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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.

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