Sometime next year, a new Federal Reserve chairman will take Alan Greenspan's seat at the massive mahogany table in the central bank's Washington boardroom. He will look around the room and see his fellow policymakers, including the presidents of the 12 regional Federal Reserve banks, based in such cities as Richmond, Va., Cleveland, Kansas City, and St. Louis -- a list that has not changed since 1914.
But wait a minute -- in an era of rampant globalization, wouldn't it make more sense for the new Fed chief to be joined around the table by his counterparts from Frankfurt, Beijing, and Tokyo rather than Richmond and Cleveland? The answer is yes, it would make more sense. And no, it's not going to happen.
The next financial crisis, when it comes, is likely to be global in scale, requiring a concerted effort by the major central banks to keep the world economy on an even footing. But no one would seriously contemplate putting Zhou Xiaochuan, Governor of the People's Bank of China, on the Federal Reserve.
Instead, the best alternative is for the next Fed chief to have a deep knowledge of the international economy and the diplomatic skills to bring his fellow central bankers to the table in a crisis. That means the list of potential replacements for Greenspan should be broadened to include such international experts as Michael Mussa, former chief economist for the International Monetary Fund; Manuel H. Johnson, former vice-chairman of the Fed and now an international consultant; and even James A. Baker III, former Secretary of the Treasury and State Depts.
During his 18 years atop the U.S. central bank, Greenspan tried to stay away from becoming too heavily involved in the global arena, fearing that such involvement might compromise the Fed's independence. But the next chief may find it harder to stay so hands-off. Soaring trade deficits have left the U.S. dependent on foreign capital. And some of the biggest holders of U.S. Treasury securities are foreign central banks, led by Japan and China. "That's the big difference from when Greenspan took over," says Robert D. Hormats, vice-chairman of Goldman Sachs International (GS ): "Increasingly, U.S. monetary policy is being impacted by policies abroad."
In past crises, Greenspan was able to act independently, backed up by the most powerful central bank in the world. For example, in 1998 the Fed moved quickly to avert a disaster after Russia's debt default and the near-collapse of giant hedge fund Long-Term Capital Management threatened to bring global financial markets to a standstill. "We were acting as central bank for the world," says Alice M. Rivlin, who was Fed vice-chair at the time and is now at the Brookings Institution.
That's no longer possible. A crash landing of the dollar could trigger a financial meltdown and put the Fed in a quandary: It could flood the banking system with dollars to buoy the financial markets. But that would then run the risk of triggering an even faster fall of the dollar and a sharp spike in long-term interest rates as foreigners dumped their U.S. bonds.
In that scenario, the U.S. could not act as global lender of last resort, as it did in 1998, says Karin Lissakers, a former U.S. director at the IMF, in a paper presented at a recent Institute for International Economics conference. Nor is there any other institution that could easily step into the role. The IMF is an obvious candidate. But its decision-making apparatus is cumbersome and its finances limited for handling a mega-crisis like a dollar crash. The Bank for International Settlements in Basel, Switzerland, sometimes called a club for central bankers, could serve as a forum for collective action. But it has no finances of its own to contribute.
In the end, what would likely happen is that a small group of central banks, including the Fed, would band together to prop up the global financial system. That approach puts a premium on having a Fed chairman who can collaborate effectively with overseas counterparts to defuse the crisis. The chief would also have to work closely with the Treasury Dept., while being independent enough to reassure skittish foreign investors.
So how do the leading candidates to succeed Greenspan stack up? Most of the attention has been focused on Harvard University professor Martin Feldstein, Columbia Business School dean and BusinessWeek columnist R. Glenn Hubbard, and Ben S. Bernanke, a former academic who heads the White House's Council of Economic Advisers. All certainly have the intellectual credentials as economists to do the job. None, though, has been tested as a global crisis fighter.
But there are other experienced policymakers who have the two key attributes for the job -- experience with international financial diplomacy and the ability to get appointed by a Republican Administration. One heavyweight with these qualifications is longtime Bush confidante Baker, who has shown a knack for stitching together international coalitions during times of stress. As Treasury Secretary in the late 1980s, he played a big role in getting the central banks of Western Europe and Japan to help bring down the dollar in an orderly way. Baker has some big minuses, though, including his long history as a top Republican political operative and his age. At 75, he's only four years younger than Greenspan.
Another candidate who might be attractive to Bush is Manuel Johnson, 56, who helped fashion Ronald Reagan's 1981 across-the-board tax cut and 1986 tax reform. Now a global economic consultant, he helped coordinate monetary policy with his counterparts in Europe and Japan during his term as vice-chairman of the Fed from 1986 to 1990.
Former IMF chief economist Michael Mussa is also no stranger to dealing with global crises. His 10-year tenure at the IMF included the 1997 Asian financial crisis and the 1998 Russia debt default. He's now at the Institute for International Economics think tank in Washington. Mussa is known for his irreverent wit, however, which could be a liability in the Fed job.
With his recent choices for the U.S. Supreme Court, George W. Bush has shown a knack for picking unexpected names. He could do a lot worse than choosing a new Fed chief who looks beyond our shores.
By Rich Miller in Washington