While the Federal Reserve does not have the power some critics claim — Alan Greenspan never was the most powerful man in the world — it does play an important role in the economy. Appointments to its Board of Governors merit more public attention than they get.
This is especially true at a time when the Fed is pumping extraordinary amounts of money into financial institutions with no specific authorization from Congress except for an obscure clause, added in 1932, in the Federal Reserve Act.
The need for public attention is particularly true because circumstances have given President Barack Obama, like George W. Bush before him, the unintended power to name a majority to the seven-member board — well outside the intent of Congress in the Federal Reserve Act.
The original act dates from 1913. It was amended extensively in 1935 in response to problems that arose after the stock market crashed in late 1929. Among other things, the amendments created the modern Board of Governors.
The board was set up with seven members serving 14-year terms. One term would begin in January of every even-numbered year. The intent was to prevent any president from naming the majority of the board until the last year of a two-term presidency.
Thus, Bush should have been able to name governors for 2002, 2004, 2006 and 2008. The last would start less than a year before the inauguration of the next president, so there would be little time to implement any partisan policies.
As it turned out, however, he inherited two vacancies. And resignations early on allowed Bush to name the fourth governor before the end of his first term.
Obama should be limited to naming governors in 2010, 2012 and, if re-elected, in 2014 and 2016. But his first nominee, banking law professor Daniel Tarullo, took office only 10 days after his inauguration. Haste was necessary because the law requires a quorum of five members to conduct the emergency loan operations so common right now, and there already were two other open seats.
Obama can fill these anytime and barring some scandal, it would be unusual for the Senate not to confirm his nominations. So we could have three Obama appointees on the board in months, if not weeks.
There are two more potential openings. Chairman Ben Bernanke’s term as governor does not end until 2020. Donald Kohn’s ends in 2016. But their four-year appointments as chair and vice-chair of the board are independent of their terms as governor. These appointments end in January and June 2010, respectively.
Were Obama to indicate to either Bernanke or Kohn that he was not going to reappoint one of them, precedent dictates they would resign completely from the board. That is precisely how the Reagan administration got rid of the too-independent Paul Volcker.
So Obama could have five of his own appointees as Fed governors only 18 months into his first term.
Whether doing so would make for good economic policy or good politics is an entirely different matter, however. These are complicated questions best left to another column some months in the future.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.