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After Greenspan: Choosing the Next Chairman of the Federal Reserve RF Fall2005 v10 p2.ps - 10/24/2005 3:48 PM View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics FEDERALRESERVE After Greenspan BY ANDREW FOERSTER Choosing the Next hen Alan Greenspan’s term Greenspan Fed has succeeded. The ends on Jan. 31, 2006, he will decisionmaking process during the Chairman of the Whave served as Chairman of Greenspan era has become more trans- the Board of Governors of the Federal parent over time, but there is still some Federal Reserve Reserve System for 18 years and five uncertainty about how the Fed will months. That is the second-longest build on its recent success. Will tenure in the Fed’s history, just four Greenspan’s successor move more in EDITOR’S NOTE: As this issue went months shorter than the one served by the direction of rules-based decision- to press, President Bush nominated William McChesney Martin from 1951 making, such as adopting an inflation Ben Bernanke, chairman of the Council to 1970. target, or maintain the more discre- Greenspan has earned a reputation tionary approach of recent years? of Economic Advisers, to succeed as a deft handler of monetary policy. The process for choosing a new Alan Greenspan. Confirmation hearings His era coincided with several signifi- chair is itself both discretionary and are pending. cant economic shocks, including the rules-bound. It involves input from the stock market crash in 1987, the terrorist executive and legislative branches of attacks on Sept. 11, 2001, recessions in government, similar to the appoint- the early 1990s and the early 2000s, and ment procedure for many other booms in the stock market and now the government posts. The Federal Reserve housing market. His success in navigat- Act (FRA) of 1913, which established ing those and other pitfalls has helped the Federal Reserve System, dictates Alan Greenspan him gain popularity outside of the usual who is eligible for positions on the August 1987 – January 2006 realm of Fed watchers. All types of Board of Governors, their term limits, media monitor his Congressional testi- and the rules for appointing the chair of mony and various speeches, the likes of the Federal Reserve. Ultimately, howev- which produced now-famous phrases er, the new Chairman can be virtually like “irrational exuberance.” anybody. The nominee’s background, Whoever his successor turns out to qualifications, and economic outlook be will have a difficult act to follow. are largely the choice of the appointing Markets are now accustomed to the President. policies that the Greenspan Fed has pursued. There is general confidence Appointing a Governor that the Fed will keep the economy in The FRA declares, “The Board of good order. At the same time, it is diffi- Governors of the Federal Reserve cult to articulate precisely why the System ... shall be composed of seven Paul A. Volcker G. William Miller Arthur F. Burns William McChesney Martin, Jr. August 1979 – August 1987 March 1978 – August 1979 February 1970 – January 1978 April 1951 – January 1970 PHOTOGRAPHY: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM/BRITT LECKMAN OF THE FEDERAL RESERVE OF GOVERNORS BOARD PHOTOGRAPHY: 2 Region Focus • Fall 2005 RF Fall2005 v10 revisedpg3.ps - 10/18/2005 9:51 AM members, to be appointed by the within 15 days of Senate confirmation, that the person must be a member of President, by and with the advice and the appointee must take the oath of the Board of Governors. In theory, this consent of the Senate.” In this manner, office, and then the term begins. requirement might suggest that only governorships are similar to many other Governors are appointed to 14-year people with experience on the Board governmental positions that require the terms, each of which begins on Feb. 1 of can be elevated to Chairman. Senate to confirm a presidential even-numbered years. Consequently, Historically, this has not been true, appointment. the terms cycle, with a different term though, as candidates have normally Usually, because Governors serve ending every two years. The fact that been simultaneously appointed as until the end of their term or give many Governors do not fill their entire Governor and Chairman. advance notice of their resignation, term means that nominations have to In addition to the normal 14-year the President is able to give some occur more often than once every two term limit that applies to all Governors, thought into the nomination before years. Instead of a new term beginning the chair is appointed to four-year there is a vacancy. This is the case with with a new appointment, if a Governor terms. Unlike the longer terms applied Greenspan’s pending retirement, since resigns during his term, a new nominee to Governors, the four-year term for it was common knowledge that he simply replaces