The biggest loser in the Fed debate
By Mohamed A. El-Erian,
Mohamed A. El-Erian is the chief executive officer and co-chief investment officer of global investment management company PIMCO.
After serving as the chairman of the Federal Reserve for eight years, Ben Bernanke probably will step down at the end of his second term in January. The speculation over who would replace him began with an insightful and important debate over the qualifications needed to lead this powerful institution at a particularly delicate time for the U.S. — and global — economy. But that talk has now entered silly season, and it is starting to pose a threat to the well-being of the nation.
Initially, several experienced central bankers were viewed as potential successors, most notably Janet Yellen, the Fed’s talented vice chair and a highly respected economist with a strong track record. Then another name emerged — that of Larry Summers, a brilliant economist who has served in influential posts both domestically and at the World Bank.
What transpired next is more reminiscent of a heated political race or popularity contest than the technocratic appointment it is.
Friends and foes of the two candidates rushed to op-ed pages and the blogosphere to express their opinions. The editorial pages of several mainstream newspapers felt compelled to endorse one of the candidates. Some Web sites ran popularity polls. And, in a gathering with congressional lawmakers, President Obama was forced to confront the issue.
In many of the cases, the arguments were made by friends and admirers who sought to boost a candidate they believed to be highly qualified. Increasingly, however, they have become more negative attacks connected, in Summers’s case, to lasting anger over his deregulatory stance and controversial statements he has made about women or, in Yellen’s, to concerns that she is too close to Bernanke and wouldn’t think independently.
As a result, this particular Fed debate now risks hurting the nation’s economic posture.
Led by the Fed, central banks around the world pursue their critical policy objectives using a range of instruments — most notably, interest-rate setting, balance-sheet operations, regulation, communication and policy guidance. To succeed in a durable fashion, they need to be able to persuade the private sector (and financial markets in particular) to behave in supportive ways and to refrain from taking certain actions. Indeed, the most successful central banks are those that entice the private sector to do most of the heavy lifting for them.
It therefore is not surprising that research has shown that the effectiveness of central banks is linked in an important fashion to credibility, including the capacity of leaders to combine constructive internal collaboration with a solid external standing. A successful central banker must do more than just convey the current policy stance. She or he must also command the necessary respect among politicians, financial markets and foreign central bankers that anchors the baseline policy path, underpins a well-disseminated methodology and facilitates the inevitable midcourse corrections.
Central banks’ policy effectiveness has at times been damaged by issues that speak less to expertise and more to personality traits, whether real or perceived. In the 1970s, for example, perceptions of Arthur Burns’s weak and tentative leadership at the beginning of his first term undermined efforts to overcome stagflationary forces that harmed the country. And the more these perceptions were highlighted and persisted, the greater the Fed and the country struggled.
That is why we should all worry about today’s Fed debate. It is pivoting away from constructive issues — including the candidates’ respective academic backgrounds, economic thinking and policymaking experience — to a form of negative campaigning replete with sophisticated mudslinging.
Discussions of whether Yellen has the needed “gravitas” and whether Summers can be too “prickly” are examples that have long left the land of relevance and are venturing ever more deeply into silly territory, territory that is not only unconstructive but that also creates more polarization on longstanding issues such as gender.
If this continues, there is a material risk that exaggerations and tangents could undermine the country by raising unwarranted questions about leadership, particularly when the next Fed chair may need to calm panicky financial markets, take controversial steps, persuade foreign central banks to cooperate or suddenly lead the private sector in a new direction.
The longer the current debate continues, the greater the risk of collateral damage and unintended consequences. This is particularly distressing as, primarily because of political polarization on Capitol Hill, there are no other entities that are both able and willing to take on the enormous policymaking burdens that the Fed has been carrying virtually on its own.
It is time to move past the circus-like atmosphere around who will be selected to lead the Fed. It is time for Obama to make his choice and move the process to Senate confirmation.
Read more in Opinions: Katrina vanden Heuvel: Fed up with Wall Street’s revolving door George F. Will: The Federal Reserve’s not-so-golden rule Charles Lane: The Fed’s trickle-down economics