Bush Prolongs the Greenspan Agony

It is widely believed in Washington that Greenspan spoiled Bush senior's chance of re-election in 1992 by running monetary policy too tightly. It would be a tad conspiratorial to assume that Dubya has extracted some sort of commitment from Greenspan to keep interest rates low before the election to avoid a fate like his father's. Nevertheless, it would be equally naive to assume that the Bushies did no detailed checking up on what Greenspan's monetary policy outlook is for the next six months before renominating him.

Looking out toward November, Greenspan's resolve as a supposedly independent central banker will be seriously tested if data show overheating in the economy. If they do, rates would have to go up more than the White House might like. But for now, monetary policy is going Bush's way. Money supply is growing at close to 5% on an annual basis. True, that's slower than the red-hot rate of recent years, but there are signs of sharp acceleration in recent weeks, and 5% is well above the rate that Bush Senior had to live with in 1992.

One could argue that a decision by Greenspan to stay till 2006 is bullish because it shows that he's confident there won't be a credit bust. After all, why would he stick around if he thought financial Armageddon was around the corner? It may be that he sincerely believes his public insistences that households aren't overleveraged. "Pride cometh before the fall," says Paul Kasriel, chief economist at Northern Trust. "I guess Greenspan believes his own press."

It's quite possible that the Bush administration sees Greenspan's intellectual shortcomings but is bowing to a confluence of events. The administration, battered by setbacks in Iraq and facing plunging presidential approval ratings, obviously needs someone at the central bank who will set the printing presses whirring right now. Greenspan is useful in other ways. He can say comforting things about tax cuts (but not budget deficits). And as a longtime critic of financial giants Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take), Greenspan has been usefully marshaled into the administration's campaign to peel away many of the government-granted advantages enjoyed by both companies.

It would have been very good for the health of the economy to see Greenspan go in June, when his current term expires. But the awful possibility exists that we would get a Greenspan clone. One of the most depressing aspects of the Greenspan years has been the increasing intellectual uniformity of Fed governors. There is no member of the interest rate-setting Federal Open Market Committee who could be identified as a real hawk. In fact, the most prominent members -- think Ben Bernanke -- follow the same lax approach as Greenspan himself.

There is some chatter that Bush will find a way to keep Greenspan in his post beyond early 2006. Seeing as the credit bust will be well under way by then, it would be tempting to want Greenspan to stick around to clear up the mess. But looking back at the last 10 years of Sir Printsalot's reign, the quicker he goes, the better.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to [e-mail].