Bush and Greenspan: A tale of political temptation
UPDATE 1-Bush and Greenspan: A tale of political temptation
(Updates with Summers quote, para 14)
By Knut Engelmann
WASHINGTON, Dec 14 (Reuters) - Faced with a slowing economy
just as he moves into the White House, President-elect George
W. Bush could find it hard to resist the temptation to openly
push the U.S. Federal Reserve for speedy interest rate cuts.
Republican administrations have a long history of being at
loggerheads with the powerful and fiercely-independent central
bank. But beware: Political pressure on the Fed to play along
with Bush's decidedly expansionist economic plans could
backfire badly, just as it has in the past, analysts say.
"The element of history that's repeating itself is that we
have a new president arriving just when a long expansion may
finally be running into some difficulties," said Lou Crandall,
chief economist at R.H. Wrightson & Associates in New York.
If Bush's family history is any guide, this coincidence may
well make for a rocky relationship between a Republican White
House and Fed Chairman Alan Greenspan -- ironically a
Republican himself, first appointed by Ronald Reagan in 1987.
Faced with an economic slowdown in 1991, Bush's father and
his team pressed Greenspan -- just reappointed to a second term
-- to ease off the brakes and give the economy some slack. When
Greenspan was slow to respond, then-President Bush reportedly
quipped: "I reappointed him and he disappointed me."
Almost a decade later and with Bush senior's son avenging
his father's defeat at the hands of the Democrats, the economy
is once again facing a dramatic shift as slowing consumer and
business spending presage a cooling of the once-steamy growth
rate. The slowdown has substantially raised the odds of Fed
rate cuts in the near future.
But analysts warn that Bush's expansionist fiscal plans,
which include a $1.3 trillion tax cut, may spell too much
fiscal stimulus in an economy that still has some momentum
left. That could complicate the Fed's monetary policy options.
PLEADING AND PRODDING
During his campaign, Bush junior has made much of the need
to use rising government surpluses for radical across-the-board
tax relief. More recently, Vice President-elect Dick Cheney has
even warned of an impending recession, arguing such a threat
would only strengthen the case for swift tax cuts.
Despite repeated behind-the-scenes entreaties by Bush's
campaign, Greenspan has resisted the pressure to throw his
considerable weight behind Bush's fiscal ideas. Instead, he has
insisted that the surplus should be used for paying down the
debt first and said a tax cut was only a second-best option.
Bush's point man on those issues has been economic adviser
Lawrence Lindsey, himself a former Fed governor, who is
expected to get a top economics job at the Bush White House. In
that role, he would likely be the key liaison with the Fed.
But Lindsey's propensity for partisan politics combined
with what some say is a lack of political finesse could make it
hard for him to see eye-to-eye with Greenspan, who is widely
revered on both Wall Street and Main Street for his savvy
handling of the more than $10-trillion U.S. economic giant.
"There's a great distrust at the Fed of ideologues," said
Greg Valliere, of Schwab Washington Research. "Fed officials
really resent any kind of pressure from the outside."
The outgoing administration of President Bill Clinton has
prided itself on a policy of noninterference with the Fed.
"Never make any comments on Federal Reserve monetary
policy," Treasury Secretary Lawrence Summers said on Thursday.
Spearheaded by his predecessor and former Wall Street
wizard Robert Rubin, that strategy has fostered a degree of
mutual trust rare in Washington's cut-throat world of power
politics. Rubin and Greenspan's tradition of having a weekly
chat over breakfast has been continued by Summers.
TESTING THE LIMITS
A more interventionist approach from the incoming
administration could sorely test both sides' political skills
-- and their patience with one another, analysts said.
"If Bush is heavy-handed in using cyclical conditions to
justify a tax cut, it's highly likely that Greenspan in turn
would have the kinds of veiled public discourse that he has had
with the previous Bush administration," said Crandall.
A gridlocked Congress that some fear is unlikely to present
much of an obstacle to fiscal profligacy could muddy the waters
further. A Republican president bent on cutting taxes may find
it necessary to grant Democratic wishes for increased spending
just so he can get his policies through, some economists warn.
"Greenspan wouldn't be a happy camper with that kind of
thing going on," said David Jones, chief economist at Aubrey G.
Lanston in New York.
With financial markets already pricing in several interest
rate cuts during 2001, analysts said Bush would be well-advised
to just let the Fed get on with its job. Anything else may
prompt Greenspan to make a display of his independence by
holding off the very rate cuts Bush is hoping for.
"I'm betting on three rate cuts next year, perhaps even
four," said Jones. "But maybe Greenspan won't give us that last
cut if that kind of fiscal love-fest goes on."
((Washington newsroom + 1 202 898-8310, fax 1 202 898-8383,
washington.economic.newsroom@reuters.com))
REUTERS
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