Before going into the individual candidates, one point that needs mentioning is that the President is the person that will determine the appointment of the Fed Chairman. This is actually very important because the Federal Reserve is suppose to be an independent body that is not subject to political influence. For the most part, since Greenspan has served under four different Presidents, independence has been easier to achieve. However, this time around, many believe that given the opportunity, any President, including the current one will pick someone who is willing to collaborate with him and avoid choosing a person who openly criticizes his economic policies. This could hurt the US and the dollar’s credibility abroad since no other job needs requires a higher level of distance from politics. The US Treasury has already lost credibility and is typically seen as nothing more than apart of the President’s grand plan. With such massive deficits, the Administration will have a vested interest in keeping interest rates low to make sure that their cost of servicing the debt does not become astronomical. According to former FOMC member Susan Phillips, “Politicians like low interest rates. That’s a fact of life.” Yet this could be dangerous for the US economy and the US dollar since artificially low rates could cause bubbles that may burst over the long run.

Who Are The Contenders?

The top three contenders for the job are Fed Governor Ben Bernanke, Columbia Business school Dean R. Glen Hubbard and Harvard economist Martin Feldstein. All three are economists with a firm understanding of how things are run in Washington and with Ben Bernanke slated to be the next chairman of the president’s Council of Economic Advisers (CEA), each of the candidates would eventually have advised the President to some degree. This may be seen as a potential risk to the independence of the Federal Reserve. The job qualifications as listed by the Associated Press are “must have credibility with Wall Street and the ability to deal deftly with financial turmoil, anytime, anywhere. Politically adept. A consensus builder. Unflappable. Business experience welcome, but not required. “ Best said by former FOMC member Laurence Meyer, the chairman needs to be “willing to play by the rules in normal times, but does not hesitate to depart from them in unusual circumstances.” With that, lets look at how each of the candidates fare:

Starting his career with a Ph.D. from MIT and a long time teaching stint in economics and public affairs at Princeton University, Ben Bernanke is probably best known for his term on the Federal Reserve Board of Governors, which he served since August 5, 2002. As a member of the board, he has quickly risen in recognition over the short span of his term as his speeches are now essentially the second most analyzed by Fed watchers after Greenspan. His most well-known stances include an unwavering devotion to inflation-targeting, which Greenspan opposes. He is also known as “printing-press” Ben, a title that he has been criticized for, because it means that he has explicitly promised to print money as a manner of increasing liquidity to generate inflation, if necessary. Bernanke has been credited with shaping the policy debate on deflation and helping to spur the decision of lowering interest rates to 45 year lows of 1%. Other work Bernanke has done indicates his advocacy of combining even more indicators into the models used to determine monetary policy in order to achieve more effective economic stabilization. He has studied this possibility over the years and penned papers describing possible implementation methods. As he prepares to take on the role of President of the CEA, many see this as a preliminary trial position before Bush names him as the top choice to follow Greenspan, who was head of the CEA under President Ford. Of the top 3 contenders for the position, Bernanke is the last one to come into this role. Having Bernanke as Fed Chairman would mean that we would probably be moving to an inflation targeting policy similar to the ones followed by the European Central Bank and the Bank of England. This would be more restrictive and less flexible than the current policy, but having Bernanke would also mean bringing about greater disclosure to the public and hopefully the credibility to the Fed.

Martin Feldstein

The oldest of the three candidates, Martin Feldstein was one of Hubbard’s supervisors for his PhD dissertation at Harvard. He served as the Chairman of the CEA during President Reagan’s term and is seen as the most controversial candidate due to his stance on some economically and politically important issues. His support for private accounts for Social Security would certainly turn off some Democrats, but his criticism of running large budget deficits doesn’t sit very well with some Republicans. Bush, however, has reasons to favor him since he’s had ties with Bush Sr. and was also an adviser on George W’s presidential campaign. Feldstein is currently a professor at Harvard and the President and CEO of the National Bureau of Economic Research, a private non-profit research organization.

Aside from the political arena, Feldstein is also very popular on Wall Street and he sits on the board of three corporations (Eli Lilly, American International Group, and HCA). He also does consulting work for a number of companies and writes commentary for the Wall Street Journal. Aside from business leaders, Feldstein is a solid choice and could also be more accepted by the community of global leaders and the central bankers since he has the most distance from the current Bush administration.

R. Glenn Hubbard

The youngest of the three candidates, R. Glenn Hubbard is the current Dean of the Columbia Business School and was head of the CEA under George W between 2001 and 2003. At one time, he was referred to as the “most influential chairman of the Council of Economic Advisers in two decades.” In his run, he was a strong proponent of Bush’s tax cuts and has always been a free-market economist. As far as the rest of his actions go, many have seen him stray from the traditional CEA role of ignoring politics and simply going on what is good for the economy. Just opposite of Feldstein, he has never criticized Bush’s glutinous spending habits. Hubbard is also quite adept at weaving both fiscal and monetary policy, and with his pro-Bush leanings, he could turn out to be a very strong candidate.

The Curse of the First Year

Despite how qualified these prospective candidates are, the curse of the first year as Fed Chairman could haunt any of the nominees. Since 1970, every Fed Chairman that assumed the top job has faced a major crisis shortly after entering office. According to Toni Straka of Prudent Investor, “Arthur F. Burns, chairman from February 1, 1970, climbed the top chair only to oversee the beginning of the 1970's bear market, the closing of the gold window and the first oil shock 1973. When he stepped down on August 6, 1979, his successor Paul A. Volcker had to fight double digit inflation with the highest Fed Funds rates seen ever and managed that the economic downturn through his tightening only became an on-and-off recession from 1979 to 1982 with GDP never declining more than a quarter in a row.” Greenspan himself had to deal with the stock market crash of 1987. With current long-term yields at such low levels, budget deficits extraordinarily high and the economic outlook uncertain, it wouldn’t surprise us if the next Chairman was faced with a similar fate. Yet for the dollar, a crisis domestically would have dire consequences.

Greenspan Could Stay on for Longer

Yet the market could be spared the uncertainty for a few more months as Greenspan may be compelled to stay on until at least May 11, 2006 because by then he would earn the title of the longest-serving Fed Chairman ever. The current longest serving Fed Chairman is William McChesney Martin Jr., who held the job from 1951 to 1970. Like the markets, President Bush is quite fond of Greenspan and could encourage him to extend his post. This would allow the Administration to put further thought into each candidate or look for other possible successors. The process would be easy, but that also means the markets would have to hold its breath for a while longer. Each new Fed Chairman needs to be confirmed by the Senate, so if Greenspan was convinced to stay on, all Bush would need to do is put off nominating a replacement. According to Bloomberg News, Karl Rove, Bush’s chief of staff was quoted last month as saying that it would be “premature” to announce a replacement this year.

Dollar and Other Market Responses

Finding someone to fill Greenspan’s shoes seems like a daunting task, but the same was said when the government was looking for someone to fill Greenspan’s predecessor Paul A. Volcker’s shoes. On the day that Greenspan was announced as the replacement for Volcker, the trade-weighted dollar index fell 1.7 percent, the S&P 500 index slid 0.5% while Treasury yields increased 25 to 35 basis points. The effect was did not last long though, as Greenspan managed to maintain the reputation of the Federal Reserve throughout his tenure. When the new Fed Chairman is announced, the dollar could see a similar fate as initial uncertainty for a new Chairman, especially following in the footsteps of Greenspan, causes some traders to think about whether this person will be competent enough to take on such an important role.