Why do presidents tend to appoint, or re-appoint, Federal Reserve chairmen from the opposite party? Brad DeLong writes:
The reason American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the things a president seeks: The 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.
But U.S. presidents seek more than just a credible commitment to financial markets that the Fed chairman will fear and fight inflation. They seek intelligence, honor, and a keen sense of public interest and public welfare.
Presidents' futures - their ability to win re-election, to accomplish other policy goals, and to leave a respectable legacy - hinge on the economy's strength.
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.
Mr. DeLong is spot on with his first point; a chairman of the opposite party should boost the credibility of the Federal Reserve's commitment to inflation fighting. Presumably, this is because a chairman from across the aisle will not hesitate to wring inflationary pressures out of the system, regardless of what the timing of such a move may mean for the electoral calendar.
Given this, it's a wonder that any president would appoint someone from the opposite party. Inflation expectations aren't set overnight; decades of responsible Fed policymaking help to anchor expectations firmly around low core inflation. Appointment of a friendly chairman might begin the job of eroding these expectations, but that erosion would take time. In the short term, a politically-friendly chairman would mean almost all upside. Anchored expectations would mean that a looser than normal monetary policy would generate a nice economic boost without near term inflation. That's the kind of combination that can win a man a second term.
The trouble will hit down the road, as expectations slowly begin to adjust and stagflation looms. For a self-interested president, nomination of a chairman from the same party seems like a no-brainer. The only way this might be avoided is if presidents were to observe a voluntary rule against same-party appointments. Fed appointments are a repeated game, so players can come to build trust and thereby avoid an outcome that's worse for almost everyone—politically-based picks leading to high inflation. But one might then assume that such trust would fall apart if one player failed to adhere to the rule. This hasn't happened here, presumably because of the credibility Mr Bernanke earned for himself during the crisis.
Mr Obama has placed his political fortunes in Mr Bernanke's hands. He had better hope the chairman is as honourable and public spirited as Mr DeLong suggests.
This article originally appeared on The Economist.com