Since I don’t much read the celebrity gossip magazines or even recognize the names when I notice a glossy cover lying around, I’m pretty excited about all the speculation over who will be the next person to chair the Federal Reserve Bank’s Board of Governors. It’s been fun reading about who are tennis buddies and who are sworn enemies, how serious public officials supposedly misbehave during closed-door meetings, and which candidates have learned the Washington-insider game and which ones have ignored it. I haven’t uncovered a threat to the American Idol, but the distraction is welcome—or is it?
Last fall I heard some boos from an audience when I criticized then presidential candidate Mitt Romney for saying that he intended to replace Fed Chairman Ben Bernanke with his own person, “someone who shared my [Romney’s] economic views.”1 Of course, the ability to appoint like-minded officials is central to a chief executive’s mandate. We’d never expect a president to hand the Fed over to someone he or she didn’t trust to lead the central bank in the right direction. But we also expect the Fed to operate independently from the executive branch.
Historically, U.S. presidents have had mixed results from putting “their man” at the head of the Fed table. President Truman thought he had an accommodative chairman in William McChesney Martin and got the man who famously took away the punch bowl.2 President Nixon also looked for a more accommodative chairman and unfortunately got one. I’m more impressed with Presidents Reagan, Clinton and Obama, who reappointed their predecessor’s man and got independent and (mostly)3 sound monetary policy. Sure Bernanke moved to the Fed chair from the chair of President Bush’s council of economic advisors, but even to his critics he’s never appeared to be a partisan figure—certainly not a GOP operative.
I have no doubt that Larry Summers, if he is chosen, has the knowledge and experience needed to lead the Fed effectively, and he certainly has proven willing to take unpopular stands. But the favorite candidate of the White House staff—honorable folks though they may be—will struggle to overcome critics who see him as the “President’s Man” rather than the neutral arbiter of monetary policy and, with increasing importance, financial regulation. I care more about the Fed’s independence than about which of the highly qualified apparent candidates eventually secures the nomination. If Prof. Summers gets the cover story (fully dressed, please), I hope he reflects on the respect McChesney Martin still commands.
- Romney says he won’t renominate Bernanke. Marketwatch, Aug 23, 2012.
- Martin, in an October 1955 speech to the Investment Bankers Association of America, famously said the Federal Reserve’s job is to be “the chaperone who has ordered the punch bowl removed just when the party was really warming up,” that is, raise interest rates when the economy was peaking. Martin is often credited with making up the phrase himself, but in the speech he attributed it to an unnamed writer.
- I blame learning the wrong lessons from the shock-and-awe tightening in 1984 rather than partisanship for the Fed’s failure to tighten away last decade’s real estate bubble.
Past performance does not guarantee future results.