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Regardless of who wins the 2012 U.S. presidential election, President Barack Obama will end his first term having decisively shaped U.S. monetary policy for at least the next two decades. Thanks to a stroke of lucky timing -- the Federal Reserve Board happened to have an unusually high number of vacancies during the president's first term -- Obama will have either appointed or reappointed every single one of the seven members of the Federal Reserve's Board of Governors, including its chairman, Ben Bernanke, by the end of 2012. With the governors each set to serve a 14-year term, they will ensure Obama's long-term impact on the U.S. economy.
Bernanke was originally appointed board chair by President George W. Bush in 2006. In 2010, Obama reappointed him until 2014. Even if Obama or his successor stripped him of that role, he will continue to sit on the board until 2020. Janet Yellen, the economist and vice chairman of the Fed board, whom Obama appointed in April 2010, is set to serve until 2024. Daniel Tarullo, a professor of law at Georgetown University whom Obama appointed to the Fed board in January 2009, is not scheduled to step down until 2022.
Two of the other governors, Elizabeth Duke and Sarah Bloom Raskin will serve until 2012 and 2016, respectively. That means Obama will certainly be able to reappoint or replace Duke and might be able to do the same with Raskin, locking in his picks until 2030. Finally, the two last seats on the board are currently vacant because Obama's nominations have been held up in the Senate. If those two are appointed this year, they will stay at the Fed until 2026.
The seven Federal Reserve Board governors wield enormous influence over U.S. economic policy. They hold a majority on the Federal Open Market Committee (FOMC), the Fed body that guides monetary policy by determining the key short-term interest rates and deciding when to buy government debt, thereby influencing the long-term interest rate as well. The FOMC consists of 12 voting members: the seven Fed governors and a rotation of four of the 12 representatives of the regional Federal Reserve banks, plus a permanent vote for the representative of the New York Federal Reserve (the regional presidents are selected in part by the Fed governors themselves). This means that Bernanke and his colleagues have the final say on U.S. monetary policy as long as they vote together. And in general, they have done so: Dissenting votes on decisions about the key short-term rate have usually come from the ranks of regional presidents, whereas the Fed governors have acted as a bloc.
Obama's shaping of the Fed is all the more notable considering the United States' current dire economic circumstances. Very loosely, the job of a central bank is to try to balance between keeping inflation low and keeping unemployment low. In the past few decades, that was an easy task. In the 1980s, former Fed Chairman Paul Volcker seemed to break inflation's boom and bust cycle, ushering in what was thought to be permanent low inflation. That decade and the one that followed happened to be coupled with very high growth. Making monetary policy was thus relatively straightforward.
But now and in the coming years, inflation is likely to increase even as economic growth continues to lag and unemployment stays high. What to do about these problems has already become a contentious, partisan debate. In the past few years, the United States has made scant headway curbing inflation and generating healthy growth, and not for a lack of trying. What little progress there has been has come on top of vast fiscal and monetary stimulation, including the Fed's decision to lower its key interest rate to near zero, which it had never done before.
In the next few years, Obama will want to continue fighting off the recession's hangover by doubling down on current policy. He will want to see the Fed keep the key interest rate near zero. U.S. debt is barely serviceable even at the current low interest rate. If interest rates were to increase sharply, the chances of a default would become even higher. Beyond that, many companies and households could go into bankruptcy. Second, and as usual during an election year, he will favor loose monetary policy -- as much currency in circulation and available to businesses and citizens as possible -- to stimulate the economy in the short term. In normal times, loose monetary policy and low interest rates are synonymous. These days, however, loose monetary policy can entail much more, for example, propping up the housing market and buying of government debt.
As expected, the Fed board seems generally ready to fall in line with Obama's favored policies. Bernanke and Yellen have advocated for a very loose policy for years to come, meaning that they would keep the interest rate extremely low for a long period and buy more government debt as needed. In response, Republicans have attacked the Fed and its chairman in an unusually straightforward way. Rick Perry, one of the former Republican contenders for the GOP presidential nomination this year, even accused Bernanke of treason. For their part, the Republicans would like to see a tighter monetary policy because they claim that the Fed, by buying government debt, is not putting enough pressure on Washington to tackle its deficit. Moreover, some believe that the Fed's loose monetary policy will fuel inflation down the road. Even if they win the election, however, they will not get the policies they want.
In a sense, what Obama has been able to do with the Fed is similar to what George W. Bush did with the Supreme Court. By dint of good timing, Bush was called on to appoint three out of nine Supreme Court justices. His selections tilted the court right, making one of the most conservative in history. Obama is now directly confronting that legacy as the court hears the case against his administration's health-care legislation.
And therein lies a problem. It is questionable whether so much partisan influence over supposedly neutral institutions is a good thing. Certainly many judicial and political scholars think that the Supreme Court is too politicized. Similarly, a large body of research, including by us, shows that central bank independence is one of the biggest factors driving low and stable inflation. The explanation is that left-leaning politicians such as Obama tend to pursue too loose a monetary policy when they have the opportunity to do so, since liquidity stimulates economic growth in the short term. (Of course, in the medium to long term, that liquidity fuels high inflation.) And right-leaning politicians are averse to inflation and hence demand a much more restrictive monetary policy. An independent and less partisan Federal Reserve could better balance these two extremes.
Politicization of the Fed board also hurts the reserve's standing at home and abroad. The effectiveness of its monetary tools is based on the confidence financial markets have in the institution. If its reputation takes a hit -- if the world starts to believe it is less an independent technocratic body than a battleground between Republicans and Democrats -- so, too, will its ability to do its job.
In the coming years, with the U.S. economy in trouble, vicious clashes between various branches of the government are likely to become the norm. Imagine some Republican president moving into the White House in January 2013, or even January 2017, perhaps with majorities in both the House of Representatives and the Senate. He would face a Fed whose Board of Governors, and thus the FOMC, is dominated by Democratic appointees. The current deadlock in Congress would be replaced with one between the White House and Congress on one side and the Fed on the other. This would surely result in uncoordinated, or even incoherent, monetary and general economic policies -- and all at a time when the United States needs cooperation more than ever.
Obama's stacking of the Fed has escaped the attention of virtually everyone, including those who are vying to take over the White House in November 2012. During debate among the Republican presidential candidates, the front-runner Mitt Romney said that he would not keep Bernanke in office. "I would choose someone of my own," he explained. His seven simple words indicated that monetary policy will be crucial in the coming years, but they also demonstrated that many in the United States are not aware of the fact that the Fed, much like the Supreme Court, will be untouchable for a long time. Romney could put in "one of his own" only if he gets elected in 2016. And even then, the Fed would still be dominated by Democratic appointees. As it seems highly unlikely that one party will control both the White House and Congress, regardless of who becomes the next president, the United States can expect a deadlock in Washington that will make the current deadlock look like a child's game.
*An earlier version of this article incorrectly identified Sarah Bloom Raskin as a George W. Bush appointee.