Cheney, Greenspan `Friend,' Key Player in Fed Choice

Cheney, Greenspan `Friend,' Key Player in Fed Choice (Update1)

May 13 (Bloomberg) -- Only one guest attended both Alan Greenspan's 50th birthday party and his 75th: Vice President Dick Cheney.

Cheney is likely to be a central player in figuring out who will replace the Federal Reserve chairman when Greenspan's non- renewable term as a governor expires in January 2006. It will be one of the most important decisions President George W. Bush makes in office, and Cheney is alone in the administration in having long-standing personal and professional relationships with both Greenspan and the president.

With eight months to go, the search for a replacement has just begun. The White House even is interested in the possibility of Greenspan staying longer, something the chairman will resist.

``The vice president has both the intellect and influence to make him a logical and important player on economic policy -- when he wants to weigh in,'' said R. Glenn Hubbard, chairman of Bush's Council of Economic Advisers from 2001 to 2003 and a potential candidate to replace Greenspan.

Cheney, 64, and Greenspan, 79, spend time together socially and have sat down to talk privately on the eve of economy-rattling events, such as the Persian Gulf War in 1991, when Cheney was secretary of defense under former President George H.W. Bush, and the invasion of Iraq in 2003. Former Cheney advisers say the vice president usually is involved in economic discussions of large consequence, such as tax or energy policy.

`Friends'

The two men met on 17 occasions from January 2001 through March 2004, according to a record of the Fed chairman's appointments made public under a Freedom of Information Act request by Kenneth Thomas, a finance lecturer at the Wharton School of the University of Pennsylvania in Philadelphia.

``They're friends,'' said Mary Matalin, a former top aide to Cheney who also has served as a political adviser to the Bush- Cheney election campaign. Greenspan has even found time in his Fed schedule to meet with Cheney's wife, Lynne, who is a senior fellow at the American Enterprise Institute, a Washington research organization.

Cheney attends economic meetings at the White House, often including the weekly Wednesday lunch of Bush's economic team. He also sometimes requests special briefings.

``He followed macro-economic trends and markets very closely,'' said Cesar Conda, Cheney's assistant for domestic policy for the first three years of the Bush administration. ``On the big-ticket economic policy issues, he was instrumental in developing policy and selling it to the Hill.''

Advice

Matalin and other Cheney aides add that there are boundaries in the Cheney-Greenspan relationship when it comes to the Fed's independence and picking a new chairman. ``There is an official distance,'' Matalin said. Cheney spokeswoman Lea Anne McBride declined to comment on the vice president's role in the selection.

People familiar with the process say other Bush advisers who are likely to weigh in on the decision include White House Deputy Chief of Staff Karl Rove, Bush's top political adviser; National Economic Council Chairman Al Hubbard; and Treasury Secretary John Snow.

They are ``going to try to find someone who is philosophically in tune with them on issues such as lower taxes and reducing the deficit,'' Matalin said. ``They want someone who knows what they are doing. It's not political.''

Bush will seek to reassure markets in replacing Greenspan, who has presided over the U.S. economy as Fed chairman for 17 years, a period that included the longest expansion on record from March 1991 to March 2001.

Impact

The mere naming of his successor is likely to move markets and shape expectations about interest rates in the months ahead. The announcement of inflation-fighter Paul Volcker's resignation on June 2, 1987, sent the 30-year Treasury bond down 3 1/4 points, or $32.50 per $1000 face amount.

The next chairman's main task will be to ``secure the peace'' of low inflation that Volcker and Greenspan achieved after a 25- year battle that entailed high social costs, said Paul McCulley, managing director at Pacific Investment Management Co. in Newport Beach, California, which manages the world's largest bond fund.

It took four recessions and an unemployment rate that averaged 8.1 percent from 1980 to 1985 to help bring the consumer price index down to its current 12-month rate of 3.1 percent in March versus 14.8 percent for the period ending March 1980.

Federal Reserve spokeswoman Michelle Smith referred questions about the chairman's successor to the White House. Bush spokesman Trent Duffy said the administration ``never speculates about personnel decisions.''

Candidates

Ben Bernanke, Martin Feldstein, and R. Glenn Hubbard topped the list of people Bush is most likely to choose for the chairmanship in a survey of 87 Wall Street professionals conducted from April 26 to May 3 by Stone & McCarthy Research Associates, a Skillman, New Jersey, economics firm.

