Obama Lucky to have Bernanke

Brad DeLong explains why presidents are willing to reappoint Fed chairs that are members of opposing political parties: 

Obama lucky to have Bernanke, by J. Bradford DeLong, Commentary, Project Syndicate: William McChesney Martin, a Democrat, was twice reappointed chairman of the … Federal Reserve by Republican President Dwight D. Eisenhower.

Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker too invested in monetary stability and not in producing strong economies to elect Republicans).

Alan Greenspan, a Republican, was reappointed twice by Bill Clinton. And now Barack Obama has announced his intention to renominate Republican appointee Ben Bernanke…

The reason American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to … confidence of financial markets that the Fed will pursue non-inflationary policies.

If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad.

Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman.

And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low. By reappointing a Fed chairman chosen by someone else, a president can appear to guarantee to financial markets that the Fed is not too much under his thumb. …

It may or may not be true, especially these days, that what is good for General Motors is good for America and vice versa, but certainly what is good economically for America is good politically for the president.

It is here that Obama has lucked out. Ben Bernanke is a very good choice for Fed chairman because he is intelligent, honest, pragmatic and clear-sighted in his vision of the economy. He has already guided the Fed through two very tumultuous years with only one major mistake – the bankruptcy of Lehman Brothers.

This probably helped with Obama’s willingness to reappoint Bernanke:

For years, some of his closest friends did not know that Ben S. Bernanke was a Republican. … “If you read anything he’s written, you can’t figure out which political party he’s associated with,” said Mark L. Gertler, a professor of economics at New York University who has written more than a dozen papers with Mr. Bernanke. Mr. Gertler, who said he did not know his close friend’s political affiliation until relatively recently, added: “He’s not ideological. I could imagine Ben working with economists in the Clinton administration.” Alan S. Blinder, a longtime colleague at Princeton who has advised numerous Democratic presidential candidates, also said he had worked alongside Mr. Bernanke for years without having any sense of his political views. “We wrote articles together and sat at the same lunch table thousands of times before I knew he was a Republican,” Mr. Blinder recalled. “We never talked politics.” …


Originally published at Economist’s View and reproduced here with the author’s permission.