WASHINGTON — Was this necessary?
The struggle to succeed Ben Bernanke as chairman of the Federal Reserve has turned into a soap opera. Bernanke, it is widely assumed, has told President Obama that he doesn't want a third four-year term — or has been informed that he won't be reappointed. This has triggered a highly public campaign by partisans of the two leading contenders for the job: Lawrence Summers, ex-treasury secretary (in the Clinton years) and former Harvard president; and Janet Yellen, the Fed's present vice chairman. Both are economists.
Summers, say his fans in op-ed articles and anonymous quotes, is "brilliant" and an experienced crisis manager. (He helped defuse the 1997-98 Asian financial crisis and, as a top Obama aide in 2009, dealt with the Great Recession.) Yellen's supporters counter that she was an early prophet of the housing crisis and is a consensus-builder and an articulate communicator. She also would be the first woman to head the Fed. Inevitably, each campaign questions the other candidate's qualifications. Summers is accused of arrogance; Yellen is seen as soft on inflation (a "dove" in Fedspeak).
All this could have been avoided, or minimized, if the president had made his choice in early summer. The result is that whoever wins — or perhaps a dark horse, for instance ex-Fed Vice Chairman Donald Kohn — will need to overcome the doubts and ill will created by Obama's indecision. This is an extra headache to go with many others, because today's Fed is very different from the one Bernanke inherited from Alan Greenspan.
Under Greenspan, from the summer of 1987 to early 2006, the Fed seemed almost omnipotent. Small tweaks up or down in interest rates could, it appeared, sustain economic expansion and contain inflation. During this period, job creation topped 30 million. The two recessions, those of 1990-91 and 2001, were mild by historical standards. Stocks rose more than fourfold. The Fed became more popular. In his confirmation hearings, Bernanke was emphatic: I will continue Greenspan's policies.
History dictated otherwise. With hindsight, Greenspan's apparent success in stabilizing the economy fostered the financial crisis. Bankers, consumers and companies became overconfident and complacent; they took risks that seemed justifiable but were ultimately disastrous. In the Bernanke era, the Fed's limited powers have become obvious. To be sure, Bernanke's deft interventions in 2008 and 2009 probably prevented another Great Depression. But the Fed has had less success in stimulating a strong recovery, despite keeping short-term interest rates near zero since late 2008 and trying to depress long-term rates by buying about $2.8 trillion of Treasury and mortgage bonds.
Bernanke has been an avowed experimenter; bond-buying has been his big experiment. It's an understandable gambit to reduce human suffering, and in some ways, it has changed behavior. A decade ago, it was unimaginable that the Fed would openly try to "talk up" the stock market; now, that's routine because one goal of the bond-buying (referred to as "quantitative easing" or QE) is to encourage more stock purchases by lowering interest rates on bonds, a competing investment.
Still, the economic effect has been modest at best. Slightly lower interest rates didn't cause a burst of production and job creation. Indeed, a study from the Federal Reserve Bank of San Francisco estimated that the second round of QE added only 0.13 percentage points to economic growth. (Other studies show larger effects.) Even these benefits might be reversed if the bond-buying slows or stops. When Bernanke announced a possible cut in purchases to begin later this year, interest rates shot up — exactly the opposite of what the Fed wants. Good intentions do not guarantee good outcomes.
The next chairman faces both political and economic challenges. Because the economy is doing poorly, the Fed is not popular. It's blamed for creating the crisis, aiding Wall Street and being too powerful. There is no relief from this resentment until the economy improves, but the next Fed chairman needs to prevent the discontent from worsening. Down that road lie many bad ideas that Congress might foist on the Fed, starting with compulsory credit allocation: the forced funneling of loans to politically connected industries. The Fed's economic challenge is to deliver what it promises and to respond competently to the unexpected. This includes keeping a watchful eye on inflation.
Being Fed chairman requires economic smarts, financial knowledge, political instincts and communications skills. Summers and Yellen each has strengths, but neither has a clear advantage over the other. It's a judgment call — and Obama should make it sooner rather than later. The longer the uncertainty continues, the greater the damage.
Robert J. Samuelson is a Washington Post columnist.
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