Morgan Stanley’s Stephen Roach takes a look at what may be the most important appointment President Bush makes — and he does not come away very confident about it:
"And that, I’m afraid, brings me to the most controversial point of all — the selection process, itself. With the consent of the US Senate, the choice of selecting a new Fed chairman falls to the President. Generalizing on the basis of George W. Bush’s most recent senior appointments, I suspect the President will look for three key traits in a new Fed chairman — familiarity, loyalty, and a pro-growth bias. This is not meant to be critical. It is a carefully determined observation based on the President’s record. In the case of a Fed Chairman, those criteria imply that President Bush will probably not select the next Paul Volcker — a tough, independent policy maker who might be predisposed toward “tight money.” While this is inconsistent with the President’s statement on this matter at a recent press conference, in the end, I still believe George W. Bush will opt for a trusted team player who shares the goals and objectives of his political agenda.
This could well pose a serious problem for US financial markets. With America’s external financing critically dependent on the foreign confidence factor, any doubts over central bank independence will not go over well. That’s especially the case for a US economy beset with record imbalances, a potential inflation scare, and bubble-like conditions in asset markets. Foreign investors have been extraordinarily generous in the terms they have offered for funding America’s external deficit. In part, that generosity may reflect the “Greenspan factor” — the confidence that investors have in Alan Greenspan’s adroit management of periodic international financial crises. With the Greenspan factor about to be taken out of the confidence equation, any fears of an “easy money” Fed could well prompt foreign investors to exact concessions in those financing terms in the form of a weaker dollar and higher real interest rates."
Or, to rephrase Mr. Roach’s concerns, consider this:
UPDATE: October 10, 2005 8:06am
Stephen Roach (from Zurich)
Morgan Stanley, Oct 07, 2005