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.
