Obama’s Next Economic Test

March 10th, 2010 at 5:54 am | 6 Comments |

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President Obama’s Federal Reserve appointments will be a key signal regarding the seriousness of his economic policy objectives.

Despite its recent battering in the public and Congressional opinion polls, the Fed remains the single most important economic policy body in the United States, and perhaps the world.  Its innovative and aggressive response to the financial crisis is the single most important reason that the panic was as short-lived as it was, and that the economic fallout was not far worse.  Forget the TARP. Forget the stimulus.  Never forget the Fed.

The Bush Administration experience is illustrative.  Nobody – regardless of the merits – has accused George W. Bush of excessive economic literacy.  Neither has his Administration been considered either economically innovative or especially successful.  But then-President Bush appointed to the Fed the current Chairman of the Board of Governors, Ben Bernanke, and the current Vice-Chairman, Donald Kohn.  Both were first-rate picks that featured leading expertise in monetary policy and the economics of financial crises (Bernanke) and an unparalleled portfolio of experience in and about the Fed (Kohn).  Bush’s discipline to push aside other considerations and choose top-quality Governors is a tribute.

The public should hope for the same from President Obama.  But there are reasons to be concerned.  The Administration out-sourced the stimulus package to Congress, resulting in a bloated bill that flunked the traditional test of timely, targeted and temporary in favor of permanent, partisan, and pork-barrel.  Will he again put aside principle in favor of somebody else’s preferred Fed pick?

In healthcare, the President opted to focus on the wrong issue – expanding coverage – at the expense of solving the real problem of higher costs.  Will he make the same mistake and fail to recognize the top challenge for the Fed is to exit its extraordinary interventions without re-igniting inflation?  The handwriting is on the wall.  The U.S. will face a prolonged period of painful unemployment.  Will he also single-handedly revive the Carter-era misery index by stacking the Board of Governors with inflation doves?

Finally, the President must address this as a management issue.  His (and every) economic team is populated with ambitious, upwardly-mobile types who want to either be the next pick or prevail for a favored friend.  He needs to impose a vetting regime that favors experience, expertise, and excellence.

Over the next few weeks, the names of potential Fed picks will begin to circulate.  The quality of these picks will be a central test of the seriousness of the Administration.

Recent Posts by Douglas Holtz-Eakin



6 Comments so far ↓

  • WillyP

    “Will he also single-handedly revive the Carter-era misery index by stacking the Board of Governors with inflation doves?”

    Uh, didn’t he just reappoint the greatest inflationary force the world has ever known in Ben Bernanke?

    “He needs to impose a vetting regime that favors experience, expertise, and excellence.”

    How do you possibly define what makes a good monetary bureaucrat? Can we grade them on their inflationary aspirations? We’re teetering on repeating the Great Depression here, and yet the so-called experts act like ostriches with their heads in the sand.

    “Neither has his Administration been considered either economically innovative or especially successful.”

    This is coming from Bush’s Director of the CBO, posted on the site of one of his former economic speechwriters? Self-loathing much?

  • sinz54

    WillyP: Uh, didn’t he just reappoint the greatest inflationary force the world has ever known in Ben Bernanke?
    Given whom Obama is liable to appoint to the Fed next,
    the day may come when you’ll be nostalgic for men like Bernanke.

    I remember when Nixon appointed Arthur Burns–a man Nixon knew was so weak that he could browbeat him into reflating the currency. That lit the fuse of the double-digit inflation we had later.

  • Independent

    Willy P wrongly claims: “This is coming from Bush’s Director of the CBO, posted on the site of one of his former economic speechwriters? Self-loathing much?”

    Hey, I thought you farLeft types saved the self-loathing label for conservative gays inside the GOP???? What gives? I want my exclusivity back!

    Bush didn’t pick the CBO director, WillyP. That’s the joint job of the Speaker and Senate Pro Tem –along with lots and lots of insight and opinions from ranking committee chairs, senior staff, in Pelosi’s time a lot of lobbyist involvement, etc.

    Second, DE-H was probably the last, best CBO director America has had. He certainly didn’t buckle at anything the Bush Administration wanted and, unlike the current Democrat choice, he didn’t sell his soul for a cup of coffee with Obama. Besides, this is about the Fed Reserve, not the CBO.

    The thrust of the article stands solid, even with your smear attempt. Did you study with Jimmy Carville or Hillary Clinton? I can’t discern the genesis of the smear modality.

  • WillyP

    Independent,
    Yes, the fact that he was the director of the CONGRESSIONAL budget office hit me right after I posted. Regardless, here is a top ranking official with substantial influence over economic decisions emanating from the central government basically saying that his years will go down as a failure. You can classify this as a “smear” of any “modality.” I think it’s funny.

    As for my alleged far leftism, well… let me say that since you’re self-proclaimed independent, perhaps you can be excused for being completely inept at placing people on the political spectrum.

    Sinz,
    Nobody would dare accomplish this feat but Bernanke:
    http://www.myinvestmentanalysis.com/wp-content/uploads/2009/06/monetary-base-1.png

    He has the intellectual gumption to actually try this Monetarist experiment. He’s Hoffer’s prototypical “true believer” (albeit for a strange cause).

    For a better analysis, see Pepperdine’s George Reisman:
    http://georgereisman.com/blog/2009/11/pro-free-market-program-for-economic.html#links

  • Independent

    WillyP, nice dodge. But answer the question: “Did you study with Jimmy Carville or Hillary Clinton? I can’t discern the genesis of the smear modality.”

  • WillyP

    independent,
    Maybe you’re a little kooky?

    I’m nothing more than a political hobbyist; a Mark Levin fan with a day job, who occasionally enjoys pointing out the glaring errors in other people’s half baked political and economic opinions. This is not terribly difficult if you understand the purpose/concepts of finance and accounting, and integrate them into coherent economic theory.

    My original beef with the article was the completely ridiculous assertion that Bernanke has proved a first-rate pick. When the columnist writes:

    “Will [Obama] make the same mistake and fail to recognize the top challenge for the Fed is to exit its extraordinary interventions without re-igniting inflation? The handwriting is on the wall. The U.S. will face a prolonged period of painful unemployment. Will he also single-handedly revive the Carter-era misery index by stacking the Board of Governors with inflation doves?”

    the intelligent reader, educated in economics, is left befuddled and frustrated, for several reasons:

    1) Obama does not have to recognize the supposed challenge to the Fed. He has no official authority to influence the Fed’s policy. Besides, Obama is a complete economic ignoramus, a schooled socialist, and proves it more with each passing day.

    2) The columnist seems to think that the Fed can somehow extricate itself from the “extraordinary” intervention seamlessly. He does not seem to realize that it will trigger massive liquidations that have been delayed due to government “support” programs. He also fails to explain how they can safely deal with the doubling of the monetary base.

    3) The columnist suggests that Bernanke, the most hardcore inflationist the country has seen since in the last 100 years, is a first-rate pick. He then suggests that Obama would err by nominating inflation “doves:” i.e., Fed appointees who favor keeping rates low. Well, which way is it? Is Bernanke, an uber-”dove” by his own definition, or a first-rate pick?

    4) He contradicts himself yet more. He suggests that Bernanke has done a great job; that he has not only rescued the global economy from total collapse yesterday but will soon accomplish the fantastical feat of taming inflation tomorrow. And yet he says himself “The U.S. will face a prolonged period of painful unemployment.”

    I think that about sums up all that is wrong with this article. It doesn’t make sense.