Hawks vs Doves? Enthusiastic bank regulators versus more cautious bankers? Insiders versus outsiders?
Questions but also doubts that any averagely informed citizen poses within the legislative decreeThe debate that has opened on who will be Bernanke's successor. That is the most powerful central banker in the world. The appointment will take place at the end of this year.
The two main candidates are: Lawrence summersformer US Treasury Secretary and current Fed Vice Chairman, Janet Yellen.
One would expect the nomination to the presidency to take place behind closed doors, with the vote of a "conclave of super experts", instead the decision rests with the US President, Barack Obama. Considering the effects of the global crisis we are experiencing, the responsibilities to which the leadership of various central banks will have to respond due to the high price charged to their citizens, it is important and interesting to ask what the fundamental requirements of the new central banker should be and what type of personality have the two main candidates.
Summers is criticized for actively contributing to the financial deregulation policy carried out under President Clinton and for not being able to foresee the crisis until it was too late. Other observers instead highlight his important role in the fight against the debt crisis.
Yellen has in recent years held a leading role in one of the areas most affected by the real estate bubble, San Francisco, and has shown great foresight in solving the financial crisis. One wonders if the possible new governor will be able to compromise herself politically to continue the policy already cautiously announced by Bernanke: tapering, the reduction of purchases of US government bonds by the FED.
In the years leading up to the crisis, we watched as Fed governors lead the global economy to the brink due to their overconfidence in unrestricted markets. Other central bankers of countries such as Australia, Brazil, Canada, China, India and Turkey have understood the lesson well: the market is not always efficient and capable of self-regulation. These countries, in fact, managed to escape the bulk of the financial crisis.
Thinking about the dramatic past experiences these are, according to the writer, the basic requirements that the successor to the chairmanship of the Fed should possess:
– It should understand the importance of effective micro- and macro-economic regulation. The objectives of responsible regulation at the macroeconomic level, of full employment with growth, as well as financial and price stability, are in fact influenced by micro-regulation, aimed at determining a correct allocation of credit to businesses and households, which is fundamental for economic activity;
– Should possess good economic judgment and discretion to weigh the risks and benefits of alternative policies, given the ease with which financial markets become turbulent;
– It should not have a totally market-driven approach: putting too much faith in it would make a new crisis almost inevitable;
– Should be able to work with people with different views from their own, especially on the importance of inflation and unemployment.
I dwell on this last point, a controversial subject of economic policy decisions. The economist K. Rogoff shows how in normal times we tend to choose a central banker who places more emphasis on price stability over unemployment: a "conservative" banker. In the last 25 years the mantra of containing inflation has been so dominant as to convince everyone that this phenomenon was the number 1 enemy to fight. However, especially in the context in which we find ourselves, we understand that the real problem to face is unemployment.
For these reasons it is important to choose a governor who pays more attention to unemployment than to inflation. Both candidates argue that the Fed should not have too much preference on price stability over unemployment. We will judge by evidence.
