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Will Biden Make a Historic Mistake at the Fed?

The past 30 years should have taught Democrats to put their own economic policy priorities before symbolic gestures of "bipartisanship." If US President Joe Biden does not replace Federal Reserve Chair Jerome Powell with Lael Brainard, he will almost certainly regret it.

BERKELEY – In 1987, Alan Greenspan was appointed by Republican President Ronald Reagan to chair the US Federal Reserve Board of Governors, succeeding Paul Volcker. Eight years later, President Bill Clinton, a Democrat, was impressed by Greenspan’s willingness to use monetary policy to offset his administration’s fiscal retrenchment. This kept growth from stalling in the 1990s, and Greenspan did it despite partisan opposition from Republicans who denounced him for too-loose monetary policy. In 1996, Clinton reappointed Greenspan to a third term, and then to a fourth in 2000.

But Greenspan’s nurturing of the (highly beneficial) 1990s dot-com boom turned out to be the last time he would act bravely, wisely, and in a nonpartisan fashion. In the 2000s, he put partisan loyalty first, endorsing Republican President George W. Bush’s 2001 and 2003 tax cuts even though he evidently considered them to be bad policy.

When Fed Governor Edward Gramlich warned that mortgages, derivatives, and mortgage derivatives demanded much closer scrutiny and regulation, Greenspan rejected this argument, insisting that it wasn’t his place to get in the way of lenders who want to lend to home buyers who want to borrow. Never mind that this macroprudential philosophy was in direct contradiction to the one famously articulated by his earlier predecessor, William McChesney Martin, who in 1955 explained that the Fed chair’s job is to remove the punch bowl before the party gets too raucous, even though partygoers are likely to protest.