Depending on who gets elected president this fall, our nation may write an interesting new chapter in monetary policy. Mitt Romney says he would replace Federal Reserve Chairman Ben Bernanke as soon as his term is up. Newt Gingrich says he would fire Bernanke as soon as he could get a bill through Congress. Rick Santorum has not been as specific, but, like his fellow candidates, is critical of the Fed. And Ron Paul prefers to do away with the whole institution.
It is not clear that any of this will happen. Candidates can say what they will in the primary campaign, but as they get closer to the general election, they become more practical. Loose talk about economic policy scares financial markets. It can alienate well-heeled supporters as well as the general public. (Clinton adviser James Carville once noted that, if there was such a thing as reincarnation, “I want to come back as the bond market. You can intimidate everyone.”)
It is worth noting, however, that Bernanke already has headed the Fed for six of the toughest years in its history. He has to be tired. His current four-year term as chair ends on Jan. 31, 2014, even though his current 14-year term on the Board of Governors extends to 2020. No knowledgeable Fed observer would expect him to stay on after his term as chair ends, unless he had the strong, openly expressed support of whomever is president at that time. And he might well prefer to step down in any case.
I consider it highly unlikely that Bernanke would step down before the next inauguration. He has a lot invested in current Fed policy and clearly believes it vital to the nation’s economy. It would be impossible to fill the chair in a short time. Even economists who disagree with Bernanke’s policy choices quail at the idea of a leaderless Fed in the ongoing crisis.
So consider the question of whether or how he could be fired. The Federal Reserve Act has no provision for the president to fire any of the governors. It doesn’t authorize it and it doesn’t prohibit it.
Fed governors, like Cabinet members and federal judges, are appointed by the president and confirmed by the Senate. Cabinet members serve at the pleasure of the president and frequently are asked to step down. But if a president tried to fire a federal judge, it would cause a constitutional crisis of great proportions. Even the firing of several regional U.S. attorneys by the George W. Bush administration grew into a major issue.
There is much less precedent in terms of Fed governors, in part since the modern Fed board has existed only since 1935. Bernanke is only the eighth chairman. But there have been a few relevant historic incidents.
Marriner Eccles, a Roosevelt appointee who wrote the sections of the Banking Act of 1935 that created the Fed’s current structure, also served as a member and chair of the board until 1948. At that time Harry Truman did not reappoint him as chairman, even though his term as governor extended several more years. If Eccles had resigned entirely at that point, his place as a great citizen and central banker would have been untarnished. However, historians will always rate the three obstructionistic additional years he clung to his board post harshly. He did, however, establish a precedent for Bernanke to stay on the board, even if he is not reappointed as chair.
William McChesney Martin, appointed by Truman in 1951, was, in many ways, the greatest Fed chairman ever, and the one who firmly established Fed independence from political pressure. When the Fed’s interest-rate policy displeased Lyndon Johnson, Martin was summoned to LBJ’s Texas ranch to be cursed and screamed at. Johnson also reportedly threatened to call for his resignation. But the canny LBJ knew this would rile financial markets and did not carry through on his threat. And while Martin played his cards close to the vest, he knew all along the threat was empty.
Martin, whose tenure spanned five presidencies, also faced down Richard Nixon. After Nixon’s inauguration in 1969, Martin was summoned to the White House and instructed to step down because Nixon wanted to appoint Arthur Burns, a very distinguished academic economist, to the job. Martin calmly responded that he had no intention of quitting before his term ended a year later. The Nixon administration, also mindful of market reactions, had not announced its move publicly and backed down. Burns did replace Martin in 1970.
Burns hung on for two four-year terms as chairman, similarly stepping down one year into the next administration, even though then-president Jimmy Carter preferred he quit.
These two incidents are close analogies to the current situation: A new president wants to name his own Fed chair, but must fire the incumbent or persuade him to resign quietly. However, neither Nixon nor Carter had made replacing the Fed chair a feature of their campaigns and thus they could back down without any loss of political face.
The precedent is that the incumbent can remain if the new president is unwilling to run the risk of panicking financial markets. In both cases above, the U.S. and global financial systems were far more robust than they are likely to be on the next Inauguration Day. I doubt that Romney or Gingrich would rush in where Johnson, Nixon and Carter feared to tread.
Bernanke could ease their task by choosing to resign as soon as a replacement was named. But don’t count on this happening, as it would establish a bad precedent in terms of Fed independence and Bernanke clearly is a man who is willing to face down tough opposition in defense of policies he thinks vital.
The broader question, then, is who any of the candidates would name to replace Bernanke, even if not before 2014. They can call for change at the Fed, but naming anyone too unorthodox might cause a dangerous stir. It would be a fun game to watch if so much were not at stake.