Is Greenspan Preparing to Leave the Fed?

By: Douglas R. Gillespie | Thu, Apr 8, 2004
Print Email

A few months ago, I raised lots of eyebrows by suggesting there was a chance, perhaps even a decent chance, that Alan Greenspan would not serve a fifth term as Federal Reserve chairman. In recent weeks, I've gained some company regarding this possibility.

How high do I rank the possibility of Alan Greenspan's departure from the Federal Reserve during 2004? Well, I suspect the current consensus view assigns a next-to-nothing probability to such an outcome. I could be talked into something approaching, say, 30%, maybe even a little higher.

Granted, these certainly are not odds you would like to take to the racetrack. Nevertheless, I don't think you can dismiss the possibility out of hand.

Before reviewing my thoughts about whether Greenspan might not, after all, serve the fifth term as Fed chairman that many have assumed as a given, let's examine excerpts of two recent columns on the subject. The first appeared last week (3/30) in the NY Post and was entitled, "White House May See Greenspan as Liability for Election." The column was authored by an old friend, John Crudele, who I view as a very competent financial writer. Crudele wrote:

"Granted, I'm a bit early on this conjecture. The Federal Reserve chairman's term doesn't expire until June, and the last word from the Bush Administration is that he can stay on.

"But a few weeks ago, I started hearing a story from a very well-connected Washington insider that the White House is peeved at Greenspan for some stuff that appeared in 'The Price of Loyalty,' the best-selling book by former Bush Treasury Secretary Paul O'Neill.

"...What is really tweaking the administration's cheek is the fact that some of the other information in the book could only have come from Greenspan. And Greenspan and the now-despised O'Neill were, and are, tight.

"'O'Neill is very friendly with Greenspan," says this source, who has worked in previous Republican administrations. 'And the White House is [not happy with]' the Fed chairman.

"Disloyalty is a sin in this White House. And being a friend to the administration's enemy makes you the enemy. ..."

NOTE: John's entire piece can be accessed using the following link:

Appearing in the Washington Post on 2/27 was a column entitled, "Cashing in Fed Credibility to Campaign." It was written by Post business writer, Steven Pearlstein, and here's an excerpt.

"I now have it on good authority that Alan Greenspan has decided not to seek reappointment as chairman of the Federal Reserve Board when his term expires in June.

"Indeed, the unwitting source is none other than Greenspan himself.

"We know this because, over the last week, in a remarkable series of talks, Greenspan has decided to cash in his personal credibility, as well as the reputation of the Federal Reserve System, to push a radically conservative agenda while serving as cheerleader for the Bush-Cheney reelection campaign. In doing so, the politically savvy Greenspan must surely have realized he was putting his reconfirmation in this election year into serious jeopardy. ..."

What's the old saying about beauty -- or the lack thereof -- being in the eye of the beholder?

On one hand, we have John Crudele opining that Greenspan might be in reappointment trouble because of disloyalty to the White House. On the other hand, here is Steve Pearlstein suggesting something approximating just the opposite.

For the people who have read my material for a while, it is hardly a secret that I view Alan Greenspan with exponentially less esteem than do his Wall Street friends and cheerleaders. In fact, I have occasionally expressed the opinion that in the fullness of time, the time required for history to appreciate the extent of the damage he's done, Greenspan would become one of the great pariahs in financial-market history. Nothing recently has changed my mind!

In hindsight, Greenspan should have taken the cue from Bob Rubin, who got out while the getting was still good. But when it was decision time for Mr. G. about a fourth term -- the summer of 2000 -- the stock market was already faltering badly. I think he probably felt that he had better hang around for a better exit point regarding that old "legacy" shtick. And I suspect that legacy considerations are something that are awfully important to Alan Greenspan.

I believe George Bush made a horrible mistake in indicating the virtual certainty of a fifth term for the Fed head roughly fourteen months before the end of the fourth term. There's still lots of time for it to come back to haunt the President, even if Greenspan takes a pass on another term. But last year, just around this time, Bush needed serious help with his tax legislation. Therefore, the indication of another term for Greenspan was a classic marriage of political convenience, and it's remarkable how quickly some of Greenspan's ideas about tax cuts and the like became "pliable," shall we say, once the fifth term as Fed chairman was strongly suggested.

The first time I began to think that something just might be up regarding no fifth term was during last year's Jackson Hole Symposium, sponsored annually by the Kansas City Federal Reserve Bank. And I admit that at the time, I did not think about it in terribly serious terms.

Last year's symposium ran from 8/28 through 8/30; its general topic was "Monetary Policy and Uncertainty: Adjusting to a Changing Economy." On 8/29, Alan Greenspan addressed the gathering, delivering a paper entitled, "Monetary Policy under Uncertainty." I thought the speech was highly self-serving, at least bordering on delusional. Nevertheless, I more or less dismissed the event, feeling that maybe the region's high altitude and majestic scenery had overwhelmed Mr. G.

Early January rolled around, and with it, another major Greenspan speech that again struck me as a bit "odd." The following excerpt is from my research missive dated 1/6, which was entitled, "Potpourri."

"...The dynamic duo of Alan Greenspan and Fed Governor Ben Bernanke were on a speech-giving binge last weekend in San Diego, at a gathering of the American Economic Association. The respective speeches, Greenspan on 1/3, Bernanke on 1/4, got a fair amount of media attention, but only in excerpted form.

