Monday, August 30, 2010

The Fed and 2010

Matt Yglesias hides an important point at the bottom of a post:
One can’t know for sure if current policy would be different if the Obama administration has acted more expeditiously to fill the still-extant Fed vacancies, but it seems plausible that it could be. I doubt that any political reporters in America are going to put “failure to prioritize Federal Reserve vacancies” high on their list of post-election “why the Democrats lost so many seats” articles, but the issue deserves very high placement in my view. 
I'm afraid I know virtually nothing about the internal governance of the Fed, so I'm not going to be able to add anything to that,  other than it certainly couldn't have hurt Obama to have filled the vacancies promptly.  But of course the more obvious point is that we know that the Fed Chair matters a lot to Fed policy, and as far as anyone can tell Obama re-appointed Ben Bernanke without assuring himself that Bernanke would carry out policies that Obama presumably supports on the merits, and would have had the benefit of helping the Democrats in the 2010 election cycle.  Just to be clear, I'm not really talking about a quid pro quo here, but there's nothing at all unethical for (1) Obama to favor pro-growth, low-unemployment policies; (2) Obama to seek to appoint a Fed Chair who supports such policies; and, (3) Obama to make sure in the appointment process that any candidate he would consider would lean towards those policies. In fact, it's the opposite.  Obama should use his appointments to seek to enact his policy preferences.

Now, it's possible that when Obama re-appointed Bernanke he thought he had such assurances, and it's possible that he believed that Fed policy to that point combined with fiscal stimulus would be sufficient to beat the recession, so that he underestimated the importance of the Fed in getting the economy back up to speed.  As it turns out, it appears that both of those would have been errors, but different errors than just not trying to get assurances in the first place.  It's also fair to say that a year ago, in the wake of the financial crisis, reassuring the markets and keeping in place the person who had experience dealing with those issues was probably a more legitimate concern than it is today.  And it's still not totally clear to me how much of the concern from people such as Yglesias is based on what the Fed has actually done to date, as opposed to worry about what they might do in the future. Moreover, it's possible that institutional biases at the Fed would have prevented any Chair nominee and any FMOC nominees from putting a priority on unemployment and not inflation.  So I do think some caution is wise in interpreting what's happened.  Still, the overall points are sound -- as far as we can see as outsiders, Obama has left some weapons unused on the economy, with the main one, it seems to me, the appointment of the Fed Chair.  And those unused weapons are a probably a lot more important to 2010 election results than reporters are likely to acknowledge.

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