Building the Perfect Fed Chairman
Rumors are swirling about who might be the next Federal Reserve chairman. Now that Chairman Bernanke appears to be on his way out, a lot of people's names are popping up as potential replacements. It's too bad we can't put together a Fed chairman that combines various pieces of all these people. But even if we could cobble together a composite chairman with the necessary monetary policy expertise, one major component would be missing-rule-writing experience.
The media have pegged the two top contenders to be Janet Yellen-current Fed vice-chairman and former head of the Federal Reserve Bank of San Francisco-and Lawrence Summers, current Harvard professor, former Treasury Secretary under President Clinton and former head of President Obama's National Economic Council.
Janet Yellen brings bank supervision experience from her role as former head of the San Francisco Fed. Staff at the San Francisco Fed and the other regional reserve banks supervise local banks and bank holding companies with an eye towards safety and soundness. The Fed, which saw its supervisory responsibilities expand under Dodd-Frank, could benefit from a leader who understands bank supervision, particularly since the Dodd-Frank-created position of Vice Chairman for Supervision remains unfilled.
Larry Summers also would bring something to the table-his willingness to speak his mind unapologetically. The Fed is going to have to stop its $85 billion-a-month bond buying program at some point. But every time the Fed intimates that the end is near, the markets suffer an attack of Fed separation anxiety that causes central bank officials to retreat from their earlier statements. The ability to tell the market that it needs to break its dependence on the Fed without subsequent back-pedaling would be a useful quality for the chairman to possess.
Other names that have been mentioned include former Treasury Secretary Tim Geithner. He could offer a skepticism of the regulatory clairvoyance on which financial regulation now seems to depend. Pre-identification of systemic risks is a central piece of the Dodd-Frank regulatory framework. For example, the newly-created Financial Stability Oversight Council-of which the Fed chairman is a member-is charged with identifying systemic risks and fingering systemically risky entities and activities for special regulation. Geithner came pretty close to acknowledging that pre-identifying systemic risks is junk science. The Special Inspector General for the Troubled Asset Relief Program reported a conversation in which Geithner said that you can't "make a judgment about what's systemic and what's not until you know the nature of the shock." A Fed chairman would do well to bring to the job some healthy skepticism of the ability of regulators in Washington to predict what is systemic.
Roger Ferguson, former vice-chairman of the Fed, has also been mentioned as a possibility. He now heads an investment management firm, but was previously a senior executive at a global insurance and reinsurance company. His exposure to the insurance industry might be helpful now that-thanks to a recent decision by the Financial Stability Oversight Council-the Fed is in the insurance regulation business. Moreover, Ferguson's experience in the securities industry and his marriage to a former commissioner of the Securities and Exchange Commission might make him sensitive to the Fed's need to defer to other regulators. SEC Commissioner Gallagher recently warned-speaking about the Fed's new authority under Dodd-Frank to impose risk management standards on SEC-regulated firms engaged in systemically important activities-that the "authority is not simply a threat to the Commission's independence - if exercised, it would be an outright annexation."
But even with all of that experience combined and assuming it was packaged with a sound approach to monetary policy, what's missing from our composite chairman? A deep understanding of the process for, and importance of, crafting effective rules that are not unduly burdensome. The Fed's post-Dodd-Frank regulatory mandate makes it a dominant-if not, the dominant-player in the financial regulatory world. Drafting regulations is difficult work. It must be done in the public eye, in contrast to monetary policymaking, which is done behind closed doors. Any Fed chairman has to be committed to conducting rulemaking deliberately, rigorously, transparently, and in a way that is based on good evidence and allows for broad and meaningful public comment. For better or worse, Dodd-Frank has made writing regulations a big part of the Fed's job, so the new Fed chairman ought to be someone who knows, respects, and employs sound regulatory processes.