What Difference Does It Make Who Runs the Fed?

It's a personality, not policy, contest


As this week's release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.

The second gear syndrome of our current economic life doesn't sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.

Instead, in Washington at least, the economic discussion is currently dominated by the debate over who will be the next chair of the Federal Reserve. The story has the perfect makings of a Washington horse race. The lead contender, Larry Summers, engenders passions both for and against, while the main challenger, longtime Fed governor Janet Yellen, has captured the anti-Summers vote. Meanwhile, former Fed governor and current head of TIAA-CREF Roger Ferguson, has emerged as a compromise candidate, though no one is quite clear how his name first surfaced, and the New York Times is reporting Obama is interviewing only three people -- Summers, Yellen and Donald Kohn, a former Fed vice chairman.

But does it really matter who the next chair of the Federal Reserve is? The answer, of course, is both yes and no. On the yes front, the Fed has assumed a central role in political life. The role of Fed chairman has become progressively more important since the 1970s when Arthur Burns was deemed to have failed to stem inflation and when his successor Paul Volcker was deemed to have tamed it. Then Alan Greenspan transformed the position into a latter-day Delphic oracle, while his successor and current chair Ben Bernanke assumed a pivotal role in managing the 2008-2009 financial crisis and in unleashing a new form of easy money known as "quantitative easing."

That said, who leads the institution may be less important than we think. Of course, focusing on the who rather than the what is an endemic issue to politics. Political reporting skews toward the personalities jockeying for position, and the coverage of the next Fed chairman bears much in common with campaign season reporting. Summers in particular is a delicious subject because of his outsized personality and history of out-of-the-box quips. Yellen, with her long career as a bank regulator, offers little of that, and so makes the perfect narrative foil.

But while they represent different personalities, it's not clear that they -- or any viable candidate -- would represent different policies. Yes, there are those who believe that the Fed has not only overreached in its policies of "quantitative easing" but have endangered the financial system and set the stage for dangerous inflation and instability down the road. If one of Ron Paul's acolytes managed to become chair of the Fed -- a scenario that is currently inconceivable -- he or she could well begin to dismantle the entire system that began in 1913. But anyone who stands a chance being nominated is likely to accept the basic parameters of the job and to support the dual mandate of the institution to maintain price stability and strive toward full employment.

Perhaps even more important, the Fed doesn't exist in a global vacuum. Ben Bernanke has championed a policy of easy money and accommodative rates, but so has every major central bank in the world, including the notoriously conservative European Central Bank. Now, you could argue that in the case of the ECB, personality has mattered, and ECB head Mario Draghi was much more aggressive in addressing the possible breakdown of the Euro than was his immediate predecessor Jean-Claude Trichet. That said, Draghi only embraced what every other central bank in the world embraced, which makes Trichet, rather than him, the exception.

Many believe that today's central bankers are an arrogant lot who are repeating the same sins as the bankers of the 1920s and setting the stage for an impending implosion of the financial system much more dire than the dry-run of 2008-2009. For them, none of the current candidates are acceptable, and the changing of the guard represents an opportunity to raise the alarm yet again.

For others, the contest over who is to replace Bernanke is a way to reopen debates over the post-crisis reforms such as Dodd-Frank and the overall regulatory framework. After all, the Fed doesn't just set monetary policy; it regulates the large financial institutions that were at the heart of the financial crisis.

Even here, however, the Fed doesn't exist alone. It is part of a lattice of institutions, many of them international, which have been working to address systemic risk and anemic growth. These institutions, dominated by technocrats rather than politicians, successfully contained the 2008-2009 financial crisis, kept the euro crisis from becoming a global panic in 2011, and have maintained a stable and functional global financial system. That isn't the same as growth or prosperity, but stability is far preferable to collapse. And for those who believe that today's stability is the financial equivalent of Europe in July of 1914, they can't argue that the current period is unstable; they can only say ominously, "just wait."

Yet it is the collective action of these institutions and systems rather than any one person that have generated today's stability. The Fed is important but it is not alone, and the next chair of the Federal Reserve will be embedded in a system that responds aggressively only when prompted by a crisis. None of the people who will replace Bernanke will upend that system. The only question is whether they will be able to respond with creativity, nimbleness and alacrity if another crisis unfolds during their tenure. There, as well, the distance between the current candidates is negligible. They are all, to one extent or another, products of a dynamic, technocratic system that has done better than most political establishments in attending to the needs of the common people.

This is a rare case where a functional system is producing competent candidates -- unless you believe that the system is about to implode despite its ostensible stability. If so, then it also doesn't matter who replaces Bernanke, because we are headed into the abyss anyway. But if we are headed toward some uncertain but more constructive future, we can focus on the challenges that remain rather than obsess over the people who will face them.