the outgoing Governor the chair has no set starting and ending could not serve beyond January 2006. and keeps serving the unfulfilled term. date — the four years begin as soon Occasionally, a Governor will decide If the term ends, the nominee can be as the chair takes office. The Chairman to resign on a given date, which creates selected for a new term if the President can serve multiple four-year terms; the a vacancy if a replacement has yet chooses to keep the Governor on the only restriction is that he must to be appointed. Currently, for Board. This means that the term limit remain a Governor. Greenspan was example, the positions held by former applies only to the Governor’s own first appointed Chairman in 1987, Govs. Ben Bernanke and Edward term; Governors themselves can actual- and his fifth and current term began Gramlich remain unfilled. As a ly serve longer than 14 years. Chairman June 19, 2004. result, the President may have varying Greenspan has served for 18 years by The procedure to appoint the time frames to find replacements. The spending the first four serving the end chair of the Board of Governors works administration can look anywhere of a different term, and then being exactly the same as for appointing for possible nominees for Governor appointed to his own term that began Governors. The nominee has a hearing positions. In the past, nominees have in 1992. in the Senate and then is approved by a come from banking, government, aca- The Governors’ 14-year term limit majority vote of that body. If the nomi- demia, and from within the Federal ranks among the longest in U.S. govern- nee for the chair position is Reserve System. ment. These lengthy terms are intended simultaneously chosen for a Governor The FRA states: “In selecting the to help the Fed preserve its independ- position, he goes through the process members of the Board, not more than ence from the political process. only once, although presumably with one of whom shall be selected from any Governors are free to pursue what they increased scrutiny. one Federal Reserve district, the feel is the best policy for the economy Previous chairmen have made a President shall have due regard to a fair even if those policies conflict with what custom of offering their resignation representation of the financial, agricul- elected officials might want. In a world upon the election of a new President. tural, industrial, and commercial with less independence for the Fed, the This tradition allows the President interests, and geographical divisions of President might threaten Governors to appoint a new chair upon the country.” Furthermore, the individ- with removal or withholding of their entering office, one with similar priori- ual may not hold other employment reappointment if the Fed refused to ties. However, while it is customary while serving as a Governor. help the administration. to offer the resignation, the President After the administration chooses a For example, the President may is not under any obligation to accept nominee, the process moves to the want a large short-term monetary stim- the offer. Greenspan, for example, Senate, where the nominee appears ulus right before an election, and if the although appointed initially by before the Committee on Banking, Governors weren’t independent of Reagan, has kept his position during Housing, and Urban Affairs. The nomi- presidential control, they might oblige both Bush administrations, plus nee delivers a prepared statement, the demand. While the Governors gen- the change of party to the Clinton and then fields questions from the erally do not serve their entire term, the administration. members of the committee. The simple presence of lengthy terms helps process usually focuses on the nomi- remove the control of monetary policy The Evolution of Chairmen nee’s qualifications and a discussion of from the political sphere. The nature of individuals who have monetary policy or banking issues. become chairmen of the Board of Next, the entire Senate votes to con- Appointing a Chairman Governors has evolved since Charles firm the nomination, with a simple A simple qualification to become Hamlin became the first Chairman majority vote needed to pass. Finally, Chairman, as stipulated by the FRA, is in 1914. While his primary career Fall 2005 • Region Focus 3 RF Fall2005 v10 revisedpg4.ps - 10/18/2005 10:32 AM was as a lawyer in Boston, Hamlin longest-serving Fed Chairman, served act effectively as Fed Chairman. tried unsuccessfully to get into from 1951 to 1970, and followed a path Although much of his career was politics, including two candidacies for in the financial world and corporate spent as a partner in the business Massachusetts’ governor, first in 1902 governance to the Fed. His meteoric consulting firm Townsend-Greenspan, and then in 1910.
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