Dunkelberg: The Politics of the Federal Reserve

Six of the seven Governors of the Federal Reserve System have been picked by President Obama, raising questions about the true diversity of views that will be presented at Board and FOMC meetings.

It wasn’t supposed to work that way, Governors were given 14 year terms to insulate them from “politics”.

Few have served full terms, departing after a few years to pursue more lucrative lines of work (Governors received under $150,000 the last time I checked). Most academic appointees leave after two years (Governor Blinder for example) to retain their tenured positions at academic institutions. Chairman Bernanke chose not to, perhaps making sufficient money from his textbook (which I used as an instructor) to supplement a not so great salary. Doubtless when he leaves his opportunities will be multiples larger.

As a consequence of all the comings and goings, one president has appointed 6 of the 7 Board members (a few earlier nominations to fill vacancies were turned back). Given the tendency of Presidents to appoint “like minded” people to top positions, the possibility of having (or creating) a Board with little diversity in views is high.

This is a very unhealthy outcome for an independent central bank.

Contributing to the possibility that the entire Federal Open Market Committee might become a “one note” policy maker are attempts by Barney Frank and others to eliminate the voting power of the regional Bank presidents or to make them all subject to Presidential appointment and Senate confirmation rather than selection by regional Boards. This would truly “politicize” the Fed, which many politicians unfortunately favor.

It is no surprise that “politicians” lose track of the fundamental logic behind the structure and purpose of an agency such as the Federal Reserve (or the FLRB!) and make appointments of individuals that support a particular political agenda rather than bring appropriate credentials and experience to fit the mission. History makes it clear, especially for central bank independence, this is a bad idea for the country.

William Dunkelberg, Professor of Economics and Former Dean, School of Business, Temple University.