Plain Sense Economics

Gregory Mankiw:

I am delighted that President Obama has decided to reappoint Ben Bernanke as chairman of the Federal Reserve. While there is certainly room for reasonable people to question some of the specific decisions Ben has made, in general he has led the Federal Reserve System with humility, intelligence, wisdom, and grace.

yeh – what he said…

Chairman Bernanke still faces tough questions in the Senate, which must approve the nomination. There are thoughtful senators who wish the Federal Reserve (mostly under Alan Greenspan) had been less reliant on market forces and tougher on banking and financial regulation. Their points are worth exploring, though with the infamous 20-20 hindsight it is hard to make good policy as a result. There will be other senators who want to score political points, grilling the chairman on his decisions. As Mankiw says, though, Bernanke took on an incredibly dangerous situation, acted aggressively, and by any standard we could impose, made decisions with the best interests of the domestic and international economy in mind. Reasonable people may differ on the margin, but he was a sterling exception to the inaction taking place in Washington during 2008 and early 2009.

Now – for principles of macroeconomics students… The design of the Federal Reserve System – in particular governance and policy making at the national level is supposed to provide political insulation from those policy makers. Each of the seven governors of the Fed are appointed for 14 years. Some may serve longer if they are appointed to complete someone else’s earlier term. That is what happened with Alan Greenspan, who served from 1987 until 2006. Then the chairman and the vice-chairman are each appointed for four year terms. Those terms lie within the overall term of being a governor, and those terms do not sync with the Presidential terms. President Obama will have had a year in office before Chm. Bernanke’s term as chairman is up. The President makes the appointments (governors and chairman and vice-chairman) and the Senate must give its consent. Once appointed a Fed governor and the two main officers may not be removed from office except under exceptional, usually criminal circumstances.

The Fed Board of Governors play an important role in setting monetary and banking policy. Together with the 12 presidents of the Federal Reserve District banks, they set interest rate targets, and other policy interventions. Fortunately, those decisions are generally made on good technical grounds, without much political influence.

There are people who think our monetary policy should be more directly answerable to elected officials – Congress. It is hard to argue that the governors or the 12 district presidents mirror the U.S. population in any way. Those people are financial and economic experts, who are usually fairly wealthy by virtue of their good judgments in the private sector, and women and people of color are usually under-represented among these officials. Yet, since the 1980s with Paul Volker, we have been fortunately to have smart, thoughtful people holding on to this important tiller for the economic ship.