The Federal Reserve is supposed to be insulated from politics, but that is impossible to do perfectly, especially in an election year. That is coming out in two ways right now.
First, politics is keeping the Fed’s Board of Governors at reduced strength during an ongoing economic crisis. Second, electoral considerations — or the desire to avoid any action that might be interpreted as responsive to electoral considerations — may influence monetary policy meetings in subtle ways between now and the election.
Of the two, the refusal of the Democratic-majority Senate to vote on two of President Bush’s board nominees is by far the more flagrant and important. The fact that it echoes a similar refusal by a Republican-controlled Senate in the waning years of the Clinton administration is no excuse.
The 1935 amendments to the Federal Reserve Act that established the Board of Governors as we know it were written to insulate this policymaking body from political control. It has seven members appointed by the president to 14-year terms. Terms are staggered with one starting in February of each even-numbered year.
Theoretically, since presidential inaugurations are in odd years, any single president could only appoint two out of the seven in any term. A majority-making fourth appointment would only occur at the end of a two-term tenure. So no president could ever pack the board with sympathetic supporters.
But in practice, few appointees ever serve full 14-year terms. They get bored or frustrated, are offered lucrative positions in the private sector or return to their home universities when limits on leave threaten their tenured chairs.
Presidents thus commonly do get to name majorities. Bush was able to do so before the end of his first term.
Presidential nominees to the board must be confirmed by the Senate, however, just as Cabinet secretaries, federal judges and ambassadors are. In most cases, the confirmations are pro forma. Senators from the party opposing the president may use the hearings for some political-grandstanding oratory, but historically, the outcome is never in doubt.
That was true, at least, until mid-1998 when George H.W. Bush appointee Susan Phillips resigned. The Lewinsky scandal was at its height and the possibility that Clinton might be impeached seemed real. A combative Republican leadership in the Senate made it clear that it would not confirm any Clinton nominees to the board. Clinton never named a replacement for Phillips nor for his own appointee, Alice Rivlin, who resigned in mid-1999.
Reagan appointee Edward Kelley stayed on through 2001, maintaining a required five-member quorum on the board. But the day George W. Bush was inaugurated, he had two open seats to fill immediately. He was able to name two more by mid-2002. By early 2006, all six members other than Alan Greenspan were Bush appointees. (And Bush had renamed Greenspan to the separate appointment as board chairman.)
Republican opportunistic truculence and Clinton’s gutless unwillingness to force the issue set a terrible precedent. With Democrats gaining control of the Senate in 2006 and a Bush administration that is lamer than a double-amputee duck, the tables have been turned.
Bush’s first nominees, Minnesotan Mark Olson and Susan Bies, resigned in 2006 and 2007. Randall Krozner, appointed in 2006 to an unexpired term, reached the end of that term this past January, though he can serve for an interim. Frederic Mishkin is stepping down at the end of August to return to his distinguished endowed chair at Columbia University and his highly lucrative consulting portfolio. That would leave the board with only four members.
The direct problem is that the Federal Reserve Act requires a minimum of five governors to approve actions like the recent Bear Sterns bailout. More subtly, a short-handed board alters the balance of influence on the critically important Federal Open Market Committee where seven governors normally outweigh five voting district bank presidents.
Bush has nominated three new governors. Elizabeth Duke, an experienced banker and former American Bankers Association chair, was named in May 2007 and finally confirmed last Friday. Two other nominations made months ago, Krozner’s reappointment and that of Larry Klane, a Capital One Financial Corp. executive, still languish in the Senate.
The confirmation of Duke ensures a temporary five-member quorum. There was no reason why the Senate could not have voted on Krozner and Klane. But the Democratic majority leadership has made it clear that they are going to keep those seats open for Barack Obama to fill should he win the presidential election, just as Republicans held seats open for Bush eight years ago.
Turnabout may be fair play in politics, but it harms our nation. The danger would be less if the economy were sailing on tranquil seas. But it faces some of the most daunting storm clouds in a half century. We need a full complement at the Fed. This is not a time for playground games of got-you-back.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.