Bush nominated Bernanke, 51, to a Fed governorship, and chose him on April 1 to be chairman of the Council of Economic Advisers. Bernanke is awaiting Senate confirmation.

Feldstein, 65, is a Harvard University professor and the president of the National Bureau of Economic Research, a private, non-profit organization in Cambridge, Massachusetts, and a Bush adviser on private Social Security accounts. Hubbard, 46, who is now the dean of Columbia University's business school in New York, was a central figure in shaping Bush's dividend-tax cuts.

All three candidates are held in high esteem by the White House, say current and former administration officials. Cheney, in particular, has had solid working relations with both Hubbard and Feldstein, formed through briefings and policy meetings.

Top Choice

Bernanke led the Stone & McCarthy survey, with slightly more than half of respondents saying he is most likely to be chosen.

A former Princeton University economics professor, Bernanke is writing a book on the Great Depression and has spoken about the damage central banks can wreak. He is the author of more than three dozen papers on economics and monetary theory. He advocates a numerical inflation goal, versus the current flexible approach now favored by Greenspan and Fed governors such as Donald Kohn and vice chairman Roger Ferguson Jr.

``Ben is a robust candidate,'' McCulley said. ``He isn't going to be anybody's lackey, and if and when he takes a political stance, as he must at times, it will be grounded in economic substance, advocating the right thing to do rather than the expedient thing to do.''

Drawback?

One drawback for Bernanke may be his lack of political experience in a job that requires such skills. Aside from his nomination hearing, he never testified as a Fed official before Congress. His resume lists his civic experience as two terms on the Montgomery Township, New Jersey, Board of Education. His professional career centers on teaching and scholarship; he has taught at Stanford University as well as Princeton. Other Fed governors, such as Greenspan, Ferguson, Susan Bies and Mark Olson, had direct work experience advising companies or in banking.

Hubbard, who is no relation to Al Hubbard, was chosen by 12.6 percent in the survey. Administration officials say the president likes Hubbard, and economists regard his work highly.

``He is a very good economist, and Bush likes him,'' said Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and a Fed historian. He may be viewed as a more political appointment because of his direct role in shaping and defending the Bush tax cuts.

Feldstein might be considered the most seasoned candidate. Like Greenspan and Hubbard, he is a past chairman of the Council of Economic Advisers, having served in the Reagan administration.

Deficits and Taxes

The Harvard professor, who was chosen by 18.4 percent of the Stone & McCarthy survey respondents, has spent much of his life explaining how government deficits and taxes soak up savings and income that would be put to better use in the assets of private companies rather than a federal bureaucracy.

Feldstein is also a director at American International Group Inc., the world's largest insurer, which will correct five years of results for reinsurance and other transactions that inflated net worth by about $2.7 billion. Regulatory probes triggered the accounting review. Feldstein is not a member of the audit, nominating, or corporate governance committees, according to AIG spokesman Chris Winans.

Nell Minow, editor of the Corporate Library, an independent corporate-governance research firm, said ``it's a certainty that there will be a lawsuit'' by shareholders against AIG directors. Feldstein said as a matter of policy he never comments on companies where he has served as a director.

An Unexpected Choice

Bush may make an unexpected choice. Ferguson, the Fed vice chairman, is close to Greenspan and ranked fourth in the survey, chosen by 4.6 percent of respondents. He is a Democrat who was first appointed by former President Bill Clinton and re-appointed to a four-year term as vice chairman by Bush in 2003.

Ferguson is the Fed's point man on international accords. He holds a Ph.D. in economics and a law degree from Harvard, and played a central role in stabilizing the financial system after the Sept. 11, 2001, terrorist attacks. Bush also would be making a political statement with a Ferguson appointment because he would be the first black Fed chairman.

In the end, Bush administration officials are likely to weigh the impact of the decision on Bush's political legacy, along with the need for stature, credibility, and market stability, say former Cheney aides.

All great Fed chairmen have understood their job is circumscribed by politics, Fed historian Meltzer said. ``Those limits are set by your political standing,'' he said.

To contact the reporters on this story:

Holly Rosenkrantz in Washington at  hrosenkrantz@bloomberg.net

Craig Torres in Washington  ctorres3@bloomberg.net

Last Updated: May 13, 2005 08:29 EDT