The next "yes" man........ More Punch?

The dollar is finding new lows daily as the deficit continues to grow and Bush insists on making his irresponsible tax cuts permanent. Bankers throughout the world are taking a second look at their portfolios of US treasury bonds. The bubble of the 90s was followed by a recession which was followed by a bubble recovery that will burst if interest rates rise too quickly. With this backdrop Bush will have to appoint a replacement for Alan Greenspan next year. Paul Krugman looks at this unsettling situation today in The Greenspan Succession.

Alan Greenspan is expected to retire next year. The Bush administration, because of its nature, will have a hard time finding a successor.

One Fed chairman famously described his job as being to "take away the punch bowl just when the party gets going." Bond and currency markets want monetary policy in the hands of someone who will say no to politicians. When a country's central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.

Today it's even more crucial than usual that the Fed chairman have the markets' trust. The United States is running record budget and trade deficits, and the foreigners we depend on to cover those deficits are losing faith. According to yesterday's Financial Times, central banks around the world have already started shifting into euros. If Mr. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.

Yet President Bush, as you may have noticed, only appoints yes-men (or yes-women). This is most obvious on the national security front, but it's equally true with regard to economic policy. The current Treasury secretary has no obvious qualifications other than loyalty. The new head of the National Economic Council apparently got the job because he is a Bush classmate and fund-raiser.

So what does Bush require in a Federal Reserve Chairman. Mr. Greenspan seems to have joined the school of irresponsible economic policy the last four years. What is needed is someone with economic credentials who will immediately forget all of the economics they spent a life time learning. Someone who will support tax cuts during an expensive war, someone who will cry wolf when it comes to Social Security and support an irresponsible "reform" package, someone who will not raise interest rates so fast that the economic recovery built on a housing bubble will burst. So who might the next person to be assimilated into the Borg Hive of the White house be. Krugman has some ideas.

For a while, the presumed front-runner to succeed Mr. Greenspan was Martin Feldstein of Harvard. Mr. Feldstein, like Mr. Greenspan, has a reputation built over a long, distinguished career. Also like Mr. Greenspan, he is a former crusader for fiscal responsibility who became an apologist for budget deficits once Mr. Bush took office.

I've known Mr. Feldstein a long time, and worked for him at Ronald Reagan's Council of Economic Advisers. He used to be a deficit hawk; now, out of what may be sincere conviction but looks from the outside like an effort to demonstrate political loyalty, he endorses tax cuts in the face of large budget gaps and gigantic borrowing to privatize Social Security.

But it's reportedly not enough, because right-wingers have never forgiven Mr. Feldstein for his finest hour - the time when, as a member of the Reagan administration, he spoke out against deficits. It's not just vindictiveness on their part: a man who once took a stand on principle while holding office might do so again once ensconced at the Fed.

Glenn Hubbard of Columbia, who served in the administrations of both Bushes, is also frequently mentioned. He's a smart economist, but everything in his policy career suggests that when the party really got going, he would say: "More punch? Yes, sir, whatever you want."

The last name one often hears is Ben Bernanke, currently a member of the Fed's Board of Governors. (Before going to the Fed, Mr. Bernanke was chairman of the Princeton economics department, where I'm on the faculty.) If Mr. Bernanke were appointed directly from his current Fed position to the chairmanship, there would be general acclaim. But he may soon move to the Council of Economic Advisers. Why?

Surely it's not because this administration, with its disdain for technical expertise in all fields, wants his advice. I hope I'm wrong, but my guess is that what's intended for Mr. Bernanke is a form of hazing: he will be expected to prove his loyalty by defending the indefensible and saying things he knows aren't true.

That might seem a tolerable price to pay for the Fed chairmanship - but a year of it might well make Mr. Bernanke damaged goods from the point of view of the markets.

It's a dilemma. I don't have any sympathy for the administration's perplexity. But I do wish Mr. Bernanke the best of luck, and hope he knows what he's doing.

The next head of the federal reserve may earn a place in history.......as the one who oversaw the collapse of the dollar and of the US economy.
That will put him right next to "The Worst President Ever™" in the history books.