Robert Novak

Bernanke vs. Kohn is no mere theoretical debate. Greenspan, blamed by Republicans for contributing to the first George Bush's 1992 defeat by tightening money, does not want to doom re-election chances of the second President Bush by snuffing out the recovery -- particularly after the president extended his tenure to 2006. Kohn and the Fed staff want to tighten whenever the economy grows -- the old Phillips Curve -- even if inflation continues to fall, as is now happening. A showdown was set for the FOMC meeting of Oct. 27.

On Oct. 23, Washington Post reporter John M. Berry wrote that Fed policymakers were not only going to retain the low 1 percent overnight rate but "are also likely" to repeat their September statement that rates would stay low for a "considerable period." What Berry writes is seen in financial circles as Greenspan gospel. However, a long article on the Oct. 27 front page of the Wall Street Journal by Greg Ip revealed strong opposition inside the FOMC to those two little words. That was seen as the voice of Governor Kohn and the Fed bureaucracy.

Money markets were in doubt. In July, Berry had signaled the FOMC would reduce the overnight rate by 50 basis points, down to .75 percent. But Ip reported the cut would be only 25 basis points -- reflecting the powerful Fed staff's caution. At the July meeting, Greenspan was passive and the staff prevailed. The results were temporarily devastating, with long-term interest rates rising and stock prices falling. To prevent calamitous long-term effects, Greenspan did not let history repeat itself in October. The "considerable period" statement, implicitly targeting inflation instead of growth, was retained. One veteran Fed-watcher called it "a manhood issue" for the chairman.

Beyond Greenspan's manhood and even George W. Bush's re-election lies America's economic future. No rookie Fed governor has ever been so ideologically adept as Kohn, who until now has kept under cover his theoretical dispute with Bernanke. Greenspan is reported to have no objection to targeting inflation, but only after he leaves the Fed. If this happens, there may never be another Greenspan -- a small price for a more stable economy.

Robert Novak

Robert Novak (1931-2009) was a syndicated columnist and editor of the Evans-Novak Political Report.

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