Thursday, May 22, 2014

Politically Feasible Candidates That Would Have Been Better Nominees to the Fed Than Stanley Fischer

Stanley Fischer Joins the Echo Chamber

The Senate has confirmed Stanley Fischer to the Federal Reserve Board of Governors, where he will soon become the Fed’s #2 official as Vice Chair. Fischer is an eminent mainstream macroeconomist and former Governor of the Bank of Israel (he was also chief economist at the World Bank and a top official of the IMF). His monetary policy views are largely indistinguishable from those of Ben Bernanke and Janet Yellen. He strongly favors the current Fed policy of keeping short-term interest rates near zero while gradually reducing the Fed’s bond purchases (“quantitative easing”). He is a bit more moderate than Bernanke and Yellen on so-called forward guidance, a euphemism for the Fed’s attempt to manipulate investors by announcing its supposed long-term plans in advance. But his overall understanding of how the economy works, the theories and models that lie behind his thinking, and his general policy views, are more or less the same as Bernanke’s and Yellen’s. (Not too surprising as he was Bernanke’s PhD supervisor at MIT.)fischer_1918777c
The Board of Governors, as described in official Fed publications, “supervises and regulates the operations of the Federal Reserve Banks, exercises broad responsibility in the nation’s payments system, and administers most of the nation’s laws regarding consumer credit protection.” (The Federal Open Market Committee, which conducts monetary policy, includes the Board plus the presidents of the regional Fed banks.) The Board performs these duties by conducting “thorough analysis of domestic and international financial and economic developments.” However, unlike effective governing boards at private institutions, diversity of opinion is not welcome on the Board of Governors.
A basic principle of good organizational governance is that board members should have a variety of backgrounds, areas of expertise, theoretical or philosophical perspectives, and experiences. The board as a whole can then analyze issues from different points of view, pooling complementary sets of knowledge and skills to get a balanced and holistic perspective on problems and their possible solutions. If the Fed is supposed to provide “scientific,” politically neutral analysis and administration, wouldn’t you expect some diversity on the Board?
Of course, I’m not expecting the Fed to appoint an Austrian economist as Governor. But there are a number of plausible, politically feasible candidates who would have provided balance to Yellen’s somewhat extreme views. John Taylor is the most obvious candidate, along with Glenn Hubbard or even Larry Summers. (OK, maybe Summers is too controversial, politically, and Hubbard was chided for not disclosing all his consulting contracts — though Fischer’s three-year tenure as Vice Chairman of Citigroup didn’t seem to hurt his nomination.) Instead, the Board will add Stanley Fischer to its echo chamber.
The above originally appeared at

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