"I am going to request something of readers bordering on cruel and unusual punishment, which is something I certainly try to do sparingly. Nevertheless, in this case, I believe it is warranted. Use the link below to access [the Greenspan speech, 'Risk and Uncertainty in Monetary Policy'], then please read [it] in its entirety. Just when you think Mr. G. has reached the zenith of delusional, self-serving behavior, something new comes along to top it!"

NOTE: The speech remains posted on the Fed's website at:

Then, along came my missive of 1/22 ("State of Union Address/Stock Market"):

"Many months ago, I identified Alan Greenspan as someone who would put a second Bush Presidency in jeopardy, mainly on the assumption that once Greenspan had been bought with the nod on a fifth term as Fed chairman, Mr. G. would probably begin creating new bubbles and exacerbating old ones. And he did! (I have a face-saving way out for him as well as the President. More on this in a moment.)

"A blowup in stock prices coming too close to the election has obvious and certainly not pleasant potential political implications. And we already are closing in on the end of January, so time is running out for what could be a pretty nasty but nevertheless healthy correction. 'Healthy' in the sense it would help deflate some of the new bubble, and it would allow some time for the market to bottom and begin a nice rise into election time.

"Of course, with the arrogance displayed by Greenspan in his recent speech in San Diego, he has likely used back channels to assure the White House the Fed can and will keep everything glued together until after the election. Good luck!

"Considering the increasingly exponential look of a number of items, the possibility of a sidewall blowout grows. And the equity market overall has now reached a critical area ... The DJIA and the S&P 500 are nearing the highs they set in the rally that began after the lows which followed 9/11. ..."

(NOTE: The respective 2002 closing highs set by the DJIA and the S&P 500 after the lows following 9/11 were 10,635 and 1,173. The 2004 closing highs, both set on 2/11, were 10,738 and 1,158. Versus the 2002 highs, these work out to +1.0% and minus 1.3%, respectively.)

Continuing from the 1/22 missive:

"The Greenspan 'Solution'"

"In a piece I published on 1/6, I said the following about a recent Greenspan speech in San Diego (on 1/3, before the American Economic Association):

"'...Just when you think Mr. G. has reached the zenith of delusional, self-serving behavior, something new comes along to top it!'

"The Fed had not really had a hand in creating any bubbles, nor could it have stopped them anyway. Nevertheless, it had handled them beautifully -- after the fact. Moreover, there is no sign at present of a new bubble. This was the gist of what Mr. G. had to say. It was really scary, scary stuff!

"However, how about this? With the great rise in stock prices over recent months, why doesn't Greenspan use this speech as the basis of pulling a Bob Rubin -- of getting out of town while the getting is good? Amplify on the points he made in San Diego to declare victory, then inform the President he no longer wishes a fifth term as Fed chairman. (Greenspan's current term expires in June.)

"When the announcement is made, the large number of Greenspan sycophants remaining on Wall Street will put the stock market into a dive -- initially, at least. In turn, this will give Greenspan an ego rush, and it will give Bush the sell-off he needs now, to avoid potentially far worse problems later in the year."

A Concluding Thought or Two

Since I authored the 1/22 piece, Mr. G. has been strutting around some more. At times, he actually has sounded like the head of a major central bank.

He has let Congress in on the fact there could be problems from chronic federal budget deficits, not to mention that Social Security has some serious problems. Brave stuff in a Presidential election year from someone awaiting reappointment by a President running for reelection. Among some other items of potential import, he also has brought to Congress' attention that some of the Government Sponsored Enterprises might have unsound financial practices. What a mensch!

My point here and earlier is that through actions of the last several months, it appears that Alan Greenspan has stepped up materially the attempt at enhancing his legacy. In turn, I would associate this more with someone who was leaving rather than someone who was signing on for another four years.

Practically speaking, there's not a lot of time left to learn of Greenspan's fate -- of whomever's volition.

Alan Greenspan joined the Federal Reserve Board on 8/11/87, appointed by Ronald Reagan as its chairman, as well as to serve an unexpired term as governor. Greenspan was reappointed to and began serving a full 14-year term as a governor on 2/1/92. He was last appointed chairman by Bill Clinton in 2000, and his current term as chairman expires on 6/20 of this year.

Were Bush not to reappointed him as chairman, Greenspan would still have more than a year left to run on his 14-year term as a governor. If not reappointed chairman, it seems inconceivable, though, he would remain on the board. Thus, Bush would most likely be given the opportunity to choose a new chairman from the outside, if he wished to do so.

If not reappointed, I'm not sure whether Greenspan would be permitted to stay on as acting chairman until a successor was confirmed by the Senate. If not, Roger Ferguson, the Fed's current vice chairman, would likely assume the role on an interim basis. Bush might even appoint Ferguson (who is an African-American) to step into the higher slot, then seek a new vice chairman.

Under any circumstances, word that Greenspan was departing the Federal Reserve would roil the financial markets, at least initially. Therefore, if he is going to leave -- either of his choice or Bush's -- I would expect an announcement to be made pretty soon. June 20 is no longer too far down the road.


Douglas R. Gillespie

Author: Douglas R. Gillespie

Douglas R. Gillespie, Sr.
Gillespie Research Associates
165 Sheridan Avenue
HO-HO-KUS, NJ 07423

Doug Gillespie oversees his own financial-market and economic consulting firm, Gillespie Research Associates. For a complimentary sample of Dougs material, e-mail him at

Copyright © 2004-2005 Gillespie Research Associates. All rights reserved.

All Images, XHTML Renderings, and Source Code Copyright ©