JFK would have done in Vietnam had he been around to direct the war he got the country into. It will be almost as interesting to see how Fed Chairman Alan Greenspan handles the credit bust that is the likely consequence of the easy-money policies he has implemented as head of the nation's central bank.
There is a very high chance that the 78-year-old Greenspan will be around to deal with his own mess, after President Bush renominated him as Fed chairman May 19. Because of some Fed rules, Greenspan probably won't be able to serve out a full four-year term. But he will be in charge of U.S. monetary policy until January 2006.
Will the economy really fall into the debt trap Greenspan has built within the next 18 months? You bet.
Impending credit collapse
Though he created the monetary conditions for the late-'90s stock market bubble and its subsequent bust, Greenspan is still viewed as an intellectual giant the world over. But he could easily spend the last days at the Fed explaining away the credit collapse he's been setting the country up for over the past four years with absurdly low interest rates.
So what, in particular, can we deduce from the fact that Bush has renominated Greenspan, who has served as Fed chairman since 1987?
First off, stock market bulls will short-sightedly see this as good news because it means interest rates will rise only by a small amount before the presidential election in November -- despite the inflationary pressures building up in the economy. If Greenspan had started hiking rates at the beginning of this year, it stands to reason that Bush would not have been so ready to renominate him.
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Dubya's eye on Greenspan
It is widely believed in Washington that Greenspan spoiled Bush Sr.'s chance of re-election in 1992 by running monetary policy too tightly. It would be a tad conspiratorial to assume that Dubya has extracted some sort of commitment from Greenspan to keep interest rates low before the election to avoid a fate like his father's. Nevertheless, it would be equally naive to assume that the Bushies did no detailed checking up on what Greenspan's monetary policy outlook is for the next six months before renominating him.
Looking out toward November, Greenspan's resolve as a supposedly independent central banker will be seriously tested if data show overheating in the economy. If they do, rates would have to go up more than the White House might like. But for now, monetary policy is going Bush's way. Money supply is growing at close to 5% on an annual basis. True, that's slower than the red-hot rate of recent years, but there are signs of sharp acceleration in recent weeks, and 5% is well above the rate that Bush Sr. had to live with in 1992.
One could argue that a decision by Greenspan to stay till 2006 is bullish because it shows that he's confident there won't be a credit bust. After all, why would he stick around if he thought financial Armageddon were around the corner? It may be that he sincerely believes his public insistences that households aren't overleveraged. "Pride cometh before the fall," says Paul Kasriel, chief economist at Northern Trust. "I guess Greenspan believes his own press."
Spectre of a Greenspan clone
It's quite possible that the Bush administration sees Greenspan's intellectual shortcomings but is bowing to a confluence of events. The administration, battered by setbacks in Iraq and facing plunging presidential approval ratings, obviously needs someone at the central bank who will set the printing presses whirring right now. Greenspan is useful in other ways. He can say comforting things about tax cuts (but not budget deficits). And as a longtime critic of financial giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), Greenspan has been usefully marshaled into the administration's campaign to peel away many of the government-granted advantages enjoyed by both companies.
It would have been very good for the health of the economy to see Greenspan go in June, when his current term expires. But the awful possibility exists that we would get a Greenspan clone. One of the most depressing aspects of the Greenspan years has been the increasing intellectual uniformity of Fed governors. There is no member of the interest rate-setting Federal Open Market Committee who could be identified as a real hawk. In fact, the most prominent members -- think Ben Bernanke -- follow the same lax approach as Greenspan himself.
There is some chatter that Bush will find a way to keep Greenspan in his post beyond early 2006. Seeing as the credit bust will be well under way by then, it would be tempting to want Greenspan to stick around to clear up the mess. But looking back at the last 10 years of Sir Printsalot's reign, the quicker he goes, the better.
In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to peter.eavis@thestreet.com. Click here to read our conflicts and disclosure policy.
© 2004 TheStreet.com, All Rights Reserved.
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