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Who Will Succeed Ben Bernanke?

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By Terry Connelly

We now officially have the Republican nominee for the presidency of the United States. Among his most prominent campaign promises is a vow to replace the current chairman of the Federal Reserve Board, Ben Bernanke.

Ironically, Bernanke was the chief economic advisor to the most recent Republican President, George W. Bush. In a further irony, the very morning after Mitt Romney's acceptance speech at the conclusion of the Republican convention, Chairman Bernanke himself will deliver his own annual speech at the Jackson Hole Conference sponsored by the Federal Reserve Bank of Kansas City, which has frequently served the Chairman as the venue for major policy debates and announcements.

The Trouble With QE

Indeed, it was Bernanke's initiative regarding the unconventional monetary stimulus policy known as "quantitative easing" —- which expands the balance sheet of the Fed by purchase of Treasury securities in order to force-feed more money through the banking system into the economy. That probably sealed his doom with any Republican administration that would come into office in 2013. Republicans have generally viewed "QE" numbers I, II and certainly any III as, at best, an ineffective steroidal prop for an economy best left to mend through free-market forces and, at worst, as a sneaky way for the Fed to "monetize the deficit" brought about by what they see as President Obama's unwarranted stimulus programs.

Bernanke has consistently justified QE on three bases: (1) At the outset, on the pressing need to augment fiscal stimulus with an extraordinary expanding of lendable funds in the banking system to counteract the worst recession since the depression -- which we now know brought GDP down nearly double-digits and employment down by 700,00 per month at its worst. (2) To also provide, through a "twist" of maturities held by the Fed to longer duration to hold down interest rate benchmarks (like 10-year Treasury bonds)  used to price mortgages to help revive a housing market that had suffered a virtual death in the mortgage finance crisis. And (3) The Fed's "dual mandate" under Congressional legislation to support full employment and also price stability, which is not being successfully realized (at 8%-plus unemployment for 40-plus months) by conventional means of Fed policy like holding the basic, short-term Federal funds rate steady for an extended period.

Republicans have increasingly come to criticize both QE and the rationales advanced by the chairman, and made the Fed a political issue in Congress and the presidential campaign. Many Republicans have also moved to create at least indirect controls even on the Fed's conventional policy moves such as setting short-term interest rates by imposing a formal audit on the board's deliberations (although these efforts seem to arise mostly from suspicions about how the Fed's "discount window" lending to banks was carried out largely in private during the 'TARP' days of 2007 and 2008).

This is the first time in modern history that the Fed has become such a directly political issue in a presidential campaign. Even in the 50s and 60s when Democrats were the party frustrated by Fed policy (in that case, tight money), replacing the Fed Chair was never central to a party platform or presidential campaign agenda. Paul Volcker was able to ratchet interest rates into the teens at the end of the 70s, but was treated largely with bipartisan acclaim. And while the first President Bush's PR blamed the three-term Alan Greenspan (appointed and reappointed by both Democratic and Republican Presidents) for costing him re-election by his tight money policy as we recovered from recession, he did so after the election, not during the campaign.

The "Politicized" Fed

What has changed, and what does this change mean for the appointment of the next Chairman of the Fed, especially if there is a change in administrations? Ironically, one thing that has facilitated the change to a more "politicized" Fed is Chairman Bernanke's practice of promoting more transparency and openness in the Fed's policy deliberations, even to the point of more frequent published dissents from the Chair's own views — something rather unheard of during the reign of Greenspan. We know the disagreements about QE within the rotating committee of the Fed that sets monetary policy, and beyond that among the Fed's regional governors. The former Princeton professor Bernanke operates much like a faculty dean who is used to "leading by persuasion" (at best), which includes giving everyone their say and then some before decisions are made.

Bernanke has also has exhibited a penchant for exposing markets a good deal in advance to potential changes in his sense of Fed direction, rather than surprising the market with sudden moves. But this policy also invites more advance critiques rather than "after the fact" complaints, and can lead to "opinion camps" both inside and outside the Fed trying to dissuade the chairman from his sense of direction. Indeed, this phenomenon has been going on for some months now on the subject of potential QE III, and has coincided with the height of the political "season."

Who's Next?

The process of debating QE III has also revealed a number of likely candidates to succeed the chairman within the Fed itself, as a number of board members and regional Fed officials have had the opportunity — indeed facilitated by Bernanke's own "faculty room" governing manner — to exhibit their agreement with Republican policy perspectives in recent weeks. The Dallas Fed President Richard Fisher has joined fellow perennial dissenter Lacker of Richmond and lately James Bullard of St. Louis in pronouncements against any further Fed easing, all of which is music to Republican ears. While it is not yet the time for submitting resumes, the courtship of such a prestigious appointments as Fed Chair is a subtle and delicate matter, but is also becoming more transparent than ever — like Fed policy itself.

Other candidacies include one of Bernanke's successors as Chief Economic Advisor to President Bush, Glenn Hubbard, who is now dean of Columbia Business School, which is a perch Romans' would call "palpable" if the Fed were the Vatican. He is also now an advisor to Romney, but he may have some issues to overcome regarding his consulting for various sovereign credits and banks that have not fared so well in the euro crisis. Kevin Warsh of Wall Street and prior Fed service is also a reasonable Chair prospect. But the sitting board members have more visibility to show their mettle in the current debate over QE III. Despite Romney's understandable efforts to unify his party, it is not at all likely that his nominee would be Ron Paul, despite his clear anti-Bernanke views, but if the senate is safely in Republican hands it could be a Senator who has led the charge to limit the Fed's mandate like Bob Corker of Tennessee.

Finally, consider the other potential result in November — an Obama re-election, but coupled with a Bernanke desire to return to the real faculty room to write the memoirs of a truly historic time in Fed history. Bet in that case on the elevation of Janet Yellen, Bernanke's Vice Chair, as Obama's opportunity to appoint the first Chairwoman of the Federal Reserve.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.