By Steven Pearlstein
Friday, August 14, 2009
A popular parlor game among Washington insiders this summer is guessing whether Ben Bernanke will be reappointed to a second four-year term as chairman of the Federal Reserve, or whether President Obama will try to put his own stamp on the Fed by appointing his most trusted economic adviser, Larry Summers.
Before getting to the question of who will be the next Fed chairman, however, perhaps it's worth considering what the job ought to be. Over the last two years, we've certainly all learned that it involves a lot more than adjusting interest rates and dissembling knowledgeably before Congress. We also saw the consequences of having left the previous chairman in the job so long that it created a cult of personality that drained the Fed of the kind of critical thinking that might have averted the recent financial crisis. If there ever was a time to reconceptualize the role of Fed chairman, now would be it.
So here are a few thoughts:
Whenever the Fed comes under serious attack, as it has recently, its reflexive response is to accuse its critics of jeopardizing the Fed's independence. Yet if you think about it, the greatest threat to the Fed's independence comes not from outside the institution but from a chairman and members who are so anxious to get reappointed that they begin to tilt policy to win favor with the White House or with Wall Street or take on a reluctance to criticize policies that they think harmful to the economy.
There are two easy fixes for this problem. Congress could extend the chairman's term from four years to six but remove the possibility of reappointment. And it could end the current practice of appointing new members of the Fed's board of governors to fill the partial, unexpired terms of governors who leave. All new governors should be appointed to their own 14-year terms, without possibility of reappointment.
One of the problems presidents have in finding suitable candidates for Fed chairman is that it is hard for people to imagine anyone new in the job. The people usually mentioned are some star academic, the head of a big Wall Street bank or a current or former Treasury secretary, most of whom have little or no experience with monetary policy, bank regulation or managing financial crises.
In theory, that experience can be found among the other members of the Fed's board of governors. In practice, however, Fed governors have tended not to have the stature, the intellectual horsepower or the political savvy needed in a chairman, or have been so marginalized by the chairmen that they have not had the opportunity to show their stuff. It should tell you something about the job of Fed governor that, other than Bernanke, none in recent memory has risen to become chairman and few have stuck around for a full 14-year term.
One way to develop a better farm system for the chairmanship would be to give more power, influence and visibility to the other governors, raising the bar so that those who are appointed show some promise of being chairman some day. If all that resulted is a bit less harmony in Fed decision-making, so be it. The old nostrum that the central bank must always speak with a "single voice" so as not to "disturb the markets" has now morphed into an excuse for stifling dissent and concentrating too much power in the hands of the chairman.
There is also legitimate concern about concentrating too much power and responsibility in the Fed itself. The financial crises of the last 20 years have only served to highlight the Fed's vital role as lender of last resort and systemic risk regulator, in addition to the more traditional role of setting monetary policy. Given those priorities, the Fed should be required to give up its duties as day-to-day bank regulator, handing those over to a single, consolidated supervisor, as Sen. Mark Warner of Virginia has proposed. It should also be forced to relinquish its largely unexercised powers to regulate abusive lending practices to the new consumer protection agency proposed by President Obama. As long as they remain at the Fed, these functions will continue to get short shrift from top officials.
Who is the right person to preside over this new Fed? That's easy: Ben Bernanke.
Certainly the Bernanke record is not without its flaws. He was wrong in denying there was a housing bubble, a wider credit bubble and a speculative commodities bubble -- and wrong in arguing the Fed couldn't do anything about any of these bubbles but clean up after them once they had burst. He allowed himself to be too easily co-opted by the deregulatory group-think of the Bush White House and the Greenspan Fed.
But time and again during the recent crisis, Bernanke has been courageous and creative in his determination to do whatever was necessary to prevent a financial meltdown. As David Wessel recounts in his wonderful new book on the crisis, "In Fed We Trust," Bernanke won the trust of key congressional leaders and served as the crucial behind-the-scenes conciliator when things threatened to come unraveled. As chairman, he has gone out of his way to share power and responsibility with other board members and fostered a new spirit of collegiality. His deep understanding of financial crises -- as an academic and as crisis manager -- makes him uniquely qualified to help Congress shape the new regulatory architecture and implement its reforms.
Steven Pearlstein can be reached at firstname.lastname@example.org.