The January 19 issue of the Frontline Weekly Newsletter points out a dangerous undercurrent of the year’s political tide: tinkering with the federal reserve for political gain.

In summary, the appointment of President Bush’s two nominees for the Federal Reserve Board are being held up by Sen. Chris Dodd, D-CT. Dodd has also announced that he will not allow confirmation of a third member, Randy Krozner (whose expertise is in mortgage markets) when his term ends.

Why would Dodd do this? He has made it clear that he is not happy with Fed policy, as has his counterpart in the House, Barney Frank; so some of this is just personal pique. They want the Fed to respond to their political goals. But some of it is clearly partisan. If there is a Democratic president, they would be able to immediately nominate three new governors, and would not have to reconfirm Ben Bernanke as chairman, which means he would leave and the new president would appoint the chairman.

Dodd clearly wants a say in this, and wants a Fed that will pay attention to his politically driven needs. This would mean the Fed would be short-staffed for at least another 18 months, which is not a good thing. The Fed does more than just hold eight meetings and set monetary policy. They have real work that needs to get done.

Whoever the new president is, they will get to nominate who they like as governor terms come to an end. But to act as Dodd is currently doing threatens the independence of the Fed, which is a critical part of the economic world. You can criticize the Fed and their policies, and I often do, but every right-thinking person agrees that Fed policy should not be set in Congress and subject to political whim. The last time we had a Fed chairman who let politics suggest policy was William Miller under Jimmy Carter, and that did not turn out well.

Politics is a merry mess, as evidenced by any day’s viewing of the continuous news channels in this election year. However, the security and prosperity of this country is far too important to be used as a pawn by those who wish to promote their own (or their own party’s) political future.

I remember the economy of the Carter years, and the prospect of a politicized Federal Reserve is a frightening one.

10 thoughts on “Politiconomics

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  3. “The last time we had a Fed chairman who let politics suggest policy was William Miller under Jimmy Carter, and that did not turn out well.”

    LOL! Well, this tells me everything I need to know about your sources and their bias. Anyone who doesn’t think Alan Greenspan let politics suggest policiy is just willfully ignorant or lying.


    As for Kro[s]zner, perhaps you can tell us (other than Democrat-bashing) why he should be entitled to a 12-year term, given how poorly his “expertise” in the mortgage market has served this country?

  4. I have to admit that this subject matter is well beyond my scope of comprehension. However, I think part of the problem is that we have a President in his last 10 months of an 8 year term who has plundered our economy so far and now wants to assure that his reign of terror continues beyond his term of office. I remember when we talked about a balanced budget – remember those days?

    Sorry, I need to get back to the subject at hand. I guess I need to know the answers to a few questions such as: How many Governors are there? Since Bush is looking to recommend 3, what percentage of the total is this? What is the term of a Governor? Is it possible for George to recommend folks who will agree to resign not later than 6 months after the inauguration of a new president?

  5. There are seven positions on the Federal Reserve; two of those are now vacant. A third term will expire soon, and Sen. Dodd has indicated that he’ll delay confirming that re-appointment in hopes that a Democrat will make the next appointments — leaving only four members of a seven-person board for the next year.

  6. “What is the term of a Governor?”

    It looks like 14 years. I was wrong about 12 years, above.


    “Is it possible for George to recommend folks who will agree to resign not later than 6 months after the inauguration of a new president?”

    I suppose anything is possible. Whether it is legally enforcible is another matter.

    Netmom, who is a former Republican Party chair for Anderson Co, is understandably anxious to see the Bush administration legacy extended beyond his term. The mileage of others may vary.

  7. I to remember the Carter years economy. As I recall, that particular problem was caused by an anomoly in the economy called stagflation.

    Neo-Keynesian theory developed a more detailed model of inflation which argued that there are two kinds of inflation–demand pull and cost push. Stagflation, in this view, is caused by cost push inflation, which could be the result of monetary policy, insufficient resiliency of the economy or from purely external factors such as a shortage of natural resources or an act of war. In this case the strategy for defeating stagflation is to cut the money supply, hoping to cut inflation to manageable levels, then increase the money supply to spur economic growth. This “disinflationary” Neo-Keynesian policy was pursued in the USA by Paul Volcker during the Carter Administration.”


    In this instance the “improper monetary policy” was failure to finance a war, Vietnam, by properly using taxation. Not the Fed. monetary policy. Also, the glut of labor from the stopping of the war, and draft caused a need for more jobs, that were not there due to a lack of resources in the form of raw materials, fuel being the primary factor.

    In the late 1970’s and the early 1980’s inflation was curbed by reigning in the money supply BY THE FED. under both Carter AND Reagan by double digit interest rates. This made money more difficult to borrow and payments high enough that debtors were paying money toward debt instead of chasing consumer goods driving prices up.

    We are in a similar economy now. The United States is not propertly financing a war using taxation. The Fed has admirably done their part in smothing out the economy ever since the Neo Keynesian policy was put into effect. BTW it appears Carter started the policy, Reagan endorsed it, and it has worked ever since.

    It was the folly of Johnson and Nixon to not properly using taxation policy that caused the problem.

  8. To clarify on the term of a governer: it appears to be 14 years. Kroszner has served two years already, so he apparently can only serve 12 more years, which is where the number 12 came from above. Dodd has been able to see Kroszner in action and is unsatisfied that the Fed has been well-served by Kroszner’s “expertise.”

  9. So Kroszner has been on the Fed. and they are blocking an incumbent. His expertise is in Mortgage loans? Isn’t ther a major problem with that part of the economy right now? Sounds like Dodd may very well be giving a Performanc Evaluation and this man is scoring low.

  10. Here is Dodd’s side of the story:




    Of course, Dodd may just be taking a page out of the Republican playbook:

    ” . . . in April 2000, Republican Senator Phil Gramm, then the banking panel’s chairman, said he wouldn’t act on Fed nominees from Democratic President Bill Clinton so a new president could appoint officials for the central bank.

    Bush’s election later that year resulted in the demise of Clinton’s nomination of bank executive Carol Parry. Fed nominees require approval from the Senate, which usually acts on a committee’s recommendation.

    Unlike Gramm, Dodd left the door open to a vote.”


    I guess it’s ok if you’re a Republican.

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