Will the 2012 presidential election affect the Federal Reserve in any way? If so, why aren’t we talking about it? Those astute questions from a reader illustrate the craziness of contemporary U.S. politics.
Over the past five years, actions by the Fed have been more important than any other economic policies. Moreover, just 18 months from now, we will have a new chairman of the Fed’s Board of Governors to replace Ben Bernanke.
Mitt Romney, the presumptive Republican presidential nominee, affirmed Friday, Aug. 24, that he would not appoint Bernanke to a new term as chairman. And for a variety of reasons, it’s unlikely Bernanke would be reappointed by President Barack Obama if Obama wins re-election in the fall.
Yet the whole issue of the Fed, its leaders and of appropriate monetary policy has been conspicuously absent from the campaign since the end of the Republican primary contests. So will the election really make any difference?
One possible answer is no; that in practical terms, monetary policy is pretty nonpartisan and that it really doesn’t matter who is in the White House at any particular time. The 1935 amendments to the Federal Reserve Act that created the modern Board of Governors specifically sought to insulate the oversight body from political influence. The staggered 14-year terms are designed insure that no president can appoint a majority of the seven governors until the end of a second term.
Moreover, outside of making pious pronouncements about the need to control inflation or the benefits of low interest rates, the president has no power to tell the board or other Fed officials on the policymaking Federal Open-Market Committee to do anything. Thus, if the president has no power over monetary policy, there is no reason to spend any time on it in the campaign.
A variation of the “it doesn’t matter” argument is that, as with Supreme Court appointments, prior knowledge of a candidate’s views gives little indication of how they will act. Fed chairman William McChesney Martin, named by Democrat Harry Truman, followed policies that angered Truman and Lyndon Johnson, another Democrat. He got along fine with Republican Dwight Eisenhower and Democrat John Kennedy and defied a request from Republican Richard Nixon to step down before his term ended.
However, none of this, nor Martin’s policy stances, could have been predicted before his appointment. His resume included being head of the New York Stock Exchange and leading the Export-Import Bank. He was not well known before his appointment.
Arthur Burns, his successor, was a famous economist who had a reputation as a hard money man. But he presided over the greatest peacetime inflation in U.S. history. Paul Volcker, Burns’ successor, was virtually unknown by the general public when Democrat Jimmy Carter appointed him in 1979. His tight money policy pushed the economy into recession and cost Carter the 1980 election, but by the time the Reagan administration pressured him out in 1987, Volcker had returned the nation to price stability.
Alan Greenspan was a well-known business economist who, like Burns, had a reputation as an anti-inflation hawk. He was appointed by a Republican, Ronald Reagan, and was reappointed as chairman by three other presidents, including Bill Clinton, a Democrat. Yet it was Greenspan who benignly presided over the inflation of the greatest financial bubble in a century.
Bernanke, a moderate Republican, was appointed by a Republican. But now many identify him with the Obama administration and most Republican candidates at various levels criticize him harshly.
Nevertheless, even if it is hard to predict how a given candidate will lead the Fed, particularly in a crisis, history does show that in crucial times, the chairman’s leadership matters.
So what kind of candidates might Obama or Romney name?
For Obama, the answer is pretty easy. He probably would nominate someone very much like Ben Bernanke, a distinguished academic economist who thinks that the Fed should act not only to forestall inflation, but also to curb recessions and high unemployment. He would name someone moderate and mainstream who would not frighten financial markets on Wall Street or anywhere else.
What would Romney do? This is harder to answer. Romney has criticized Bernanke in generic terms.
But he is no Ron Paul, who thinks the U.S. should abolish the Fed. Romney has perhaps the deepest Wall Street roots of any presidential candidate in U.S. history and he would not appoint any bomb-thrower.
However, one thinks that when he appoints someone to replace Bernanke when the chairman’s term ends in January, 2014, that he would like to put his own stamp on the board. So what might he do?
We perhaps can turn to his running mate, Rep. Paul Ryan, for answers. Ryan has been an articulate critic of Bernanke, giving him a hard time during the chairman’s congressional appearances. And Ryan has called for a change in the Fed’s mandate, removing the legal requirement that it consider unemployment to focus solely on controlling inflation.
This would mimic the “single mandate” enjoyed by the old German Bundesbank that many conservative economists admire.
So if Romney followed Ryan’s instincts, he would name an economist or financier who would demur from using monetary policy to try to increase economic growth or lower unemployment. And, given the demands of the Republican base, any Romney appointee would have to oppose government bailouts of financial institutions. In other words, he would have to reject the role of the central bank as a “lender of last resort.”
The knotty question is how far Romney could go in this direction without scaring financial markets.
Leaders of large financial institutions may talk a good line about less government intervention in the economy, but they have become very reliant on the Fed, both as their backup in emergencies and as a supplier of liquidity.
When push comes to shove, this appointment would pose much knottier problems for a President Romney than for a President Obama.