A weekend article in the Washington Post titled “Stan Fischer Saved Israel’s Economy. Can He Save America’s?” squarely raises the question of who will succeed Federal Reserve Chairman Ben Bernanke if he retires a year from now, as many observers expect. This article is prompted by the speculation that Bernanke is likely to be succeeded by his mentor, Stan Fischer, the retiring governor of the Bank of Israel.
The Post article is loaded with interesting information on the remarkable number of leading economists Fischer has taught at MIT and worked with when he was second in command at the International Monetary Fund, and on the success Fischer has enjoyed in turning the Israeli economy around, but in my humble opinion, it is mistaken in thinking Fischer is in line for this particular appointment. This article will review the issues raised by the two assumptions of the article; first, that Bernanke will not be reappointed, and second, that Fischer will succeed him.
The late Robert Weintraub, a student of Milton Friedman who led the team that drafted the Humphrey-Hawkins Act that restates the Fed’s dual mandate and provides for semiannual reports to Congress by the Fed, used to say that a Fed chairman, regardless of party, will support the re-election of the president, again regardless of party. Then, having achieved this objective, the re-elected president will re-appoint the Fed chairman.
This scenario seemed to play out quite nicely in 2012, when Bernanke, who served under both Presidents George H.W. Bush and George W. Bush, practically enlisted in the Obama campaign, not only by pursuing a highly accommodative monetary policy, known as quantitative easing (QE), but also by making speeches before strategically chosen audiences to explain and defend the policy. The economy was the leading issue in the campaign, and Fed policy helped the administration make the case that the economy had shaken off the Great Recession and was growing again.
So where does the theory break down in this case? First, there’s a good chance that Bernanke’s retirement was understood when he was reappointed in 2010 that he would leave next year. Otherwise, President Barack Obama would spend two terms in the White House without ever appointing a Fed chairman, one of the most significant appointments a president can make.
President Ronald Reagan reappointed his holdover Fed chairman, Paul Volcker, and consequently did not have a chance to appoint his own chairman until 1987, near the end of his second term, when he appointed Alan Greenspan.
The Post article may serve as a means of establishing that Bernanke will in fact retire as chairman. It also suggests that the White House wants to settle the succession issue by the fall, which may or may not be the case, given the propensity of important decisions in Washington to take the shape of cliffs.
Whenever the decision is made or announced, the fact that it would be a crowning career achievement for Fischer to be named would probably be irrelevant. The reason is quite straightforward. Obama already has his next Fed chairman in place, and her name is Janet Yellen, former Berkeley professor, former president of the Federal Reserve Bank of San Francisco and current vice chairman of the Fed.
What would be the point of putting Yellen in place if she would not be promoted to chairman once the seat opened up? Why would Obama pass up the opportunity to appoint the first female Fed chairman? What kind of fallout would occur if she were passed over?
Yellen is known to be a “dove” on monetary policy, consistent with administration policy, although she has given a couple of speeches that indicate there may be a limit as to how far she would go in risking a bout of inflation if the economy actually recovers for a sustained period of time. At least as likely is that she would have to manage a period of “stagflation,” in which the economy grows slowly while a stubborn inflation takes hold.
In her capacity as vice chairman and head of a committee to improve the Fed’s communication on monetary policy, Yellen spoke to the AFL-CIO, a key administration constituency, on Feb. 12. As reported by Bloomberg, she stated that monetary easing might continue even after the stated goals of QE have been achieved. So there is no doctrinal reason why Yellen would not be appointed, and the factors weighing in her favor were probably resolved when she was appointed vice chairman in 2010.
The only reason she would not get the job would probably involve some intervening event that would affect her ability to serve. In that event, the administration would have a large stable of liberal economists from which to choose.
In conclusion, much can happen in a year, but when it comes to the appointment of the next Fed chairman, as of early 2013, the scenario outlined above is more likely than the Fischer appointment proposed by the Post.
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