The Federal Reserve’s Captive Minds

The appointment of Vice Chair Janet L. Yellen to succeed Ben Bernanke as Chair of the Federal Reserve highlights an important point: What used to be a technical appointment, of interest only to nerdy economists, has now become a major cause of political tension. That may not be a bad thing.

CHICAGO – Before the US government shutdown took center stage in American politics, all attention was focused on President Barack Obama’s likely pick as next Chair of the Federal Reserve. Indeed, the appointment of Vice Chair Janet L. Yellen to succeed Ben Bernanke highlights an important point: What used to be a technical appointment, of interest only to nerdy economists, has now become a major cause of political tension, not only dividing Republicans and Democrats (it does not take much to do that), but even splitting the Democratic Party.

Interestingly, the point of contention was not the candidates’ stands on inflation, but their positions on bank regulation. Why has the job of Fed Chair become so politically important? And why is bank regulation more interesting than inflation to US senators (who must confirm Obama’s appointee)?

These changes are simply a consequence of the 2008 financial crisis and of the policies that Bernanke adopted to overcome it. In an effort to save the financial system from collapse – and, later, in pursuit of economic recovery – the Fed has engaged in very active policies: near-zero interest rates, massive asset-purchase programs, remuneration of banks’ reserves, and so forth. While partly successful in stimulating the economy, these policies have had massive redistributive effects: from small savers to banks, from underwater homeowners to rich investors, and from pensioners to financiers.

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