Greenspan and Bernanke: Day of Transition

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After Alan Greenspan retires on January 31, Ben Bernanke is the new Fed Chairman. It's an election year and “We're going to see a show like we've never seen for two decades,” predicted Kevin Hassett, chief economist at the American Enterprise Institute (AEI), a conservative think tank.

Rising interest rates will be a clear topic of focus for lawmakers. Forbes describes the Fed's raising of the Fed funds rate as heartless. Greenspan is expected to raise the rate to 4.75 percent at his last policy meeting on January 31st and futures markets give Bernanke a 60 percent probability of raising the rate another 50-basis points at his first policy meeting in March.

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Greenspan gathered regulatory powers, especially as Congress dismantled Depression-era laws segregating financial industries, according to MarketWatch. Greenspan has been a strong opponent of government regulation that stems from his being a disciple of libertarian sage Ayn Rand. In his tenure as Fed chairman, he supported deregulation as long as it did not weaken the Fed's competitive position in relation to other regulators, did not harm large commercial banks, and didn't spawn political opposition to the Fed from the White House or Congress.

The Fed became the regulatory authority overseeing financial-services holding companies, according to MarketWatch. Bernanke's first test comes as proposals authorizing corporations to own banks and legislation softening federal oversight of Fannie Mae, Freddie Mac, and other housing agencies. There are calls for the Fed to shed some regulatory powers, especially those won by Greenspan, so it can concentrate more on making monetary policy.

Ken Guenther, former Independent Community Bankers of America (ICBA) chairman, told MarketWatch, “We'll have to see how politically adept the [new] chairman is. Clearly part of the chairman's success will be maintaining the authorities and powers” won by Greenspan. Guenther held his position in the ICBA for more than two decades, according to MarketWatch.

MarketWatch reports that the Fed shares regulatory powers for the U.S. financial system with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, 50 state bank supervisors, the Justice Department, the Securities and Exchange Commission, The Treasury Department, The Commodities Futures Trading Commission, and the National Credit Union Administration.

Tom Schlesinger, executive director of the Financial Markets Center, told MarketWatch, “Bernanke is an academic, pure and simple.” Schlesinger continued, “What long-term effect that has on the Fed as a political institution is one of those things we'll be watching closely. Its hard to tell where it is going to lead.” The Financial Markets Center is a nonpartisan think tank that follows Federal Reserve policy.

Greenspan has many fans. Michael Bradfield, a former Fed general counsel, told MarketWatch, “Greenspan had the ability to create relationships which were very important to the Federal Reserve.” Bradfield described Greenspan as not “some glad-hand guy doing people favors.” He went on to say, “Because he was so successful as a micromanager of the economy, he was very influential on the Hill, particularly with the Republicans.”

Former Labor Secretary Robert Reich told MarketWatch, Greenspan “could neutralize opposition before the opposition even knew it needed to be neutralized.” Reich continued, part of holding power in Washington is “giving the appearance of being able to influence powerful others. Greenspan was at every official gathering, every cocktail party and every dinner. And let everyone know he was going to the next party with everyone worth knowing.”

Bernanke may find himself in the middle of several fights immediately ahead, according to MarketWatch. The face of banking may change after the brawl is over. Large banks want to sell real estate, while the real-estate lobby is pressuring to forbid it. The Treasury and the Fed share the authority to define what activities qualify as permissible “financial” activities for financial holding companies.

Wal-Mart wants to get into banking, too. Their only loophole is to purchase an industrial bank, and Greenspan sent a letter to Congress this past week urging them to close this loophole. If allowed, Wal-Mart, and other large commercial corporations, could buy industrial banks and the Federal Deposit Insurance Corporation (FDIC) would be their primary regulator. This oversight means “jobs and employment and power and authority,” Michael Bradfield told MarketWatch.

Ken Guenther told MarketWatch, “This is a power battle between the Federal Reserve and the FDIC over the cutting edge of where banking is going.” Charles Calomiris, a Columbia University finance professor and AEI scholar, told MarketWatch that the Fed has no business in these political brawls. Calomiris goes on to say that the U.S. should follow a global trend of removing regulatory authority from central banks, while allowing them greater independence over monetary policy. Calomiris finished, “There has never been a better time to rethink our bank-regulatory structure and to consider the advantages of removing regulatory authority from the Fed.”

In other Fed news, Kevin Warsh and Randell Kroszner have been nominated to take two vacancies on the Federal Reserve Board. Warsh was a Morgan Stanley investment banker between 1996 and 2002 and is now executive secretary of the White House's National Economic Council. He is also special assistant to President Bush for economic policy. Kroszner is a University of Chicago economist and was on the president's Council of Economic Advisors between 2001 and 2003.

Former Richmond Fed President Al Broaddus told Bloomberg, “This would be a really well-balanced Board of Governors, in terms of the distribution of knowledge and expertise. Ben knows a lot about bank regulation, but he probably hasn't worked on the operations side a whole lot so it will be good for him to have the support of these other people.”

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