What difference does it make who runs the Fed?

August 2, 2013

As this week’s release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.

The second gear syndrome of our current economic life doesn’t sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.

Instead, in Washington at least, the economic discussion is currently dominated by the debate over who will be the next chair of the Federal Reserve. The story has the perfect makings of a Washington horse race. The lead contender, Larry Summers, engenders passions both for and against, while the main challenger, longtime Fed governor Janet Yellen, has captured the anti-Summers vote. Meanwhile, former Fed governor and current head of TIAA-CREF Roger Ferguson, has emerged as a compromise candidate, though no one is quite clear how his name first surfaced, and the New York Times is reporting Obama is interviewing only three people — Summers, Yellen and Donald Kohn, a former Fed vice chairman.

But does it really matter who the next chair of the Federal Reserve is? The answer, of course, is both yes and no. On the yes front, the Fed has assumed a central role in political life. The role of Fed chairman has become progressively more important since the 1970s when Arthur Burns was deemed to have failed to stem inflation and when his successor Paul Volcker was deemed to have tamed it. Then Alan Greenspan transformed the position into a latter-day Delphic oracle, while his successor and current chair Ben Bernanke assumed a pivotal role in managing the 2008-2009 financial crisis and in unleashing a new form of easy money known as “quantitative easing.”

That said, who leads the institution may be less important than we think. Of course, focusing on the who rather than the what is an endemic issue to politics. Political reporting skews toward the personalities jockeying for position, and the coverage of the next Fed chairman bears much in common with campaign season reporting. Summers in particular is a delicious subject because of his outsized personality and history of out-of-the-box quips. Yellen, with her long career as a bank regulator, offers little of that, and so makes the perfect narrative foil.

But while they represent different personalities, it’s not clear that they — or any viable candidate — would represent different policies. Yes, there are those who believe that the Fed has not only overreached in its policies of “quantitative easing” but have endangered the financial system and set the stage for dangerous inflation and instability down the road. If one of Ron Paul’s acolytes managed to become chair of the Fed — a scenario that is currently inconceivable — he or she could well begin to dismantle the entire system that began in 1913. But anyone who stands a chance being nominated is likely to accept the basic parameters of the job and to support the dual mandate of the institution to maintain price stability and strive toward full employment.

Perhaps even more important, the Fed doesn’t exist in a global vacuum. Ben Bernanke has championed a policy of easy money and accommodative rates, but so has every major central bank in the world, including the notoriously conservative European Central Bank. Now, you could argue that in the case of the ECB, personality has mattered, and ECB head Mario Draghi was much more aggressive in addressing the possible breakdown of the Euro than was his immediate predecessor Jean-Claude Trichet. That said, Draghi only embraced what every other central bank in the world embraced, which makes Trichet, rather than him, the exception.

Many believe that today’s central bankers are an arrogant lot who are repeating the same sins as the bankers of the 1920s and setting the stage for an impending implosion of the financial system much more dire than the dry-run of 2008-2009. For them, none of the current candidates are acceptable, and the changing of the guard represents an opportunity to raise the alarm yet again.

For others, the contest over who is to replace Bernanke is a way to reopen debates over the post-crisis reforms such as Dodd-Frank and the overall regulatory framework. After all, the Fed doesn’t just set monetary policy; it regulates the large financial institutions that were at the heart of the financial crisis.

Even here, however, the Fed doesn’t exist alone. It is part of a lattice of institutions, many of them international, which have been working to address systemic risk and anemic growth. These institutions, dominated by technocrats rather than politicians, successfully contained the 2008-2009 financial crisis, kept the euro crisis from becoming a global panic in 2011, and have maintained a stable and functional global financial system. That isn’t the same as growth or prosperity,  but stability is far preferable to collapse. And for those who believe that today’s stability is the financial equivalent of Europe in July of 1914, they can’t argue that the current period is unstable; they can only say ominously, “just wait.”

Yet it is the collective action of these institutions and systems rather than any one person that have generated today’s stability. The Fed is important but it is not alone, and the next chair of the Federal Reserve will be embedded in a system that responds aggressively only when prompted by a crisis. None of the people who will replace Bernanke will upend that system. The only question is whether they will be able to respond with creativity, nimbleness and alacrity if another crisis unfolds during their tenure. There, as well, the distance between the current candidates is negligible. They are all, to one extent or another, products of a dynamic, technocratic system that has done better than most political establishments in attending to the needs of the common people.

This is a rare case where a functional system is producing competent candidates — unless you believe that the system is about to implode despite its ostensible stability. If so, then it also doesn’t matter who replaces Bernanke, because we are headed into the abyss anyway. But if we are headed toward some uncertain but more constructive future, we can focus on the challenges that remain rather than obsess over the people who will face them.

