Wednesday, December 09, 2009
I had wondered about this last night and spent a few minutes today re-reading Donald Kettl's Leadership at the Fed. While the Fed maintains a political independence, he argues, it's up to each chairman or chairwoman to build support to keep it.
Throughout the Fed's history, its power over the economy has depended more on the political leadership of its chairman than on any other factor. Both the friends and enemies of the Fed focus on its unrivaled legal independence, but that independence is only a precondition for power, not power itself. The Fed's power depends on the support it can build, not on its legal status. Without political support, its credibility is low, its effectiveness is sharply limited, and its legal independence is fragile. Indeed, as the Fed's history shows, its much-vaunted legal independence is most important because it provides the flexibility for building support. And this central job -- of building support, of developing credibility, of dealing with the complex and conflicting political environment in which the Fed finds itself -- has been the central job of the chairman. (193)Chairman Bernanke, when he was an academic and when he was a governor of the Fed, was a strong advocate of increasing transparency, including his support of inflation targeting (see Bernanke and Mishkin  and Bernanke , e.g.) But he's had to learn that transparency doesn't always mean that one's actions are understood. And transparency doesn't always mean you build support for your actions. Harry Reid is perhaps too transparent on health care these days, for example. If I was a Democratic adviser, I'd tell the man to button his lip.
Has Bernanke built support by his statements? Judging by his poll numbers you'd have to say no. (Support was about 50-50 in October 2008 when the Lehman/Merrill/AIG hit the fan.) A Gallup poll of Greenspan in 2005 found only 20% of Americans had a "great deal" of faith in his ability to manage the economy -- and that's when the economy was not in recession. It was at 29% in April 2001. Barry Ritholz has a Bernanke approval graph. It is worth noting, as Kettl does, that after the wrenching recession of 1981-82, 46% of Americans felt Paul Volcker had made "a major contribution" to lower inflation and 64% were willing to have the Fed tighten money again if inflation reappeared. If we had another banking panic, would Bernanke have that kind of support?
Support means, though, support from the Congress and the executive branch. The Senate Banking Committee votes on his re-confirmation next week and it looks like he'll pass, though with several dissents. The same most likely when the full Senate votes, probably in January. The magic number on the Senate floor will be 19, though. That's the number of senators who didn't vote for Volcker's reappointment in 1983. No Fed chair has ever had 20 noes.