The Greenspan Temptation

WASHINGTON, DC – The drafters of the United States Constitution had to make a fundamental choice: Should they concentrate power in the hands of one man, or devise a political system in which decision-making influence would be more diffuse? A similar choice now faces US President Barack Obama as he considers who should succeed Ben Bernanke as Chairman of the Board of Governors of the Federal Reserve System.

Bernanke’s legacy is decidedly mixed, but its most appealing feature is the ethos of collegiality and shared responsibility that he encouraged at the Fed. Indeed, a key goal for his successor should be to cement this approach as a new institutional tradition.

Yet a strong inclination toward an all-powerful Fed chairman is apparent both from history and from trial balloons recently floated by the Obama administration. The Federal Reserve Board comprises seven governors; but, for most of its history, the Board has operated in the shadow of its chairmen, three of whom (Marriner Eccles, William McChesney Martin, and, most recently, Alan Greenspan) served for nearly 20 years.

Monetary policy is, in principle, decided by the Federal Open Market Committee, which includes 12 voting members: the seven Fed governors, the president of the New York Fed, and four presidents of the other 11 regional Federal Reserve Banks (who serve on a one-year rotating basis). In practice, however, Greenspan and many of his predecessors came to dominate the FOMC.