The New York Times had a pretty good article yesterday about the unfilled seats on the Federal Reserve Board and the possibility that the normally seven-person board may soon be down to three members. Based on my experience of having sat on the FOMC with the Board of Governors and the other Reserve Bank presidents for almost 14 years, I have some opinions on that subject.
It matters much less to the full board’s work than to the committee structure within the board. The article basically got that right, but failed to give some important reasons why. To me, the problem has to do with the influence of the board staff relative to the board committee members. Committees are largely staff driven even when they have their full complement of board members. Reducing the latter number just makes the staff more dominant. Not that the staff is not good. It is. But most senior staff have been there for many years, know the issues, know the facts, and can be an imposing influence on the poor new board member. Yet the fresh thinking of those poor board members is essential for change and fresh thinking.
The article fell into the trap (in my opinion) of thinking that the most important issues required more heads thinking and more hands working. For example, monetary policy is the most important function, but carrying it out is relatively easy. The Chairman, at least, is usually an expert and the staff has monetary policy experts in every nook and cranny of the issues. Ms. Yellen, like Mr. Bernanke before her, had spent a lifetime working out their philosophy of monetary theory and policy. An exception to this, of course, was the unique challenges of the financial crisis of 2008 when Chairman Bernanke had to make policy by the seat of his pants. But, normally monetary policy is easy to do compared to many issues of regulatory policy and issues involving the payments system. Those areas would be more threatened by a shortage, not necessarily of Governors, but of committee members.
Take the taper as a sub-set of monetary policy. Gradually reducing the volume of bond purchases was no doubt hotly debated, but the concept is simple. And, it’s now on automatic pilot. Maybe the economy will provide us with another surprise swoon and require them to hit the pause button for a while, but that is not a complicated decision. Important isn’t necessarily complicated.
The way the Board of Governors was set up was that they would have relatively long 14-year terms of office to insulate them from political pressures and their terms would be staggered so that one term expired every two years. A one-term president would get two picks; a two-termer would get 4 over the eight year period. Very neat!
What has happened, of course, is that, increasingly, the Governors don’t serve out their full terms so the vacancies and need for replacement no longer fit that neat pattern.
Alan Greenspan once told me that he favored rich people for such jobs. The context was that he though the right people would have successful careers behind them and they were taking on the responsibilities of service without trying to build a resume and without having to go into debt to serve.
Increasingly, we’ve been getting hot-shot young professors in mid-career coming for a couple or three years to build their resumes and increase their future value in the market place. That is a main source of the problem. Governors don’t make enough money to move to Washington and serve without the possibility of supplemental income. Only if they arrive with means at the end of a successful career like Chairman Greenspan did.
No, I’m not going to propose a raise—not in this political environment. The other part of the problem is those in Congress who are holding up nominations for unrelated political reasons.
Ironically, the Fed enjoys less confidence on Capitol Hill than it used to, largely because, under the leadership of Chairman Bernanke, it saved the world from a second Great Depression. No good deed goes unpunished.