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Not Who Should Lead the Fed, But How

PH2009072203641.jpgSteve Pearlstein has a nice column today arguing that the important question is not who should be appointed — or reappointed — chairman of the Federal Reserve, but how that job is to be structured in the first place.

Whenever the Fed comes under serious attack, as it has recently, its reflexive response is to accuse its critics of jeopardizing the Fed's independence. Yet if you think about it, the greatest threat to the Fed's independence comes not from outside the institution but from a chairman and members who are so anxious to get reappointed that they begin to tilt policy to win favor with the White House or with Wall Street or take on a reluctance to criticize policies that they think harmful to the economy.

There are two easy fixes for this problem. Congress could extend the chairman's term from four years to six but remove the possibility of reappointment. And it could end the current practice of appointing new members of the Fed's board of governors to fill the partial, unexpired terms of governors who leave. All new governors should be appointed to their own 14-year terms, without possibility of reappointment.

At the end, though, he does come down behind Bernanke as the guy best suited to guide the Fed into this new and more collegial era.

Photo credit: Gerald Herbert -- Associated Press

By Ezra Klein  |  August 14, 2009; 11:38 AM ET
Categories:  Federal Reserve , Solutions  
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You could (and possibly should) say the same thing of all politicians.

Posted by: JohnSnider | August 14, 2009 12:15 PM | Report abuse

Wow that's stupid. 1 6 year term means you have to get employment after your term which means you keep more friendly with the bankers who will hire you afterwards.

Posted by: endaround | August 14, 2009 12:32 PM | Report abuse

The vaunted 'independence' of the Fed shouldn't be uncritically accepted as a good thing (Andrew Jackson would like to whisper in your ear).

I don't argue that the Fed should be just another government agency with leadership reporting to the Exec. branch, but having the banks be the sole appointers of the Fed boards (regional and national) is an open invitation to bad outcomes. The Fed board(s) should contain representatives of various public constituencies, not just bankers. When ALL US currency is marked (and issued) as Federal Reserve notes you know this isn't and shouldn't be a private institution.

I do agree with a limits on the Fed chairs term of office. One longish stint seems optimal (maybe six or eight years), and former chairs should be given some federal advisory position to avoid the Wall Street second life for maybe 5 years or so.

The Fed has utterly failed at one of the two major missions given under present law: full employment (the other being stable money and financial institutions). It is arguable whether the Fed has done ANYTHING of value in regard to regulation of member banks. So maybe they should just be a monetary easing/tightening body - with limits, lots of transparency, and accountability to somebody - although Congress isn't prolly that oversight body and the President isn't either. How about to a Philosopher King of Finance to ride herd?

But for sure we should never repeat the Greenspawn thing again with way to many years in power and no body to call the fouls.

Posted by: JimPortlandOR | August 14, 2009 1:44 PM | Report abuse

The problem is that the Fed can't win. If the Fed had jacked up interest rates to kill the housing boom years before the crash, it would have been criticized (by Ezra) for strangling a strong economy and conspiring to keep poor people out of home ownership.

Posted by: tomtildrum | August 14, 2009 2:10 PM | Report abuse

So, under this proposal, if a member's term was set to expire during Obama's presidency, he could resign while Bush was still President to make sure his replacement was more conservative? Sounds like a bad idea.

Posted by: Steven_desJardins | August 14, 2009 3:00 PM | Report abuse

The problem is, as endaround suggests, more complicated than that. Mostly because not all Fed governors or chairmen seem to want that to be their final job. Not nearly everyone serves out a 14-year term. And all of them could make piles more money in the private sector. (Heck, they could do better as university professors with some writing and consulting on the side.)

You would get a far different composition and different results if you did something like the appointment of judges, with a lifetime salary but a bar against employment in the financial industry after service.

Posted by: paul314 | August 17, 2009 10:34 AM | Report abuse

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