Many Potential Pitfalls Await Greenspan’s Replacement

The worry continues over who will be selected as the next Fed Chair, and the bar is already being set fairly high, perhaps too high.  Here’s a whole list of problems the new chair will be expected to solve, something that will be difficult to achieve in each and every case.  This article expects the new chair to successfully solve international financial disequilibrium, prevent international financial instability, deflate the housing bubble, and maintain the economic expansion no matter what happens to oil prices.  That’s a tall order:

New Fed chairman must tread an uncertain path, By Henry Kaufman, Financial Times:  When a new chairman of the US Federal Reserve assumes office next year, the transition will be greeted by great fanfare and widespread market apprehension. ... The new chairman will … be forced immediately to confront some knotty domestic and international challenges. Internationally, the new chairman will assume the role of de facto head of the world financial system. ... The International Monetary Fund, the closest thing we have to a global central bank to respond to these gyrations, is hampered by its lack of authority and cumbersome bureaucracy. So when financial crises arise, the US Fed and Treasury must shoulder much of the burden of maintaining global stability.  The new Fed chairman will need to address the current economic and financial disequilibrium of the world's large economies. Although the US is outperforming most other industrial economies, it is borrowing heavily to sustain a massive wave of spending. … the new chairman must formulate a monetary strategy for an ageing economic expansion that, on the day he or she takes office, will be in its fifth year. … guiding the economy on a sustainable path ... if oil prices continue to rise.  The new chairman will need to make tough judgments on the housing sector. … household debt has risen sharply, and the grave risks this poses can be minimised only by low interest rates, rising household income or a combination of the two. … For their part, financial markets will watch closely to see if the new chairman maintains the current tactical monetary approach. Under Alan Greenspan, this has consisted primarily of two tenets - measured responses to economic developments and increasing transparency in monetary policy. …