President Bush's appointment of economist Ben Bernanke to be chairman of the Federal Reserve Board is a wise decision. In contrast to his appointment of Harriet Miers to the Supreme Court, Bernanke is unquestionably qualified for his position. I'm grateful that Bush didn't appoint his personal banker to the Fed and just ask us to trust him.
One of the things that struck me about the Bernanke appointment is how thorough the White House selection process was, as opposed to the slipshod method by which Miers was chosen. According to press reports, the selection process began in April, there were some 20 names on the list and all the candidates were thoroughly vetted. Senior White House staff interviewed finalists, and several met with the president personally.
This is one reason why many conservatives were so upset with the Miers selection. It appears that President Bush short-circuited the normal selection process, did not allow adequate vetting, did not give sufficient attention to other candidates, and was unconcerned about the need for an appointee with the appropriate credentials and independence from the White House.
Why President Bush did such a good job in finding a new Federal Reserve chairman while doing such an extraordinarily poor job with the Supreme Court is an interesting question.
In any case, the Bernanke appointment sets in motion a possible game of musical chairs inside the administration. He presently is chairman of the Council of Economic Advisers and therefore must be replaced. There are also two additional vacancies on the Federal Reserve Board. With growing pressure on President Bush to improve the quality of his economic team, this may be a propitious moment to make some other changes, as well.
I believe that the most important economic problem the Bush administration will have to deal with in the next few years will be coping with the explosion of entitlement spending, which is in the pipeline due to the aging of society. I continue to believe that enactment of the Medicare drug benefit was insanely bad policy for this reason. Instead of massively increasing the government's entitlement spending, Congress and the White House should have been trying to reduce it.
I think it is inevitable that some economic event will soon put deficit reduction at the top of the to-do list. Ted Truman, a former top Federal Reserve official, was recently quoted as saying, "Over the next 18 months, it's a reasonable bet, especially with interest rates going up, there will be some accidents in financial markets."
I agree. We have already seen the collapse of Refco, a big stockbroker, and I fear that the end of the housing bubble or a bad bet by some giant hedge fund could trigger a massive market correction larger than the stock market crash of 1987. When that day comes, President Bush is going to need people around him who know how to handle a financial crisis and how to get the budget under control, because deficit reduction will be the prime order of the day.
This being the case, I would make two suggestions. First, the name I hear most often for Council of Economic Advisers chairman is Douglas Holtz-Eakin, now director of the Congressional Budget Office. He is as respected in the area of fiscal policy as Bernanke is in monetary policy. A former professor of economics at Syracuse, Holtz-Eakin served as chief economist for the council under President Bush. He is the best person I can think of for the job under current circumstances.
I think President Bush should also seriously consider upgrading the Treasury Department by appointing Alan Greenspan as secretary when his term as Federal Reserve chairman ends in January. From what I know about Greenspan, I don't think he is ready to retire and write his memoirs, and would take the job if it were offered. After all, we remember former Treasury secretaries like Alexander Hamilton. How many people today can even name Greenspan's predecessor at the Fed? (Answer: Paul Volcker.)
I, for one, have confidence that Greenspan would know what to do in a financial crisis and would sleep better at night if I knew that he was treasury secretary. His unquestioned standing and respect among economists and those on Wall Street would also raise the stature of the Treasury Department, which has been badly downgraded by President Bush, to his own detriment in my opinion. I believe many missteps on things like tax policy and Social Security reform could have been avoided if Bush had properly utilized the Treasury Department.
I think we are in the calm before the storm and that things are going to get very dicey very soon. This may be the last chance President Bush has to upgrade his economic team before a financial Katrina hits.