At the end of December, Alan Greenspan comes to the end of his long tenure as chairman of the Federal Reserve. Between now and then, the president will nominate Greenspan's successor.
That nominee isn't likely to stir the passions of the left and right in America. He or she won't decide anything about abortion rights or gay marriage, or whether this or that law or regulation is constitutional.
But Greenspan's successor will have a lot to say about how fast the economy grows and how many people in it have jobs. That makes the pick enormously important.
Alan Greenspan's greatest achievement was to understand that our economy could run faster and employ more people without spurring inflation than was commonly assumed in the 1990s. He knew that technology and globalization were placing intense pressures on companies to keep prices in check even when demand soared. As a result, more than 20 million jobs were created in the '90s, and inequality of income and wealth actually dropped for several years.
Greenspan's greatest failure was not to oppose the Bush tax cuts of 2001 and 2003. And now that the budget deficit is out of control because of them, he should be demanding they be rolled back. He's not. Nobody's perfect.
This means the stakes for Greenspan's successor are huge. The American economy is now on the verge of something we haven't seen in 30 years -- the dread beast called "stagflation." The growing budget deficit combined with soaring energy costs are pushing prices upward. Meanwhile, consumers are watching their pocketbooks. Higher prices for oil, food, and health insurance are making them wary of buying anything they don't have to.
If the president names to the Fed someone as undistinguished as Harriet Miers, his current pick for the Supreme Court, or Michael Brown, his former selection to head the Federal Emergency Management Agency, watch your wallets. These two, like so many others in the administration, got the nod because they were loyal friends of the president, or friends of friends.
Even if some cronyism is inevitable in government, it shouldn't have a place at the highest levels. White House staffers say the president wants someone at the Fed with whom he can have a good rapport. Since when is good rapport with the president a proper criterion for Fed chief?
The Senate will have a lot to say about the president's nominee for the Fed, but don't count on the Republican majority to exercise much independent judgment on this one. They'll do as the president wants -- unless, that is, financial markets act up.
Here's the real constraint on White House cronyism at the Fed. Unlike presidential nominees for the Supreme Court, nominees for the Fed must be approved by financial markets. Wall Street doesn't have a formal veto, of course. But if the president nominates someone who's major credential is being a friend of the president, Wall Street may have a fit.
Today's stock and bond prices depend to a large extent on investors' confidence in Alan Greenspan. Take away Greenspan and nominate a lackey to replace him, and that confidence will plummet. When Wall Street's confidence drops, so will stock and bond prices. And when they drop, you can bet the administration will reverse course and find another nominee who'll make investors feel better.
It's not exactly the constitutional system of checks and balances. Call it the market system of checkbooks and account balances. When it comes to the next Fed chief, it's the best safeguard we have against the president giving this critical job to a loyal friend.
Robert B. Reich is co-founder of The American Prospect. A version of this column appeared on Marketplace.
