Justice Oliver Wendell Holmes famously described President Roosevelt as having a second-class intellect but a first-class temperament. Historians do quibble over whether he was referring to Franklin or Teddy, but his insight that leadership qualities can be more important than sheer intelligence applies as well to heads of central banks as to heads of state or military commanders.
Janet Yellen has a first-class intellect and unprecedented Federal Reserve experience. And by many accounts, she has a first-class temperament for leading this peculiar policy institution. Lets hope that proves true and lets also hope that this temperament is not tested too hard, too soon.
It is President Barack Obamas own fault that replacing Ben Bernanke as chairman of the Fed turned into such a farce. If he were not as stubborn and as disconnected from realities of life outside of the Washington-New York axis as he is, he never would have indicated Lawrence Summers was his preferred candidate. Circumstances saved Obama from himself, with Summers bowing to the long-true reality that he had little chance of success in a confirmation process that would have been politically bloody.
So now we can move forward. U.S. monetary policy is plagued by economic uncertainty on both ends. Making policy is hard because the global economy is so uncertain, and the difficulties of making policy on the part of the worlds most important central bank foster further uncertainty. Moreover, congressional follies in fiscal policy accentuate the need for wise monetary policy.
Now that we know who will likely chair Federal Reserve Board and Federal Reserve Open-Market Committee meetings after Feb. 1, such uncertainty will be at least marginally smaller.
One can only hope that Yellens Senate confirmation goes smoothly. That is the historical norm. Until the last three years of the Clinton administration, confirmation of appointed Fed governors was pro forma. A few senators with axes to grind could use hearings as a soapbox or could make symbolic statements with no votes, but most nominees sailed through the full body with votes of 95 to 5 or better.
Only when the tactics of the Newt Gingrich-led house diffused up to the Senate, and Bill Clinton wounded himself with the Lewinsky affair, did things become political. The GOP majority in the Senate made it clear they would not confirm any Clinton appointees to the two Fed governors seats that came open, and would rather run out the clock on his term so that the next president, presumably a Republican, could have two appointments right out of the box.
So during the last two years of George W. Bushs administration, Democrats regrettably responded in kind, as then did the Republicans. Sen. Richard Shelby of Alabama earned a place in the Dumbbells Hall of Fame by blocking the nomination of Peter Diamond, who won a Nobel Price in the middle of the process. Shelby, who earlier had no trouble appointing an inexperienced head of a small state bankers association and a 34-year old son-in-law of a Bush campaign donor, said Diamond was not sufficiently versed in monetary policy.
This polarization is tragic and unnecessary. It is tragic because it accentuates already excessive uncertainty and gives global markets further evidence of the dysfunctionality of U.S. economic policy. Greater uncertainty takes a toll on economic growth.
It is unnecessary because there is far less disagreement on monetary policy between economists on the basis of their political leanings than politicians may dream. Yes, there are differences, particularly now when we are in the late stages of a once-in-a-century financial crisis.
Yes, a conservative Keynesian Republican like Stanfords John Taylor or Harvards Martin Feldstein or Greg Mankiw might slow growth of monetary base somewhat sooner or more sharply than Janet Yellen. But once on the FOMC, where the chairman has only one vote of 12 and must cajole 11 other highly independent minds to follow his or her lead, the practical differences in policy are small.
Moreover, just as appointees to the Supreme Court tend to move ideologically, with Republicans Earl Warren and David Souter becoming more liberal and Democrats Felix Frankfurter and Hugo Black more conservative, so members of the Federal Open-Market Committee modify their views once at the actual policy levers.
Senators need to remember that Fed governors can serve 14 years or more and can be appointed to successive four-year terms as chair or vice-chair. Much can happen over four years, to say nothing of 14.
One should consider how a candidates experience and temperament will serve over a long and unknown horizon rather than how they will vote on tapering off the buying of securities through the issue of new bank reserves in the first half of 2014.
The Fed has three vital roles: It sets monetary policy in the short and long run. It is an important regulator of the banking system. And, most important, it acts as a lender of last resort during financial crisis. How it conducts the first two has great effect on how often it has to face the third. It is no accident that we did not have any financial crises in the half-century after the onje in 1929-1933 that started the Great Depression. And it is no accident that we have had repeated crises over the past two decades.
Yellen is well equipped to deal with questions arising in any of these three areas. So are many other economists. But she is the nominee now, and the Senate would do the country well by confirming her with as little drama as possible.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at firstname.lastname@example.org.