Is Geithner The Next Fed Chairman?

Earlier, I wrote about Obama administration economic advisor Larry Summers' letter (opens .pdf-like document) to Congress. Simon Johnson also wrote about this letter today in an interesting post on the New York Times' Economix blog. After Johnson comments on the letter, he makes a very interesting assertion: Obama will replace Federal Reserve Chairman Ben Bernanke with his own Treasury Secretary Timothy Geithner.

In Johnson's piece, he focuses on the financial regulatory reform aspect of Summers' letter. He says that the reforms suggested are modest. He then asserts that they may have waited too long. With the crisis is abating, lobbyists are successfully urging lawmakers to water down or table the regulatory provisions. Then, he notes that Geithner is becoming extremely frustrated, because he's having trouble convincing anyone that the financial reform the administration has proposed needs to happen.

I agree with all of that, and find his claims relatively uncontroversial. But he continues:

Even the Federal Reserve chairman, Ben Bernanke, does not seem to be on board with reform as proposed by Mr. Geithner and pushed by the White House. It's not clear if Mr. Bernanke has become too close to the banking industry or too captured by his staff, but in any case the Treasury Department feels that he is not sufficiently supportive.

If the administration really wants to put the economy on a path to sustainable bubble-free growth, it looks increasingly likely that it will want to replace Mr. Bernanke when his term is up early next year.

Despite the vast majority of economists believing that Bernanke will be kept around next year, I have long been skeptical of the Obama administration's willingness to keep him. I have argued that Obama would rather have one of his cronies in there who he knows he could trust. Johnson's rationale is a variation on that tune, specifically citing Obama's regulatory goals as an example of why one of his team would be better suited for the job.

Johnson's thinking seems generally in line with my own on this matter. Not everyone will agree, but the rationale explained is clear enough. What I find far more controversial than Johnson's claim that Bernanke might get sacked is who he names for his likely replacement:

Secretary Geithner is the most plausible replacement. He was previously head of the New York Fed and vice chairman of the Federal Open Market Committee, so he knows the system intimately. He has spearheaded all the financial rescue efforts of the past few years; better than anyone he knows what went wrong. The markets see him as a safe and friendly pair of hands.

And increasingly, if he wants any kind of real reform, it looks as if Secretary Geithner will have to go to the Fed and implement it himself.

That, I think, would be a huge shake-up. It would also be a fascinating move. He's essentially saying that Geithner would get the job in order to ensure that the Obama administration's financial regulation is implemented, whether Congress likes it or not.

I wondered just whether Geithner would have the power to accomplish these goals, even as Fed chairman. After all, the Federal Reserve Board is not a dictatorship. So I consulted someone who knows more about the Fed than I do, former president of the Federal Reserve Bank of Dallas and former member of the Federal Open Market Committee, Robert McTeer.

He says, "Influence is more to the point than power." The Board of Governors (not the FOMC) is responsible for regulation. "It's not the usual political type influence, it's a very collegial thing," he adds. "It's more who's persuasive in an open discussion." That means that Geithner could manage to persuade the other Governors to go along, but that he would still need the other governors on board. But McTeer also notes that the group tends to be homogenous and unified. So Geithner's influence there could be significant.

As for Johnson's theory, McTeer has his doubts. For starters, he says, "I think the president would be crazy to replace Bernanke." He believes Bernanke has done a great job at managing the financial crisis. He also believes that Bernanke has better credentials for the job. Although Geithner was president of the New York Fed, Bernanke is a more learned student of monetary policy and more of a high level macroeconomist than Geithner.

Finally, McTeer also believes that Bernanke is a team player, particularly in this instance. He does not believe that Geithner would be all that much more effective at bringing regulatory changes than Bernanke could be. He admits that Geithner might be more vocal, but does not believe that Bernanke's fundamental views are all that different from Geithner's.

For what it's worth, I agree with everything McTeer said. I also have my doubts about Johnson's theory, mostly because I think it would be a huge shake-up for the Treasury to bear. You might recall that it was a challenge getting Geithner installed there in the first place and an even greater challenge to ramp up his staff. In early 2010, just when the economy is beginning to show signs of real recovery, would you really want to jeopardize the Treasury's stability? After all, a new Fed chairman pick would already make waves the Federal Reserve at that time. Shaking up both bodies seems like a little too much change, even for Obama.

That's why, if Obama does decide to replace Bernanke, I think he would choose someone else who champions his regulatory aspirations. And I still think that his most likely ally chosen for the job would be Summers, his chief economic advisor.