WHO WILL REPLACE GREENSPAN? WHO CARES!
Yes, the chairman is a genius. But his successor doesn't have to be.
(FORTUNE Magazine) – WE WILL MISS HIM, THAT MUCH IS clear. We will miss his gnomic utterances, his unflappable calm, his shuffling gait, his occasional calls for fiscal responsibility. But will we really miss Alan Greenspan's hand at the monetary tiller? Chances are, no.
It's not that Greenspan, whose term expires Jan. 31, has done a poor job of running the Federal Reserve. While no longer deified as he was in the late 1990s, the man is still by general acclamation the most adept central banker ever. But President Bush's pick to replace him--to be announced any day now--doesn't need to be that good. Being Fed chairman just isn't that hard anymore.
Greenspan has been hailed for shepherding the U.S. through a remarkable era of declining inflation, declining unemployment, and healthy economic growth during his 18 years in charge of the Fed. But Britain, New Zealand, Australia, and Canada have experienced similar economic bliss during that period. Central bankers have also kept inflation in check in Japan and the nations of Western Europe (and aren't to blame for those countries' other economic problems).
"Have all these countries found a genius like Greenspan?" asks 93-year-old Milton Friedman, on the phone from his San Francisco apartment. The Nobel prize--winning economist answers his own question: "What the foreign experience suggests is, you don't need a genius. You just need someone willing to make fighting inflation his top priority."
That has been the momentous change at the Federal Reserve during the past quarter-century. In the 1960s many economists and Fed officials believed that the central bank could trade higher inflation for faster economic growth. Friedman, who argued from his perch at the University of Chicago that the tradeoff was only temporary, was the loudest voice in opposition to that orthodoxy--and the painful, stagflationary experience of the 1970s proved him right. As a result, since the appointment of Paul Volcker as chairman in 1979, the Fed has focused on the Friedmanite task of achieving stable prices first and worrying about other things (like unemployment) later. So has every other major central bank on earth.
Barring a national crisis that leads the President to commandeer the Fed to fund the federal deficit, as happened during World War II --the kind of thing even a Greenspan couldn't stop--there's no reason to think the Fed's priorities will change. There is no longer a constituency in academia or anywhere else for higher inflation. Instead, there is now an entrenched monetary-policy technocracy that, while it may argue over technicalities, subscribes to a clear consensus that controlling inflation is the Fed's No. 1 job. Unlike the Supreme Court, there are no raging ideological battles at the Fed that will require the new chairman to choose sides. "It's irrelevant what somebody's politics are," says Frederic Mishkin, a professor at Columbia University, a former chief economist of the Federal Reserve Bank of New York, and a member in good standing of the monetary-policy technocracy. "It just matters whether they would be a good central banker."
But Greenspan, in a series of addresses this fall, has been saying that even skill as a banker matters less than it used to. In the Fed chairman's telling, the moderation of the business cycle that has occurred on his watch is a product of new information technologies and reduced government regulation that have together left the economy far more flexible and resilient than it was. "That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policymakers, whose responses have often come too late or have been misguided," he said in a speech on Oct. 12.
Still, we'd rather have a Fed chairman whose responses aren't "too late" or "misguided," wouldn't we? That may be the most intriguing issue raised by the succession at the Fed. Greenspan worship has subsided along with stock prices since 2000, but the still-widespread belief that he can bail the economy out of any crisis has left investors complacent. Just ask Greenspan: The "vast increase" in asset values--stocks, houses, etc.--during his time at the Fed "is in part the indirect result of investors accepting lower compensation for risk," he said in August. "Such an increase in market value is too often viewed by market participants as structural and permanent." So, do we really want the President to find another "genius" to run the Fed? "Of course, we'd like to have another one," says Friedman at first. Then he reconsiders: "Though wouldn't it be better if we learned that we could do without one?"