Ben Bernanke’s four-year term as chair of the Fed’s Board of Governors ends in January. Rather than reappoint him, President Barack Obama should name a new chair who can take a fresh shot at the job, unencumbered by any policy baggage from the boom and bust of the past five years. Janet Yellen, president of the San Francisco Fed would be a fine choice.
Understanding the administrative details is important. To insulate monetary policy from short-term political pressures, Fed governors are appointed to 14-year terms. Bernanke was appointed to the board in 2006 for a term that expires in 2020. But appointments of governors to serve as chair or vice-chair are for four years at a time. Bernanke’s current term as chair also began in 2006 and ends Jan. 31, 2010, even though he could serve as a governor for another decade.
Bernanke could thus remain on the board, but Obama could appoint a new chair of his choice, since Donald Kohn’s term as governor also ends in January, opening up a seat. However, with only one exception, governors who are not reappointed as chair customarily resign from the board, and Bernanke would undoubtedly do so.
Why should Bernanke be replaced? The problem is that he is saddled with the failures as well as any successes of the past four years. Historians will argue about this era for decades, just as Bernanke and other historians of the Great Depression still argue about what transpired back then.
It’s clear that he will get at least a B+ for his performance since the bubble began to implode with the failure of two Bear Stearns funds in June 2007. Mistakes were made, as the saying goes, but on the whole, Bernanke’s crisis management over the past two years probably was as good as anyone could have done. History undoubtedly will show some actions were wrong, but they resulted from good-faith decisions made with limited information under great pressure.
Unfortunately, he will get at best a D+ for his government service over the five years before the crisis exploded in 2007. First appointed as a Fed governor in 2002, followed by a brief term as head of the President’s Council of Economic Advisors in 2005, Bernanke was at the center of economic policymaking as the Fed permitted the largest real estate and financial bubble in history to inflate undisturbed and as the federal government perpetuated a policy of fiscal deficits financed by borrowing from East Asia that will vex us for decades.
Rightly or wrongly, at this point Bernanke is so saddled with policy decisions from the past seven years that whatever positions he takes now on issues of monetary policy, regulatory reform or fiscal issues, they will inevitably be tainted by however people feel about his past actions. It would be better for everyone, institutions as well as individuals, if he stepped down with the convenient explanation that his term is ending.
Janet Yellen is a highly capable individual largely untainted by past decisions. Like Bernanke, she had a distinguished career in academia. She served as a Fed governor from 1992 to 1997 and as head of President Bill Clinton’s Council of Economic Advisors from 1997 to 1999, a time when the federal budget deficit was reduced to its lowest levels in 30 years. And she has headed the San Francisco Fed since 2004. She knows the Fed, and she knows executive branch economic policy making.
Her only policy input during the asset price bubble’s inflation was as a voting member of the Federal Open Market Committee in 2006, as the Fed was belatedly slowing the rate of increase in the money supply.
Many observers were struck during the past two years by how all the major players: Treasury Secretary Henry Paulson, New York Fed President Timothy Geithner and Fed Chair Bernanke, were all white males, graduates of elite colleges and highly deferential to Wall Street interests. Yellen, herself, was educated at Brown and Yale. But maybe it is time to let a wise woman have a crack at a job in which previous male incumbents screwed up pretty royally.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.