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Bush Picks Successor to Fed Chief Greenspan

Ben S. Bernanke, a former Ivy League economist, vows to 'maintain continuity' with the central bank's current policies.

October 25, 2005|Peter G. Gosselin and Warren Vieth | Times Staff Writers

WASHINGTON — President Bush on Monday dashed ahead of his own timetable for naming a successor to Federal Reserve Chairman Alan Greenspan, picking former university economist Ben S. Bernanke to head the nation's central bank.

The 51-year-old Bernanke, who is chairman of Bush's Council of Economic Advisors and served as a Federal Reserve governor from 2002 until June, immediately promised that "my first priority will be to maintain continuity with the policies ... established during the Greenspan years."

The choice of Bernanke was warmly received both on Wall Street and in academia. Stocks staged a broad rally, with the Dow Jones industrial average posting its biggest gain since April 21, climbing 169.78 points, or 1.7%, to close at 10,385. Analysts attributed the run-up in part to hopes that Bernanke would be less aggressive than Greenspan in pushing for further growth-damping interest rate hikes to control inflation.

Although Bernanke was hailed by many Monday as a seamless successor to Greenspan, veteran Fed watchers said there were some clear differences between the two men in background and style that could eventually result in the new chairman leading the central bank in a distinctly different manner from his predecessor.

Bernanke must be confirmed by the Senate before he can replace Greenspan, whose nonrenewable term as a member of the Fed's governing board expires Jan. 31. Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) described Bernanke as "highly qualified" and said he would press for early hearings.

For Bush, announcement of the nomination was politically charged, coming only days before the possible indictment of top White House aides in connection with the leak of a CIA agent's identity and amid festering controversy over the qualifications of his Supreme Court nominee, Harriet E. Miers, who was once Bush's personal attorney.

For Bernanke, his selection represented the latest step in a dizzyingly fast ascent from the quiet confines of Princeton University, where he was a professor for most of the last two decades, to the very top of the economic policymaking world.

For Greenspan, Bush's nomination began the final act in an extraordinary 18-year run atop the interest rate-setting Fed, a performance that the president and congressional leaders noted in discussing the chairman's replacement.

"Under his steady chairmanship," Bush said of Greenspan, "the United States economy has come through a stock market crash, financial crises from Mexico to Asia, two recessions, corporate scandals and shocks ranging from devastating natural disasters to a terrorist attack in the heart of America's financial center."

"He was a kind of Rock of Gibraltar for the American economy," said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa).

Among academic economists, there was a clear sense that one of their own had reached the big time, a feat that was once the norm but has become less common in recent decades. Stanford University economist Robert E. Hall said that Bernanke had "clearly demonstrated he can carry on the whole Greenspan package of doing the right thing and presenting it clearly to the public."

As an example of the distinctions between Greenspan and his potential replacement, Bernanke was a product of the nation's top-tier schools -- having earned a bachelor's degree from Harvard University and a doctorate from Massachusetts Institute of Technology in quick succession. Greenspan attended the grittier New York University and collected his doctorate decades after completing his undergraduate work and at the age that Bernanke is now.

In addition, whereas Bernanke has written and lectured widely about the need for the Fed to set clear and public goals for things such as inflation, Greenspan has expressed deep skepticism about rules, especially in managing something as complex as the U.S. economy.

"Alan Greenspan is not an academic economist," declared Carnegie Mellon University economist Allan H. Meltzer, who is writing a multi-volume history of the Fed.

"He thinks academic economists are much more concerned with rules and models, while he's more concerned with making judgments," Meltzer said. "He has gone to some effort to establish that he is not following a rule."

If confirmed, Bernanke would take the reins of the Fed at a time when the central bank has raised its benchmark short-term interest rate from a 1% low to 3.75% today in an effort to quell a rising inflation threat, stoked by higher energy costs. Many economists expect the Fed to continue raising rates to as much as 4.5% before the new chairman takes over Feb. 1.

The question facing the new chairman will be whether to continue this tightening or halt it. Some critics of current Fed policy say the central bank is overestimating the threat of inflation and is running the risk of causing an economic slowdown by raising rates too high.

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