Bush Picks Successor to Fed Chief Greenspan

President Bush on Monday dashed ahead of his own timetable for naming a successor to Federal Reserve Chairman Alan Greenspan, picking former university economist Ben S. Bernanke to head the nation’s central bank.

The 51-year-old Bernanke, who is chairman of Bush’s Council of Economic Advisors and served as a Federal Reserve governor from 2002 until June, immediately promised that “my first priority will be to maintain continuity with the policies ... established during the Greenspan years.”

The choice of Bernanke was warmly received both on Wall Street and in academia. Stocks staged a broad rally, with the Dow Jones industrial average posting its biggest gain since April 21, climbing 169.78 points, or 1.7%, to close at 10,385. Analysts attributed the run-up in part to hopes that Bernanke would be less aggressive than Greenspan in pushing for further growth-damping interest rate hikes to control inflation.

Although Bernanke was hailed by many Monday as a seamless successor to Greenspan, veteran Fed watchers said there were some clear differences between the two men in background and style that could eventually result in the new chairman leading the central bank in a distinctly different manner from his predecessor.

Bernanke must be confirmed by the Senate before he can replace Greenspan, whose nonrenewable term as a member of the Fed’s governing board expires Jan. 31. Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) described Bernanke as “highly qualified” and said he would press for early hearings.

For Bush, announcement of the nomination was politically charged, coming only days before the possible indictment of top White House aides in connection with the leak of a CIA agent’s identity and amid festering controversy over the qualifications of his Supreme Court nominee, Harriet E. Miers, who was once Bush’s personal attorney.

For Bernanke, his selection represented the latest step in a dizzyingly fast ascent from the quiet confines of Princeton University, where he was a professor for most of the last two decades, to the very top of the economic policymaking world.

For Greenspan, Bush’s nomination began the final act in an extraordinary 18-year run atop the interest rate-setting Fed, a performance that the president and congressional leaders noted in discussing the chairman’s replacement.

“Under his steady chairmanship,” Bush said of Greenspan, “the United States economy has come through a stock market crash, financial crises from Mexico to Asia, two recessions, corporate scandals and shocks ranging from devastating natural disasters to a terrorist attack in the heart of America’s financial center.”

“He was a kind of Rock of Gibraltar for the American economy,” said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa).

Among academic economists, there was a clear sense that one of their own had reached the big time, a feat that was once the norm but has become less common in recent decades. Stanford University economist Robert E. Hall said that Bernanke had “clearly demonstrated he can carry on the whole Greenspan package of doing the right thing and presenting it clearly to the public.”

As an example of the distinctions between Greenspan and his potential replacement, Bernanke was a product of the nation’s top-tier schools -- having earned a bachelor’s degree from Harvard University and a doctorate from Massachusetts Institute of Technology in quick succession. Greenspan attended the grittier New York University and collected his doctorate decades after completing his undergraduate work and at the age that Bernanke is now.

In addition, whereas Bernanke has written and lectured widely about the need for the Fed to set clear and public goals for things such as inflation, Greenspan has expressed deep skepticism about rules, especially in managing something as complex as the U.S. economy.

“Alan Greenspan is not an academic economist,” declared Carnegie Mellon University economist Allan H. Meltzer, who is writing a multi-volume history of the Fed.

“He thinks academic economists are much more concerned with rules and models, while he’s more concerned with making judgments,” Meltzer said. “He has gone to some effort to establish that he is not following a rule.”

If confirmed, Bernanke would take the reins of the Fed at a time when the central bank has raised its benchmark short-term interest rate from a 1% low to 3.75% today in an effort to quell a rising inflation threat, stoked by higher energy costs. Many economists expect the Fed to continue raising rates to as much as 4.5% before the new chairman takes over Feb. 1.

The question facing the new chairman will be whether to continue this tightening or halt it. Some critics of current Fed policy say the central bank is overestimating the threat of inflation and is running the risk of causing an economic slowdown by raising rates too high.

The choice of Bernanke comes at a crucial moment for Bush, whose approval ratings have fallen to the lowest point of his presidency and who has come under fire from both the left and right for his personnel decisions, policy choices and crisis management abilities.

The president’s mounting problems were a factor in both the choice of Bernanke and the timing of the announcement, said several GOP strategists and independent analysts who have been tracking the process.

Previously, the White House had indicated that the president would not choose a new Fed chairman until early November, and Bush said this month that he had not yet seen a short list of potential candidates.

Speeding up the announcement of Bernanke was expected to deflect some of the attention focused on Miers, Bush’s Supreme Court nominee, who has no judicial experience and whose views on key legal issues such as abortion are not clear enough to satisfy some conservatives. In addition, White House officials hope that the move will ensure a speedier Senate confirmation process for the new Fed chief, and one that might overlap and perhaps partially offset what is expected to be a contentious Senate debate over Miers.

“Ben Bernanke is everything Harriet Miers isn’t: He’s got all the qualifications, he’s worked at the White House, but he didn’t come from Waco,” said conservative activist Grover Norquist, president of Americans for Tax Reform, underscoring that the economist was not a Texas insider.

Bernanke’s nomination sets the stage for Greenspan’s departure from the central bank, which he has led since August 1987. Only William McChesney Martin, who is widely considered the architect of the modern Fed, served longer.

By most measures, Greenspan has been immensely successful. The U.S. economy has endured two recessions in the last 18 years, both comparatively mild. By contrast, there had been four downturns in the preceding 18 years.

Inflation has edged steadily downward, as has the unemployment rate, which averaged 5.5% over the last 18 years, compared with 7% during the previous 18 years. And growth has been stronger and more consistent.

But Greenspan has been dogged by some criticism in recent years. Some say that he abetted the stock market bubble of the late 1990s by keeping interest rates low and not speaking out more forcefully against investment excesses. Others worry that in trying to damp the effect of the stock market bust of 2000 he has set the stage for another bubble, this time in housing.

Greenspan will preside over his last Fed policymaking committee meeting Jan 31. At midnight, his term will expire and he will no longer be a member of the Fed’s policymaking body.

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Nominee’s views

The economy according to Ben Bernanke.

On the Fed’s role:

“The right way to think about the Fed is as a proponent of price stability, and that means inflation should be neither too high nor too low.” -- Interview with Money magazine, August 2003

On economic policy:

“The U.S. economy is fundamentally strong. What’s important is whether we continue to pursue good economic policies -- taking the actions necessary to increase the skills of the workforce, keep our economy open to the world, increase our energy security, reduce the government deficit, keep taxes low, curb frivolous lawsuits, ease unduly burdensome regulations and ensure that Social Security and other entitlement programs are placed on solid long-term footing.” -- Column in the Wall Street Journal, July 27, 2005

On low long-term interest rates:

“Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving -- a global saving glut -- which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.” -- Remarks to Virginia Assn. of Economists, March 10, 2005

On worker productivity:

“The most important economic development in the United States in the past decade has been the sustained increase in the rate of growth of labor productivity, or output per hour of work.”

-- Remarks to the Council on Foreign Relations, Jan. 19, 2005

On shortcomings of economic data:

“Despite the best efforts of the statistical agencies and other data collectors, economic data provide incomplete coverage of economic activity, are subject to substantial sampling error and become available only with a lag.”

-- Remarks before the National Economists Club, Dec. 2, 2004