Advancement Through Incompetence at the Fed


There has been a major debate in Washington policy circles over who should replace Ben Bernanke as Federal Reserve Board chair when his term expires in January. The two leading contenders are Janet Yellen, the current vice-chair of the Fed, and Larry Summers who served as Treasury Secretary in the Clinton administration and as the head of President Obama’s National Economic Council in his first two and a half years in office.

However the Obama administration has raised the possibility that he may not select from just these two candidates. They have put forward two other names who are apparently under consideration, Roger Ferguson and Donald Kohn. While neither figure is particular well-known even in Washington policy circles, what they have in common is their tenure on the Greenspan Fed.

Ferguson was first appointed as one of the seven governors of the Fed in 1997. He was promoted to vice-chair in 1997, where he remained until his resignation in 2006. Donald Kohn was a career civil servant who advanced to the top levels of the Fed bureaucracy.  He was appointed as one of the Fed’s governors in 2002. He was then elevated to vice-chair to replace Ferguson. He eventually retired from the Fed in 2010.

Given their association with the Greenspan Fed, it is striking that Ferguson and Kohn’s names would come up as candidates for Fed chair. The Greenspan Fed laid the basis for the worst economic downturn the United States has suffered since the Great Depression.

As the housing bubble was growing to ever more dangerous levels, the Greenspan Fed puts its head in the sand. Greenspan and the Fed consistently denied the existence of a bubble. Furthermore, Greenspan argued that even if bubbles do appear the best route for the Fed is to let the bubble run its course and then pick up the pieces after the fact. The Greenspan Fed also completely ignored the growth of subprime and other non-traditional mortgages, which was widely discussed at the time by those following the industry.

This course had disastrous consequences, as is now apparent. This raises the question of why President Obama would be looking to bring back some of the top assistants to Greenspan in pursuing this path and to give them the job of managing the Fed.

The decision to bring back one of Greenspan’s top lieutenants, or to even consider such a move, effectively amounts to a rehabilitation of the Greenspan Fed. It implies that the Fed basically served the country well during this period.

This should have people across the country up in arms. While the economy is certainly better than it was at the trough of the recession in 2009, it is much closer to the trough than the prior peak. The decline in the unemployment rate from a peak of 10.0 percent to 7.4 percent in the most recent data is primarily the result of people leaving the labor force. The employment to population ratio stands at 58.7 percent, more than 4.5 percentage points below the pre-recession peaks and just 0.5 percentages about the low-point for the downturn. By this measure the economy has recovered just 10 percent of the ground that it lost.

Wages have also not begun to recover at all, as high unemployment saps workers of bargaining power. As a result, real wages at most points along the wage distribution are actually below their 2000 level, meaning that workers have received none of the benefits of the economy’s growth over the last 13 years.

The list of harms that the country continues to suffer as a result of the downturn is lengthy, but the point should be clear. This has been a disastrous downturn by any measure and it is not close to being over.

In this context, the idea of giving the country’s top economic position to one of the people most directly responsible for the downturn is effectively rewriting history. It is implies that the Fed did a good job in allowing a housing bubble to grow unchecked and letting banks run wild issuing and securitizing bad mortgage loans.

Remarkably the state of economic debate in the United States is so distorted by deference to those in power, it is likely that the connection of these two candidates to the fed’s disastrous policies will go almost completely unmentioned. In policy circles it is considered rude to mention the responsibility of specific individuals for the policy failures that led to the downturn.

While their tenure in high positions gives them standing for Fed chair, the public is supposed to ignore their actual performance in these positions. In its self-understanding the United States is meritocratic society. The people who get to the top get their as a result of a track record of successes.

In the case of these two candidates for Fed chair we are seeing an example of advancement by seniority. We have two individuals whose track record is such that they should never be allowed near a top policy post again. But because of their long tenure in top posts, either one could end up as Fed chair.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Caixon.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Weekend Edition
October 9-11, 2015
David Price – Roberto J. González
The Use and Abuse of Culture (and Children): The Human Terrain System’s Rationalization of Pedophilia in Afghanistan
Mike Whitney
Putin’s “Endgame” in Syria
Jason Hribal
The Tilikum Effect and the Downfall of SeaWorld
Paul Street
Hope in Abandonment: Cuba, Detroit, and Earth-Scientific Socialism
Gary Leupp
The Six Most Disastrous Interventions of the 21st Century
Andrew Levine
In Syria, Obama is Playing a Losing Game
Louis Proyect
The End of Academic Freedom in America: the Case of Steven Salaita
Rob Urie
Democrats, Neoliberalism and the TPP
Ismael Hossein-Zadeh
The Bully Recalibrates: U.S. Signals Policy Shift in Syria
Brian Cloughley
Hospital Slaughter and the US/NATO Propaganda Machine
John Walsh
For Vietnam: Artemisinin From China, Agent Orange From America
John Wight
No Moral High Ground for the West on Syria
Robert Fantina
Canadian Universities vs. Israeli Apartheid
Conn Hallinan
Portugal: Europe’s Left Batting 1000
John Feffer
Mouths Wide Shut: Obama’s War on Whistleblowers
Paul Craig Roberts
The Impulsiveness of US Power
Ron Jacobs
The Murderer as American Hero
Alex Nunns
“A Movement Looking for a Home”: the Meaning of Jeremy Corbyn
Philippe Marlière
Class Struggle at Air France
Binoy Kampmark
Waiting in Vain for Moderation: Syria, Russia and Washington’s Problem
Paul Edwards
Empire of Disaster
Xanthe Hall
Nuclear Madness: NATO’s WMD ‘Sharing’ Must End
Margaret Knapke
These Salvadoran Women Went to Prison for Suffering Miscarriages
Uri Avnery
Abbas: the Leader Without Glory
Halima Hatimy
#BlackLivesMatter: Black Liberation or Black Liberal Distraction?
Michael Brenner
Kissinger Revisited
Cesar Chelala
The Perverse Rise of Killer Robots
Halyna Mokrushyna
On Ukraine’s ‘Incorrect’ Past
Jason Cone
Even Wars Have Rules: a Fact Sheet on the Bombing of Kunduz Hospital
Walter Brasch
Mass Murders are Good for Business
William Hadfield
Sophistry Rising: the Refugee Debate in Germany
Christopher Brauchli
Why the NRA Profits From Mass Shootings
Hadi Kobaysi
How The US Uses (Takfiri) Extremists
Pete Dolack
There is Still Time to Defeat the Trans-Pacific Partnership
Marc Norton
The Black Panthers: Vanguard of the Revolution
Andre Vltchek
Stop Millions of Western Immigrants!
David Rosen
If Donald Dump Was President
Dave Lindorff
America’s Latest War Crime
Ann Garrison
Sankarist Spirit Resurges in Burkina Faso
Franklin Lamb
Official Investigation Needed After Afghan Hospital Bombing
Linn Washington Jr.
Wrongs In Wine-Land
Ronald Bleier
Am I Drinking Enough Water? Sneezing’s A Clue
Charles R. Larson
Prelude to the Spanish Civil War: Eduard Mendoza’s “An Englishman in Madrid”
David Yearsley
Papal Pop and Circumstance
October 08, 2015
Michael Horton
Why is the US Aiding and Enabling Saudi Arabia’s Genocidal War in Yemen?