The Obama administration has repeatedly complained about Republican blocking tactics in the Senate. In this context, it is worth remembering that the Democrats blocked President Bush’s last three nominees to the Federal Reserve Board. The Democrats calculated that a member of their party might win the White House in 2008, and why not wait in the hopes that a Democrat could shape the Federal Reserve for a generation to come?
This bet paid off in that the seven-member board is now comprised entirely of Obama appointees. Moreover, Fed member terms are for fourteen years, so a president’s choices may influence monetary policy long after he has left office.
Does any of this matter? Yes, the Federal Reserve has more power over the economy than the president himself. But isn’t monetary policy a non-partisan affair? Surely Fed members don’t operate with R’s or D’s on their backs.
Actually, the idea of appointing non-partisan Fed members is even more of a fairy tale than the similar idea of appointing non-partisan judges. No one doubts anymore that the appointment of a Supreme Court Justice is about politics. The illusion has persisted a little longer that we just need “good people” at the Fed, regardless of political and economic orientation, but illusion it is. As in the rest of politics, the Fed represents a battle between ideas and special interests.
The pretense of non-partisanship lasted longer at the Fed because until recently both Republicans and Democrats largely agreed about what they wanted from it. With the exception of Ronald Reagan, they were Keynesians who wanted more dollars printed and lower interest rates, because that was seen as the route to getting elected or re-elected–and why worry about the long run consequences, since as Keynes pointed out, “in the long run we are all dead.”
This is now changing. Republicans succeeded in blocking Obama’s nomination of radical economist Peter Diamond to the Fed in 2011. After Democrats invoked the “nuclear option” of restricting the filibuster, Republicans could no longer repeat this performance. However, 28 of them voted against Obama’s nomination of Janet Yellen to be the new Fed chairman. Only eleven of them voted to confirm: Flake (R-AZ), Kirk (R-IL), Corker (R-TN), Coburn (R-OK), Collins (R-ME), Coats (R-IN), Chambliss (R-GA), Burr (R-NC), Alexander (R-TN), Ayotte (R-NH), and Murkowski (R-AK).
Bob Corker (R-TN) exemplifies the confused Republican of today. He grasps that current monetary policy favors endless expansion of government control over the economy, with huge pay-offs to Wall Street and other special interests along the way, but falls for the circular argument that Fed members are “well qualified” precisely because they come from Keynesian university economics departments, government, or Wall Street.
In retrospect, there was something notable about George W. Bush’s last three appointees to the Fed board–the ones that that were blocked by the Democrats. None of them had advanced degrees in economics. This was a throw-back to the old days when Fed appointees were rarely academic economists, but a sharp departure from current practice, when most are.
Respected financial writer Jim Grant jokes that today’s Fed has replaced the gold standard with the “PhD standard.” The problem, of course, is not PhDs, but the economics departments they are coming from, and the lack of common sense in those departments. The PhD standard has given us the likes of the last Fed chairman, Ben Bernanke, who bet the future of the US and indeed the world on a completely unproven and untested economic theory while literally smirking at those few unintimidated souls who, like Congressman Ron Paul, dared question him.
President Obama has now given us three more nominees to the Fed, and the Senate has had a chance to interview them. The first and most important is Stanley Fischer, aged 70, nominee for vice chairman as well as a regular member.