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Bernanke’s the One

BERKELEY – William McChesney Martin, a Democrat, was twice reappointed to the job of Chairman of the United States Federal Reserve by Republican President Dwight D. Eisenhower. Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker was too invested in monetary stability and not invested enough in producing strong economies in presidential years to elect Republicans). Alan Greenspan, a Republican, was reappointed twice by Bill Clinton. And now Barack Obama has announced his intention to re-nominate Republican appointee Ben Bernanke to the post.

As this history suggests, it is more remarkable for a US president not to reappoint a Fed chairman named by the opposite party than to reappoint one who wishes it. Reagan’s failure to reappoint Volcker and Jimmy Carter’s failure to reappoint Arthur Burns are the main exceptions. The Fed chairmanship is the only position in the US government for which this is so: it is a mark of its unique status as a non- or not-very-partisan technocratic position of immense power and freedom of action – nearly a fourth branch of government, as David Wessel’s recent book In Fed We Trust puts it.

The reason, I think, that American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the two things that a president seeks: the confidence of financial markets that the Fed will pursue non-inflationary policies. If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad.

Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman. And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low. By reappointing a Fed chair chosen by someone else, a president can appear to guarantee financial markets that the Fed is not too much under his thumb. And that can be a very valuable asset for an incumbent Fed chair – one that no other candidate could match.