It is widely remarked that while there are numerous contributors to the current credit crisis, the primary cause -- without which the others would not have led to calamity or even occurred at all -- is the easy money policy of the Fed through much of the '00s.Of course, Wall Street, the banking industry and politicians in both the White House and the Congress have historically pressured the Fed to keep the printing presses running. Easy money generally means low interest rates and expansion of the economy even if the actual savings patterns of Americans don't warrant it. Although bubbles and/or price inflation are the eventual result of such policies, historically the Fed has buckled to this political pressure. It continues to do so right now.
So how do we insulate the Fed chief from these powerful special interests? One Wall Street Journal blogger suggests term limits.
In his Jan. 26 post, Jon Hilsenrath points out that the chief of the European Central Bank has an eight-year limit and maybe Fed chairmen should too. After all, term limits "would insulate the Fed from political meddling because a chairman would know that there would be no point to pleasing political masters because the job runs out after eight years."
He suggests the Fed "became complacent during the latter years of [Alan Greenspan's 19-year] reign, keeping interest rates too low for too long ... and underestimating building risks in the financial system. Because the economy seemed to do so well for so long, it became harder over time to second-guess the approach championed by Mr. Greenspan."
Simon Gilchrist, a Boston University economist, agrees. “It would accomplish the goal of giving the public a greater sense of oversight without creating undue political influence ... It would also have the benefit of forcing the Fed to be more articulate about its specific goals and policies,” he said, because it would de-emphasize the power of single chairman.
Interesting. I confess I had never considered it, but I think he's right. Naturally, a central banking system in which interest rates and money supply are manipulated by political appointees can never be independent of politics. But term limits may reduce the special interest pressure.
Another point that Hilsenrath doesn't mention: Because of his failures Fed Chairman Ben Bernanke currently suffers from CYA Syndrome and presides over a highly secretive organization that aggravates this common political illness. New leadership would feel freer to 'fess up and share information, improving the transparency of the body as well.
Independence? Transparency? Bernanke promised both when he took the reins at the Fed. We didn't get them. Term limits may help.
