The Most Important Economic Story Nobody Is Talking About

By failing to appoint new members to the Federal Reserve, Obama has failed the economy


Behind every great president stands a great central banker. Ronald Reagan had Paul Volcker. Dwight Eisenhower had William McChesney Martin. And FDR had, well, FDR.

There's a corollary. Behind every great central banker stands a great central banking committee. Or at least a pliant one. It's this latter reality that President Obama still has not quite recognized. And this malign neglect of most matters monetary has added a wholly unnecessary degree-of-difficulty to the economic recovery.

Here's a depressing reminder: We're in a $1 trillion hole. That's how much income we have been losing every year since the onset of the Great Recession. Ben Bernanke and Co. have done a good job preventing a full-on replay of the Great Depression, but Ben Bernanke and Co. have not done a good job preventing a lost decade. The key phrase here is "and Co."

Bernanke doesn't set monetary policy by himself. That's what the Federal Open Market Committee (FOMC) votes on. Its structure is a bit Byzantine and not terribly important, but what is important is that the Fed Chairman usually gets his way without any dissent. That hasn't been true lately. The Fed's unconventional measures have unsurprisingly not been too popular with the FOMC's more conventional members. Unfortunately, that hasn't stopped Bernanke from trying to reach a consensus. He thinks he needs to. Bernanke recently told Roger Lowenstein that he thinks any policy that doesn't get at least a 7-3 majority simply won't be credible. This political calculation gives the hawks more policy influence than they would otherwise have.

And now it looks like there are more hawks. As Greg Ip of The Economist has pointed out, most of Bernanke's colleagues now want to raise rates before he does. He increasingly looks isolated. Even if Bernanke is inclined to ease a bit more -- and reading between the lines, he might be -- there's little chance of it happening. It's worth remembering that even the hawks project inflation to remain below target and unemployment to remain above target for the next few years. If the Fed believes its own forecasts, it should be doing more.


I've left out a fairly important detail. There are two unfilled seats on the FOMC. President Obama's picks for those positions have been among the victims of the endless Republican obstruction in the world's greatest deliberative body. There's a simple solution. Obama could just bypass the Senate with recess appointments. That's what he did for the Consumer Financial Protection Bureau (CFPB) and National Labor Relations Board (NLRB). Why not do the same for the Federal Reserve (or the Federal Housing Finance Agency)?

There's no good reason not to. The administration's rationale is that Republican obstruction over the CFPB and NLRB was particularly pernicious -- that it amounted to de facto nullification. Hence, the extraordinary recess appointments for just those vacancies. But even if that's true, who cares? It's hard to run the government if it's not staffed. So staff it! More importantly, there's little Obama can do that might help the economy more than sending Bernanke a few more friendly faces on the FOMC.

Regrettably, the Obama administration has consistently underestimated the importance of the Fed. That there are still two empty FOMC seats proves as much. So do the administration's (blocked) nominees. Consider Peter Diamond. He's a phenomenal economist -- a Nobel-prize winner -- who's clearly qualified to serve on the FOMC. But he's said that he doesn't think there's much more the Fed can do now. Even if he's right -- and I clearly don't think he is -- wouldn't you rather appoint someone who thinks otherwise and find out if the Fed really is powerless? Someone like ... former Council of Economic Advisers Chair Christina Romer.

Let's try pushing some more before we declare that we're pushing on a string.


Sending Bernanke some reinforcements wouldn't be some economic panacea. Fed policy actually might not change all that much. But it could shift the FOMC's bias away from hiking and back towards easing, which its forecasts say it should be doing. That potential benefit is worth the cost -- which is approximately zero. (Remember the steep political price Obama paid for his previous recess appointments? Neither do I).

We tend to overlook monetary policy when we judge presidents. It's only natural that we think about presidential accomplishments in terms of things the president, you know, actually does. So we talk about how Reagan unleashed the supply side revolution, Eisenhower balanced the budget, and FDR's New Deal turned the tide against depression. But none of that would have been possible without good central banking. Reagan wouldn't have whipped inflation without Volcker. Eisenhower's postwar boom wouldn't have been quite so strong without Martin's fiercely independent Fed. And FDR might not have broken the psychology of deflation had ... FDR not devalued against gold. (Okay, FDR deserves heaps of credit).

It's hard to have a great presidency without great central banking. It's a necessary, but not sufficient condition. Just ask Herbert Hoover or Jimmy Carter. That's company Obama should be terrified of joining.