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Thursday, March 20, 2008

Turnover at the Fed

Justin Fox follows up on the post noting that all of the current Federal Reserve Governors have been appointed by Bush:

Why is the Federal Reserve Board made up entirely of Bush appointees? Because Fed governors don't serve out their terms, by Justin Fox: Mark Thoma points out that the Federal Reserve Board is now stocked entirely with Bush appointees, which isn't really how the Fed is supposed to work. But he doesn't go into why. Fed governors serve staggered 14-year terms, so clearly the idea is to keep any one president from appointing the entire board. But nowadays Fed governors almost always leave before the end of their terms. Or they end up getting appointed for a term that only has two or three years to run. Other than longtime chairman Alan Greenspan, the only Fed governor since the early 1970s who actually stuck around for a full 14 years was Edward W. Kelley Jr., who served from 1987 to 2001. ... Why don't they stick around? Maybe it's the pay--$172,000 a year (the chairman makes $191,300). ... Still, Supreme Court justices make only modestly more ($208,100 a year) and they sure don't quit after four or five years. So maybe it's the work. Much of what the Fed governors other than the chairman spend their time on is not monetary-policy glamor (such as it is) but regulatory drudgery. Also in the Alan Greenspan era, the rest of the Fed governors were mostly just appendages when it came to the big decisions (former Vice Chairman Alan Blinder's frustration with his treatment by Greenspan is well documented). Blinder's former Princeton colleague Ben Bernanke has been pursuing a consciously more collegial approach as chairman than Greenspan. I certainly can't imagine him treating Don Kohn or Rick Mishkin like underlings. So maybe they'll stick around for a while. ... Does the partisan makeup of the Fed matter? I agree with Felix Salmon that there is no clear partisan divide these days on ... monetary policy. ... Where I guess partisan politics could matter most is in matters of regulation. The other three big banking regulatory agencies are more directly controlled by the administration in power (the Office of the Comptroller of the Currency and the Office of Thrift Supervision are part of the Treasury Department, and the FDIC is governed by a board consisting of the OCC and OTS chiefs plus three presidential appointees serving six-year terms). Long-serving Fed governors could presumably try to temper any radical changes in regulatory approach brought on by a new president. Which brings to mind Ned Gramlich, a Bill Clinton appointee who urged tighter regulation of subprime lending. Except that he did this while Clinton was still in office, and was thwarted by another long-serving Fed governor--Greenspan. In any case, though, Congress clearly intended in drafting the Federal Reserve Act for Fed governors to stick around longer than presidents. And now they hardly ever do. Which is mildly disturbing. ...

When people take jobs in the public sector, they know the salary, and in this case the length of the term before they accept the appointment. It's also no mystery what the Fed job is like, so that shouldn't be too much of a surprise either. So the terms of the Fed Governor job are well-known to someone mulling over an offer. Once someone has accepted the job of Federal Reserve governor, it's in the public interest that they remain on the job for the full term - that's what was intended in the system design - and while we can't compel them to serve out their terms, and there are sometimes good reason to step down, I think honor demands that they do their best to serve out the term they signed up for. If that's not possible, if they don't think they can persevere for the full fourteen years, then don't say yes to begin with. This is not motivated by any concern about the current Fed or its actions - sometimes I think that politicians don't understand economics sufficiently to impose ideological preference on Fed appointments anyway - but just because Bush got lucky in his appointments to the Fed doesn't mean every president with a reputation for appointing ill-fitting "Brownies" to important government positions will be so charmed. We should limit the damage that any one president might do.

    Posted by on Thursday, March 20, 2008 at 06:19 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (6)


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