Rational choosing of a new Fed chief

For investors who get the jitters over a hurricane, Iraq attacks, or a Wal-Mart sales report, there's a new jitter-bug in town: a pending White House announcement of a successor to Alan Greenspan, who's been Federal Reserve chairman for 18 years.

As the nation's hold-it-all-together lead banker, Mr. Greenspan has probably influenced American economic life more than any of the four presidents, keeping interest rates and inflation low, and financial crises at bay. He's presided over the longest economic expansion in postwar US history (1991 to 2001).

Greenspan's expected retirement in January as the money-supply wizard of the world has financial markets wondering if anyone can successfully follow his act, or do even better.

President Bush would be wise to announce his choice in a matter of weeks to ensure a safe Senate confirmation and smooth transition. But more than timing, Mr. Bush must select someone with similar Greenspan skills in delicately balancing job growth against price stability (or low interest rates against inflation).

The money-supply maestro, in a rare moment of commonspeak, recently said he had little doubt "my successor ... will continue to sustain the leadership of the American financial system in an ever-widening global economy." That modest comment is a pat on the back for the central bank's staff and board of governors, who've aided the chairman through two mild economic recessions.

Greenspan, however, won't be leaving office with a perfect record. He has also presided over two market bubbles: The stock-market "dotcom" bubble that burst in 2000, and now a real-estate bubble (or "froth," as he calls it) in many cities that some critics say the Fed could have prevented with higher interest rates.

But Greenspan contends the Fed's job is to clean up after bubbles or provide a "soft landing," not prevent them. The idea that the Fed has the power to prevent a bubble without hurting the economy is "almost surely an illusion," he says.

The next Fed chief may want to challenge that assumption. Overvalued assets, be they stocks, houses, or antiques, don't just happen without some connection to cheap credit.

Greenspan also leaves with Democrats grumbling about his favoring the large Bush tax cuts. But such criticism only illustrates how revered he is as an economic oracle, when in fact he has nothing to do with tax policy except to offer advice. His successor may want to steer clear of passing judgment on policy decisions outside his or her turf. After all, the Fed must maintain an air of independence from political debates.

One important skill for a Fed chief is knowing what to do in a financial crisis. Greenspan's quick and smart reactions to the October 1987 stock-market crash and to the panic after Sept. 11 helped to keep these bad situations from growing worse.

Greenspan's legacy is in showing how a central banker can be both flexible in analyzing data and yet stable in monetary policy.

The reasons for his success may never be fully understood, given the Fed's secrecy, but his nearly two decades of effective results provide enough lessons for the next chief to follow.

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