The writer is the author of ‘Unelected Power’ and a former central banker. His new book on geopolitics and the international economic system is coming out next year
The seemingly inexhaustible vibrations surrounding the Federal Reserve Chair’s re-appointment – the will he, not him, of whether President Joe Biden will bend to the progressives, Stick to the center, listen to Wall Street, the main street or the powerful senators – is finally resolved on Monday. Jay Powell is, after all, continued writing for another four years.
The dance exposed flaws in the design of the world’s most important central bank that should be remembered long after the excitement wears off. Fortunately, these shortcomings can be remedied quite simply.
No elected politician would pass up the dramatic opportunity of exercising his patronage. In the UK, I have sat on the sidelines for developments around the re-appointments of the Bank of England’s successor governors during their days serving short, renewable terms. In each case, politicians will loudly indicate that they are considering alternatives. And in each case, the incumbents would quietly, and sometimes preemptively, form the impression that they did not necessarily carry on even if they were wanted.
In this case, from Gordon Richardson in 1978 on – so Robin Leigh-Pemberton, Eddie George and Mervyn King – were each reappointed for another five years. Given the costs to all involved, especially the public, as regulatory reform is being prepared in the wake of the 2007-08 financial crisis, the Bank proposes to move to a single term non-renewable for eight years. That is already the regime for the European Central Bank, and the US Congress should recommend it to the Fed when the opportunity arises.
This is not just to avoid unnecessary uncertainty around future monetary policy, or the distracting effort spent on campaigns to survive or succeed. The fate of Alan Greenspan’s five four-year terms, which spanned 19 years at the helm of the Fed, warns us of deeper dangers.
If central bank independence finds its justification in offering a counterweight to political short-termism, it is more ironic that as Greenspan’s stature grows, US presidents Ky finds himself stuck again each time his latest term approaches. In the words of the biographer, Sebastian Mallaby, “The longer he stays, the more reassuring his presence is”.
Fearing a wave of market volatility as any new broom emerges, successive presidents have been constrained to do what’s right for the long-term health of the institution and the country, which is infusing new life. , especially on the Fed’s approach to banking. the stability. The result was a career that had started off wonderfully by taking advantage of the low inflation achieved by Paul Volcker left a legacy of holes in the financial system that kept the world in constant decline and exacerbated the tension in the American social fabric.
But the reform case is not based on history, though that is a guide. If, as many expect, the Fed acts next year to regain some of the unusual monetary support injected as the Covid-19 pandemic unfolds around the world, the Fed will almost certainly have to deal with it. faced the question of whether they would have acted sooner with its leaders in place. has been reappointed.
And if, as unlikely, the provisional is said to be inflationary 2021 becomes a matter of wages and prices, those questions will be charged. Policymakers would, of course, sincerely reject such proposals. But how can we know? Indeed, how can they? The whole point of monetary policy regimes is to shape incentives, including incentives themselves.
Extraordinary power in the hands of our unelected central bankers requires careful design. They should be given tenure long enough to avoid the turmoil of the past year. But that should only be a single term, so elected politicians cannot avoid the need for change as a Fed chair’s term expires.
One would say, whatever the merits of this argument, for a sclerotic Congress would not act. But a good maxim is to instill ideas so that they appear there whenever the door of opportunity opens.
It can also be asked foreigners like me what to do with this. The answer is easy. As long as the dollar is the world’s preeminent world currency, we have a vital part to play in the integrity of the US monetary system and its custodian, the Fed. With rival reserve coins, whether from the crypto world or a new superpower, hovering over the horizon, it is vital to the free world that Washington has a money home. his bad.