AP Boils Down Greenspan Succession to 3 Names

Monday, June 06, 2005

239 days or 5,750 hours before Alan Greenspan is to retire, the Associated Press (AP) (via Forbes) has shortened the list of possible successors to 3 names.
They are Harvard economics professor Martin Feldstein, Columbia business school dean R. Glenn Hubbard and Fed governor Ben "printing press" Bernanke, currently awaiting Senate confirmation as chairman of the president's Council of Economic Advisers (CEA).
I have elaborated on Alan Greenspan's virtues extensively (read this post!) when the Washington Post brought up the possibility that Greenspan might retire a little later. The White House faces a difficult task in finding a suitable successor that will fit into the oversize shoes of mental perfection Greenspan will leave as a legacy.
Greenspan's unsurpassed art of calm and logic rhetoric unter the immense pressure from policymakers and the spotlight of live TV cameras transmitting his every word and movement onto trading floors worldwide has never faded for a second. No man has done more to sedate markets when they needed it most.
This unique capability makes it even harder for his successor; whoever it will be. Never mind that his way of expression led to the phrase, "shall I Greenspan it," in Washington circles.
In the question about his succession I hope it is not going to be Bernanke as his coming role in the White House cannot be seen as a post where one gains independence from an administration that is well known for its ways to silence critical voices in all fields. His view of dropping dollars from a helicopter if the economy needs it also does not really vouch for a tough stance on inflationary dangers.

