WASHINGTON – President Bush said Tuesday he supports another term for Federal Reserve Chairman Alan Greenspan, even though the central bank chief had angered some conservatives with his cool reaction to the president’s latest round of proposed tax cuts.
The announcement sent a soothing message to the financial markets. The stock market rose sharply higher, with the blue-chip Dow Jones industrial average up 156.09 points.
But if Bush follows through and reappoints the Fed chief next year, Greenspan may be able to serve only two years of what is normally a four-year chairmanship.
That’s because Greenspan’s 14-year term as a board member runs out in 2006. By law he cannot be reappointed to another full term, and only board members can be chairman. Getting around these barriers would be a difficult legal maneuver.
Bush was questioned at a meeting with economic journalists about whether Greenspan should be reappointed. He replied tersely, saying, “Yes, I think Alan Greenspan should get another term,” and praised the chairman for conducting a “strong monetary policy.”
Later, White House spokesman Ari Fleischer said, “The president views Chairman Greenspan as a very wise monetary steward, that Chairman Greenspan has a very steady hand at the helm of the monetary policies for our country, that he has very good judgment that is reassuring both to the president and to markets.”
The White House endorsement came on a day that Greenspan, 77, underwent surgery because of an enlarged prostate, similar to a surgery he had in 1994. Later in the day, the Fed issued a statement saying the surgery was “routine and successful” and that he is expected to be back in the office later in the week. Despite Bush’s statement, it is unclear whether Greenspan wants to stay in his post after next year, as he has given no public signal. He is thought to be in general good health and exercises regularly.
The president’s statement of support was surprising in that it came more than a year before he has to decide whether Greenspan, often called the second most powerful person in Washington, will be replaced. The comments seemed designed to assure a jittery business and financial world that an experienced leader would remain at the helm of the central bank.
Greenspan won widespread praise during the economic boom of the 1990s, but he has been criticized recently for helping create the “bubble” that burst with the fading of high-tech and other stocks. Still, many in Washington and Wall Street view him as a sage and might feel nervous at any suggestion he would be replaced.
Greenspan’s chances of reappointment became more tenuous in February when he publicly undercut the president’s tax cut proposal, saying Congress should wait to see if the economy recovers before passing it. He also said any tax reductions should be offset by spending decreases.
Those remarks touched off speculation that Bush would put someone else in charge of the central bank, which sets interest rates for the economy by manipulating the supply of money in the banking system. Many fiscal conservatives in the GOP were particularly angry with Greenspan about his remarks, because he appeared to support the Democratic line on tax cuts.
Fred Breimyer, chief economist at State Street Bank in Boston, said the economy’s sluggish performance likely affected Bush’s thinking. “You want to have all the horses working for you that you can get,” Breimyer said. “In ratifying Alan, he is also in some ways acknowledging the difficult problems in the economy.”
Davis Wyss, chief economist at Standard & Poor’s, added that it would be hard for Bush to find another Fed chairman as good as Greenspan-“you are not going to get anybody better”-and he could easily name someone who would do worse.
Still, Wyss said, “I am surprised. I really felt he would go for somebody else because of Greenspan’s age.”
The fact that Greenspan’s four-year term as chairman runs out in June 2004, in the middle of an election year, likely enhanced his chances of reappointment, because no president wants a nervous Wall Street while campaigning for re-election.
Greenspan, a staunch Republican and free-market conservative, has served as Fed chairman since 1987, when President Ronald Reagan named him to replace Paul Volcker. Since then he has become the premier economic official in the United States, if not around the world. Markets hang on his every pronouncement.
He won high marks for pumping huge amounts of money into the economy during the 1987 stock market crash and the Asian financial crisis in the late 1990s, and after the Sept. 11, 2001, attacks.
During the boom of the 1990s, he largely accommodated the strong economic performance without driving interest rates up sharply, believing that robust productivity was keeping inflation under control. He received praise for his association with that boom, but some critics have since blamed him for helping create a market “bubble” that went bust with the arrival of a new century.
Greenspan did criticize “irrational exuberance” in the stock market in the late stages of the boom and began to push up interest rates to slow down the red-hot economy. The expansion came to an abrupt halt toward the end of 2000, and Greenspan went on an interest-rate cutting spree that drove rates down to their lowest levels since the early 1960s.
The Fed chairman has reduced interest rates a dozen times since the beginning of 2001 to get the economy going, with the benchmark bank lending rate the Fed controls now at 1.25 percent.
Although Greenspan served as chairman of the Council of Economic Advisers under President Gerald Ford and advised Republican presidential candidates on economics, his relationship with Bush and his father has been rocky at times.
During the 1992 election, the first President George Bush criticized the Fed chief for not lowering interest rates enough to stimulate the economy. Many economic advisers in the White House blamed Greenspan for Bush’s loss to President Bill Clinton.
In February, when Greenspan urged a wait-and-see approach to a proposed tax cut, he said Congress should be concerned about the federal deficit as it considers tax reductions, and make sure every dollar of tax reduction is matched by a spending cut or a tax increase elsewhere.
In his session with reporters Tuesday, Bush made another pitch for his tax cut, since reduced from $726 billion to $550 billion, but the news about Greenspan overshadowed his point.
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AP-NY-04-22-03 2053EDT
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