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Tuesday, October 11, 2005

Bloomberg Assesses Feldstein's Assets and Liabilities

Bloomberg discusses Martin Feldstein's qualifications and the factors that work for and against his chances of becoming the next Fed chair:

Harvard's Feldstein May Have Best Credentials, Biggest Liabilities for Fed, Bloomberg: Harvard University economist Martin Feldstein may have the best credentials to succeed Alan Greenspan as Federal Reserve chairman. He may also have the biggest liabilities. The 65-year-old Feldstein, a free-market Republican who served as President Ronald Reagan's top White House economist from 1982 to 1984, is one of a handful of economists Wall Street considers suitable to replace Greenspan, 79, whose term at the Fed expires Jan. 31. ... At the same time, Feldstein's prospects may be harmed by his association with American International Group Inc., a scandal- plagued insurance company where he has been a director for 17 years, as well as a reputation for not being politically astute. ''Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman's job,'' says William Niskanen, who ... is now chairman of the Cato Institute ... Economists say Feldstein's reputation for independence, probity and analytical thinking make him an ideal choice to head the central bank. For most of the last three decades, he has headed the National Bureau of Economic Research ... and he has earned a worldwide reputation as an expert on public finance. A Feldstein appointment might not be so welcomed within the Republican Party. During the Reagan years, he angered supply-side economists by dismissing their claims that soaring budget deficits didn't matter. He publicly argued with then-Treasury Secretary Donald T. Regan, who said tax cuts would spur enough new economic growth to close the budget gap. At one point, Feldstein even advocated a so-called ''stand-by tax'' -- anathema in an administration bent on tax-cutting --to help reduce the budget deficit if it got out of hand.

The biggest impediment to his nomination may be his connection to New York-based AIG, the world's largest insurance company. AIG faces a securities fraud lawsuit ... and is being investigated by federal authorities in a scandal that forced the ouster of its longtime chief executive, Maurice ``Hank'' Greenberg... ''I can't imagine that Feldstein is directly involved, but if there were any reasonable prospect of his being called to testify, with some presumption of culpability on the part of the board, that would be a problem,'' says Thomas Mann, a senior political analyst at Brookings Institution. Feldstein also serves on the board of HCA Inc., the biggest U.S. hospital chain, which is involved in a Securities and Exchange Commission investigation into whether U.S. Senate Majority Leader Bill Frist received insider information before selling his stock in the company.

Feldstein's views on monetary policy and interest rates are spelled out in a series of papers he wrote for NBER. ...he agrees with Greenspan's ''risk- management'' approach of adjusting policy to counter risks to the economy. He ... opposes numerical inflation and growth targets, warning they could backfire and hurt the Fed's credibility. ... he wrote in 2003. ''An inflation target might actually weaken the credibility of a central bank'' if it ''cannot or does not achieve the target value or range, especially if this failure to deliver persists for several years.'' At the same time, Feldstein criticized Greenspan's stewardship of the central bank during the early 1990s, saying the Fed didn't act aggressively enough to increase the supply of money when it became clear the economy was stagnating. ... Feldstein hasn't said whether, if appointed, he'd continue Greenspan's habit of commenting on the federal budget, a practice that occasionally drew criticism from Greenspan-watchers who said he should have confined his opinions to interest rate policy...

Lawrence Lindsey, a Fed governor from 1991 to 1997 ... describes Feldstein as a quiet, hard-driving man with a well-deserved reputation for integrity. He works long hours, frequently traveling to NBER conferences around the world. ... Feldstein forged early ties with the Bush camp. When then- Texas Governor Bush was running for president, Feldstein was part of the economic team that hammered out his plans for budget- and tax-cutting programs and influenced Bush's proposals for overhauling the Social Security system. ''He's certainly been very supportive of the president's fiscal policy and tax program,'' says Lindsey. Lindsey says Feldstein ... would run a ''collegial'' board of governors. ''He would want to have a high- level discussion,'' Lindsey says. At the same time, Lindsey says, Feldstein ''would be a tough guy to argue against'' because ''he's very capable'' and can defend his positions vigorously.

Feldstein's political skills may have sharpened since his Reagan White House days. ... Moreover, Greenspan himself wasn't always as politically savvy as he is now. During his term as President Gerald Ford's chief economic adviser in the mid-1970s, Greenspan sparked headlines around the world by telling a welfare-rights advocate that stockbrokers, not welfare mothers, had been hurt most by the 1973 recession...

    Posted by on Tuesday, October 11, 2005 at 01:45 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (5)


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