Credibility Abroad is Most Important
Getting dyed in the White House just before climbing the Fed chair would be a very blunt signal to the markets that the administration is not willing to accept any dissent in monetary policy. Hubbard faces the same obstacle, having chaired the CEA from 2001 to 2003. So does Feldstein who held this post under the Reagan Presidency from 1982 to 1984. Bernanke would have a better stand in the international community of central bankers if the Senate would not elevate him to the CEA chair. The independence of the Fed has to be guaranteed - and visibly - under all circumstances in a world of fiat money.
The Bush administration has every reason to install a willing collaborator though. Any rise in US interest rates (risk premiums) will add heavily to the already overwhelming budget deficits in form of ever higher interest payments.
The national debt, standing at 7.774 trillion dollars today, might zoom even higher than projected by the White House (see this post) if short and long term rates will rise more than 100 and 150 basisponts respectively. What is good for the president, namely artificially low rates, may not be of benefit for the American nation in the long run.
Concluding the three names, all of them have an impressive CV, Feldstein appears to be the best choice as he can show the temporally biggest distance to the current administration and might be able to hold onto the Fed chair should the next elections bring a Democrat president again. (The nomination for 14 years does not mean he could withdraw prematurely as other Fed chairmen did before, especially when the mess they were facing just grew bigger.)
A wide distance to the Bush adminstration is direly needed if the successor wants to gain the same credibility abroad that Greenspan has been enjoying.
No job requires a higher level of honesty and integrity.
Any sign that the next Fed chairman will be acting according to the wishes of the US Treasury, which fights with overboarding deficits without a sign of winning, could lead to a massive confidence crisis in the US dollar as the prime reserve currency of the world and a rapidly diminishing appetite for US debt. Bernanke may talk of a savings glut, the world will find other investment vehicles if the dollar looks at (political) risk. In that case the Euro could suddenly look good again, despite the massive crisis the EU is facing these days.
For the troubles every new Fed chairman faced shortly after his entering the office read this post.
Oxford Analytica on Cox' nomination to the SEC chair
UPDATE: Oxford Analytica provides the following analysis on Bush's choice of Republican Congressman Christopher Cox to replace SEC Chairman William Donaldson who resigned last Wednesday.
Donaldson's chairmanship has restored the agency's reputation. However, his tenure has also been controversial, with deep divisions among commissioners over the agency's basic regulatory approach. Cox faces the difficult task of forging a regulatory consensus that relaxes perceived SEC 'overreach' without sacrificing agency credibility.
The SEC's five commissioners have been deeply divided on the general direction of appropriate policy. By law, no more than three commissioners can be from one political party. Many key decisions -- requiring independent chairs for mutual funds; mandating registration of hedge funds; and embracing the 'trade-through' rule requiring accepting the best price for equity trades -- were taken by a 3-2 vote, with Donaldson (a Republican commissioner) voting with the two Democratic commissioners.
Under Donaldson's chairmanship, most of the nearly two dozen rule-making procedures necessary to implement the wide-ranging 2002 Sarbanes-Oxley Act were completed on schedule. However, he has faced heavy business criticism for increasing regulations perceived as an over-reaction to 'yesterday's' problems.
By contrast, other critics assert that the SEC has been too lax in responding to new challenges; they compare the SEC's modest record to the lead role taken by New York state Attorney-General Eliot Spitzer in launching investigations into areas including investment banking conflicts of interest, mutual funds, and insurance practices.
Spitzer will remain a force in setting the tone for regulation of corporations, regardless of developments at the federal level.
In addition to the nomination of Cox, a conservative Republican and a former corporate lawyer, other significant personnel changes are pending or have occurred at the SEC:
Democratic commissioners: Bush will have the opportunity to replace the two Democratic commissioners, if he so chooses. Roel Campos, whose term expires on June 5, would continue in his post, if re-nominated, while Harvey Goldschmid intends to return to his teaching position at Columbia University this year. Neither of these potential appointments will have the significance of Cox, since Bush cannot nominate additional Republicans to the commission. Moreover, since Cox and his fellow Republican commissioners will have a majority, they can set SEC policy regardless of the votes of the Democratic commissioners.
Director of enforcement: The SEC's director of enforcement, Stephen Cutler, resigned in April. On May 12, Donaldson appointed Cutler's deputy, Linda Chatman Thomsen, to replace Cutler; she is the first woman to hold the position. Thomsen headed the agency's Enron investigations, and is likely to continue the trend of aggressive enforcement established under Cutler.
As Cox is likely to ally himself with the Republicans on the commission, SEC policy will become more pro-business, and less investor-friendly. Cox has previously embraced significant pro-business positions on a variety of issues. Indeed, he was a sponsor and key proponent of the Private Securities Litigation Reform Act, which with other securities law changes, made it more difficult for investors to bring securities law actions and therefore indirectly facilitated problematic bubble-era financial transactions.
That said, Cox is well aware of the problems Pitt encountered as SEC chair: he too may find that his past positions and contacts prove to be a liability in his new post. Given the agency's currently heavily politicised atmosphere, his actions will be very carefully scrutinised. In order to be successful, he must strive to maintain the SEC's regulatory credibility.
In this context, it is uncertain whether a Cox-chaired SEC will go so far as to re-consider previously decided issues. Although the agency responds to political pressures, it is structured so as to prevent sharp policy divergences after changes in political control of either Congress or the presidency. The requirement that a party cannot control more than three commissioner seats, and the staggering of the five-year terms so that one commissioner's term expires each year, is designed to ensure policy continuity. Such continuity is vital both to maintaining investor confidence, as well as to ensuring a stable framework for making business decisions.
Pending policies: It is thus most unlikely that Cox will expend the political capital necessary to re-visit the majority of controversial decisions made under Donaldson. Nonetheless, most of the close 3-2 votes affect areas where rules have yet to be implemented, so that at least in theory, some of these decisions may be reversed:
Hedge funds: Modest new hedge fund registration requirements are the most likely area to be reconsidered or overturned. However, whether this happens is in part dependent on market conditions. A collapse of a major hedge fund, for example, could make it politically impossible for the SEC to roll-back implementation of the new rules.
Securities Act: The SEC is also in the process of revising the rules that pertain to the registration, communications, and offering requirements established in the 1933 Securities Act. The period for public comment on proposed changes has closed and final action is expected before the end of the year. Crucially, rules on communications will be modernised to accord with the reality of modern communications, especially the internet; and 'seasoned issuers' will probably qualify for streamlined offering procedures (thus reducing their costs of acquiring capital).
Shift in enforcement climate: Securities lawyers are examining closely what changes, if any, are likely in the enforcement climate, especially in light of Cutler's departure. It would be politically difficult to replace Thomsen at this point, especially given her experience and record.
In this regard, the US Supreme Court's decision this week in the 'Arthur Andersen versus United States' case is relevant. By overturning the criminal conviction for the firm for destroying Enron documents on the grounds that jury instructions were too broad, the decision suggests that prosecutors will have less leeway in future corporate fraud cases. Although such cases are rarely prosecuted against firms, prosecutors successfully use such threats to encourage cooperation in a securities investigation. The Andersen decision suggests that the climate for these cases may shift away from the pro-investor orientation established by the immediate post bubble-era lawsuits.
CONCLUSION: Cox's chairmanship will push the SEC in a more business-friendly direction, but is unlikely to result in the reopening of many previously settled areas. The most likely decision to be reconsidered is the introduction of new hedge fund registration requirements, which are currently due to take effect in February 2006.


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