Could the Fed Have Saved Us All?

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Matt Yglesias:

I really liked Ezra Klein’s review of Ron Suskind’s book in the NYRB for its wholesome focus on monetary policy errors as the most plausible way the Obama administration could have made things better. Nobody was stopping them from replacing Ben Bernanke with someone more committed to full employment, and it seems likely that they could have filled two existing Board of Governors vacancies with people more committed to full employment. If the chairman and those two empty seats all felt the way Charles Evans feels, we’d be in much better shape today. None of that is to deny that fiscal policy could have been better, but as Klein says the key blocking points on fiscal policy were in Congress.

I liked Ezra’s review too, but I’m not sure its focus on monetary policy was really such a strong point. I was opposed to the reappointment of Bernanke from the start, but even so, I really have to ask how likely it is that Obama could have seriously affected Fed policy if he’d only tried harder. A more activist chairman certainly would have helped, and a couple of additional activist board members would have helped too. But even assuming that the Senate would have approved those hypothetically activist Fed members, that’s still only three out of 12 members of the FOMC, the committee that sets monetary policy. What’s more, the three board members Obama has appointed (and gotten confirmed) haven’t exactly been champing at the bit to launch money-laden helicopters over the heartland.

In other words, it strikes me that there were several problems here. The first really is Obama himself: he just isn’t inclined to nominate outspoken expansionists to the Fed board. The second is the reality of the applicant pool: there’s a limited supply of the kind of person who can plausibly serve on the Fed, and most of them tend to fall within a fairly narrow band of mainstream economic thinking from center left to center right. Third, Congress is still a bottleneck. The Senate will approve moderately liberal folks like Janet Yellen and Daniel Tarullo, but not anyone much further to the left. And fourth, even if Obama had miraculously managed to stack the board with more activist lefties, you still have the five regional bank presidents on the FOMC to contend with. And they tend to be pretty conservative on average.

Maybe I’m protesting too much here, since I’m on board with the need for better Fed governors and I’m on board with the importance of monetary policy. But I think there’s always a tendency to be too idealistic when you think about counterfactuals. Even if Obama had been on the side of the angels here, a lot of things would have had to go precisely right for us to end up with a significantly more expansionist Fed than the one we have. And I’m not sure why this would have been more likely to go precisely right than any of the other things that actually did happen and ran into the buzzsaw of real-world politics.

POSTSCRIPT: One caveat: supposedly, it’s traditional for the entire board of governors plus the New York Fed president to vote with the chairman. In other words, the chairman always has eight votes out of 12 and carries the day. If this is true — and knowledgeable feedback would be welcome on this — then nothing mattered except appointing a better Fed chairman than Bernanke. That’s a far more feasible thing for Obama to have done.


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