PHOTO: Janet Yellen is sworn in as a Federal Reserve Board governor by U.S. Federal Reserve Chairman Ben Bernanke (L) in the Board Room of the Eccles Building in Washington October 4, 2010. REUTERS/Britt Leckman/U.S. Federal Reserve/Handout 


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All these countries are involved in a lattice or web of a few institutions, and most if not all of them are multi-national, they are the very ones who have been working to cause the systemic risk and anemic growth to America. These institutions intentionally caused the 2008-2009 financial crisis, and contained it by stealing money from Americans and “redistributed money” into their own pockets mostly, or took it to foreign countries and started a WAR or exploited the natural resources of that country with our money and security by our US Military. 80% of Americans do not have a “stable and functional financial system.” To me collapse is much more preferable. These players have no respect or mercy on the American public. Only when they are the ones that lose their money can things be different. And as far as I can tell, Bernanke is just setting us up for another bail out to his buddies before he leaves office.

Posted by 2Borknot2B | Report as abusive

It is enjoyable to read this astute and logically rationalized assessment of the state of the Fed and our economy in general as influenced by the powers-that-be.

However, it seems that the One Percenters, the Plutocracy, is firmly in control. The creation of massive amounts of cyber-dollars by the Fed has worked well to support some of the prime investment targets of the rich and super rich. Bernanke has even commented on it with the hope that this profligate “printing of money” (his words) will help the 99%. It has had little effect for five years, so the best thing to do is keep doing what has failed. One definition of insanity is to keep repeating that which has failed.

At least the Third Depression (a Paul Krugman term) hasn’t gotten as bad as it could have been. Congress and the Executive Administration seem to be thrilled with all the MacJobs that have been created since the beginning of the latest depression.

“Let them [the Pee-Ons] eat cake!”

Posted by ptiffany | Report as abusive

Real reform = fixed money supply enshrined in constitution. The next guy will just be another puppet who prints money, gives it to the banksters, who loan it to the 1%, who outsource or mechanize and funnel the proceeds through tax havens.

Posted by BidnisMan | Report as abusive

I read The Age of Turbulence cover to cover and while Greenspan claimed to be independent of mind it was clear that when presidents spoke he ‘mostly listened’. Anyone who can be fired by someone is never independent of the person.

Posted by BidnisMan | Report as abusive

“The only question is whether they will be able to respond with creativity, nimbleness and alacrity if another crisis unfolds during their tenure.”

it’s not the only question…….

2.] What will the country do as the Fed continues it’s headlong battle to create asset bubbles.

3.] what will the concentration of wealth, as envisioned by the Fed, lead to?…

Posted by Robertla | Report as abusive

This writer really loves to ‘hear himself speak’ as it were. 1500 words on a nothing subject and no conclusion? Of course it matters because it’s a signal to investors. Summers is a loose money guy, Yellen is certainly not. Summers lives to give BJs to power, Yellen certainly not.

The only real reason Summers in being considered (his stint as Treasury Secretary and Harvard should have IMMEDIATELY disqualified him vis gross incompetence) is because he served as a special advisor to Obama. In private Summers must have said enough of the things Obama wanted to hear to get his attention. Let’s hope Obama has enough sense to kick this clown to the curb…

Posted by CDN_Rebel | Report as abusive

No, it doesn’t matter who the fed is. As long as the power bases in Washington are there, it won’t matter. Term limits for congress and campaign finance reform are the only things that will fix anything.

Posted by tmc | Report as abusive

The Fed has…”done better than most political establishments in attending to the needs of the common people.” That is pathetic. We live in a consumer based economy where 70% of the GDP is from consumerism. Yet the actual living wages for the majority has been heading downwards for years, and since the crash of 2008 that downward spiral for the majority has accelerated. In 1968 inflation adjusted dollars today’s minimum wage would be $10.74, and corporate international, who is hoarding their trillions, will fight any raise for the masses that drive the same economy they need to increase the GDP. Blame Washington, blame the Fed, blame the too big to jail financial institutions, but the facts remain the same. If people have more they spend more. In a consumer based economy, the solution is not rocket science.

Posted by anotherfakename | Report as abusive

And then there’s the issue of economic infrastructure. Cyber threats both local and foreign (ref: http://vpnexpress.net) pose a greater threat today than ever before, and the vulnerability of or key infrastructure is weakening fast. Plus, the way that NSA surveillance programs have imposed on other countries and businesses does not help investment and business relations. It matters greatly who will now don the cap to preserve this portion of economic and political influence.

Posted by AHRoberts | Report as abusive