President Bush has made record progress in assembling a cabinet. As the process now moves to lower-ranked positions, the public and media are likely to focus on other issues.
This inevitable shift of attention is unfortunate because the new president faces an unprecedented situation. There already are three open seats on the Federal Reserve Board of Governors. Another will open in 12 months. Bush will have the opportunity to nominate four governors by the end of his first year in office, and perhaps as many as five.
The media tend to ignore everyone on the Board but its chairman, Alan Greenspan. But the three to five Board appointments that President Bush makes early in his administration will play a crucial role in the U.S. and global economy.
Readers who paid attention during their college economic courses may bridle and ask, “What? Don’t Fed governors serve long terms precisely so no single president can appoint a majority? Why can George W. Bush nominate four governors in his first year in office?” The answer is that there is a difference between how the Board was legally structured when established in 1935 and the way it really operates.
The law specifies that there be seven governors, with staggered 14-year terms that begin on February 1 of every even-numbered year. During a four-year term, any president should name no more than two individuals to the board. Theory and practice would coincide if no governor died or resigned and if every president promptly made appointments as they opened.
In the real world, however, few governors sit on the board for a full 14 years. Since 1935, 59 individuals have served on the board. Only five stayed for 14 years or more. Some 25 failed to even make the five-year mark.
This led to some strange anomalies. John Kennedy named only two governors during his abbreviated term and Lyndon Johnson only three. Gerald Ford got to name five in two years. George H. W. Bush named just three, while Clinton made six appointments.
The fact that Clinton made a total of six appointments to a seven-member board does not mean that his nominees dominated the body. Three of his nominees, Alan Blinder, Janet Yellen and Alice Rivlin, resigned after relatively short periods. So the bulk of his appointments were to replace people he had previously named. Until Lawrence Lindsey, now President Bush’s economic czar, resigned in 1997, four of the seven board members were Reagan or Bush appointees.
The current unique situation stems from the fact that Clinton simply ignored open seats during the last three years he was in office. No one has a clear explanation of why this lapse occurred. Some speculate that Clinton assumed Al Gore would win and left these choices to his presumptive successor. Others point to the distractions of the Lewinsky scandal. In any case, there are two open seats that Bush should fill immediately.
Bush faces the thorny question of what to do with the seat of Roger Ferguson, the Board’s vice chair. Ferguson was appointed in 1997 to fill a term that ended January 31, 2000. He was also appointed to a four-year term as vice-chair in early 1999. Clinton, however, failed to reappoint him to a new governor’s term when the one he was named to fill expired last year. He has continued to serve, but in an unprecedented legal limbo.
His status is simply not clear under the law. Ferguson, the first African-American to serve on the board, has both a Ph.D. in economics and a law degree from Harvard. He gave up a highly paid position with Anderson Consulting to accept a seat on the board. In his three years of service, he has made a name for himself as both intellectually brilliant and politically adroit.
But his term as governor has expired, and Bush could effectively dismiss Ferguson by naming someone else to the seat he has occupied. That would add another Bush-Lindsey leaner to the board. But it might also be interpreted as snubbing the African-American community.
George W. Bush thus must fill two long-empty seats and decide whether to reappoint Ferguson. It is in his interest to act immediately. The key Federal Open Market Committee, usually split 7 to 5 between governors and district Fed bank presidents, is now dominated by the latter. The district presidents generally advocate tighter money than the board members, and few have much sympathy for Bush’s economic nostrums.
The new president’s appointments will not end when the first three positions are filled. The term of Laurence Meyer, perhaps the brightest economist ever to sit on the board, expires on January 31, 2002. And the term of Edward Kelly, a Texan appointed by Bush’s father in 1990, ends in 2004. Kelly just turned 68, and some sources say he would be glad to step down now that his replacement by a Republican appointee is certain.
President Bush thus will get to fill five seats on the seven-member board during one term of office. This is not what Congress intended when it gave the board its current form in 1935. And while Bush most likely will not name radicals from either the loose or tight money ends of the spectrum, a wholesale change of this type does not improve the credibility of monetary policy as we face an economic downturn.
None of this is Bush’s fault. Bill Clinton simply failed to do his job of appointing governors as the need arose. The result may be only a historical footnote. Let’s hope that future history books do not record this lapse as a major failure of his presidency.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.