Tuesday, August 31, 2010

When Democratic Presidents reappoint Fed Chairmen

Regarding Fed Chairman Ben Bernanke's refusal to juice the economy at this point with further extraordinary measures such as a new round of quantitative easing, Jonathan Bernstein suspects that "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."

Bernstein does grant that "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."  Finally, he arrives at what may have been the key point for Obama decision:

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. 

As is the case on so many fronts, Bill Clinton, facing a rejectionist Republican majority, worked under constraints similar to those confronting Obama (and if Republicans capture one or both chambers of Congress this November, as seems increasingly likely, the operating environment will be more similar still).  According to Taylor Branch in The Clinton Tapes, when Clinton reappointed Greenspan in 1996, he
had wanted badly to replace chairman Alan Greenspan with Felix Rohatyn, the shrewd investment banker from Lazard Freres, but he ran into vexing constraints everywhere. Rohatyn himself advised Clinton to reappoint Greenspan instead, arguing that the Republican Senate would confirm no one else. Wall Street could not elect a U.S. president, Rohatyn told him, but it could surely un-elect one.  If threatened, financial, financial powers would sacrifice short-term profits to drive interest rates higher, hurting blue-collar workers with layoffs and shaky pension funds. In the end, Rohatyn refused appointment to both posts -vice chair as well as chair], and Clinton suspected that Greenspan had engineered this result by warning of political friction and terrible drudgery at the Fed.  He thought the wily incumbent protected his brittle ego from comparative scrutiny alongside Rohatyn, who was just as accomplished and a far more persuasive, attractive public speaker (p. 348).
 Yet Clinton claims that he was ready for a confirmation battle:
"I was committed to him, and I really think he ducked this fight," Clinton said with lingering dismay. "He backed out too soon. He didn't have the stomach for it" (p. 349).
The analogy is imperfect, insofar as more Republicans than Democrats voted against Bernanke's confirmation. Yet Bernanke came into the job as a free-market Republican.  Votes against him on the Republican side were part of the strange alchemy whereby the GOP strove, with a good deal of success, to pin the bailouts, stimulus and the Fed's extraordinary measures in 2008-2009 as a package on Obama -- with the Fed's easy monetary policy and lax oversight throughout the Bush years thrown in for good measure.

One overarching impression in The Clinton Tapes is that Clinton relished wrestling with the Republicans in  Congress, and generally outmaneuvered them or faced them down successfully. Looks like we'll find out soon enough whether Obama has as much fight in him.

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