Federal Reserve System, Chairman

Department/Agency: Federal Reserve System

Position:

Chairman

Executive Schedule: Executive Level II - Presidential Appointment with Senate Confirmation

Major Responsibilities:

Set U.S. monetary policy and influence interest rates
Keep the U.S. financial system stable
Regulate Federal Reserve Banks
Protect consumers' credit rights

Key Competencies and Preferred Qualifications:

Highly regarded and experienced economist
Ability to interpret economic developments and trends
Familiarity with federal budgeting, legislative and policy-making processes

Insight:

The chairman of the Federal Reserve System is the principal architect of the nation's monetary policy. Acting with the six other members of the Fed's Board of Governors, he or she is responsible for keeping the economy stable. Their decisions about money supply instantly move interest rates up or down. It is a job fraught with challenges in the best of times. In difficult times, it is unquestionably one of the hardest jobs in Washington and perhaps the world. Historians blame Fed decisions and indecisions in the early 1930s for converting a downturn into the Great Depression.

What began as a problem with sub-prime mortgages in mid-2007 now has erupted into the worst financial crisis since the Depression era. The burden of making the right decisions at the Fed this time fell on the shoulders of Ben S. Bernanke, the former chairman of President Bush's Council of Economic Advisers who succeeded Alan Greenspan as Fed chairman in February 2006. Bernanke came to Washington from academe, where he built his reputation with scholarship on the Great Depression. Initially seen as a stolid free-market champion in the Greenspan mold, the specter of financial collapse has led Bernanke to take actions that no Fed chairman before him attempted. "He has slashed interest rates, established new lending programs, extended hundreds of billions of dollars to troubled financial firms, bought debt issued by industrial corporations such as General Electric, and even taken distressed mortgage assets onto the Fed's books," financial journalist John Cassidy wrote in a New Yorker profile. "These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history. Ben Bernanke, who seemed to have been selected as much for his predictability as for his economic expertise, is now engaged in the boldest use of the Fed's authority since its inception, in 1913." Bernanke acknowledged he was wrong in believing the fallout from the collapse of the risky subprime mortgage sector would be limited. He said the Fed initially tried a "finger in the dike" approach toward dealing with the escalating crisis.

The Fed is the U.S. central bank, founded by Congress in 1913 during the Wilson administration to provide the nation with a safer and more stable financial system. "Over the years, its role in banking and the economy has expanded," a Fed history notes. Its actions on interest rates can dampen inflation or jump start the economy out of the doldrums, but it cannot by itself fix an ailing economy, as the current crisis demonstrates. It sets reserve requirements for banks and decides the federal funds rate that they are charged on their balances at the Federal Reserve. It buys and sells U.S. securities in the open market, which also influences interest rates. The Board of Governors relies on an 1,800-member staff to carry out its work. There have only been 14 Fed chairman in its 94-year history.

Fed governors serve staggered 14-year terms to insulate them from political pressures, but Fed chairmen serve four-year terms that can be renewed only if the President and the Senate so choose. Bernanke's term as chairman expires Jan. 31, 2010, which means that President-elect Barack Obama will get to decide whether to keep Bernanke on the job or nominate a successor. Two weeks after the election, Obama named former Fed chairman Paul Volker to chair a new Economic Recovery Advisory Board. Volcker, 81, was credited with curbing the runaway inflation of the late 1970s by pushing up interest rates during his tenure at the Fed. Obama's choices for his economic team include Treasury Secretary-designate Timothy Geithner, president of the Federal Reserve Bank of New York, and former Treasury Secretary Lawrence H. Summers, who will head the President's National Economic Council.

Bernanke's predecessor, Greenspan, who followed Volcker's successful chairmanship, commanded wide respect on Wall Street and in the White House under four presidents during his 19-year tenure. He was faced with a sharp downturn on Wall Street soon after he started in 1987. But the country and the economy recovered quickly from that small shock. During the economic boom of the Clinton years and into the second Bush administration, Greenspan held interest rates low and steady, even while warning in a 1996 speech of "irrational exuberance" on Wall Street, four years before the bubble in technology stocks burst. Now, in hindsight, some economists and lawmakers are questioning Greenspan's legacy and arguing that he was too much of a "free marketeer" and too reluctant to use the Fed's regulatory clout to rein in risky financial practices.

Bernanke worked closely with President Bush and outgoing-Treasury Secretary Henry Paulson in trying to navigate these uncharted waters in recent months. He and Paulson sat side by side on numerous occasions as they tried to persuade a reluctant Congress to approve the $700 billion bailout that finally passed a few weeks before the election. The newly elected president (who voted for that package) and his economic team will be looking to the Fed chairman for support for their decisions.

Bernanke's decisions will be debated for years, and it is impossible for now to predict whether his judgment will be vindicated. His actions, starting with the Fed decision last spring to bail out Bear Sterns, a foundering investment house, and later decisions to rescue the insurer American International Group while letting Lehman Brothers collapse, remain highly controversial.

Bernanke expressed confidence in a speech a month before the election that these moves would help the country recover without long lasting damage to the economy. He told the National Association for Business Economics: "These are momentous steps, but they are being taken to address a problem of historic dimensions. In one respect, however, we are fortunate. We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased. This is not the situation we face today. The Congress and the Administration chose to act at a moment of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy. The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery."

When Bernanke testified before the House Financial Services Committee shortly after the election, Rep. Barney Frank, D-MA, the chairman, told reporters, "He's been a responsible Fed chairman, and I think it would be disruptive both in terms of message and substantively to replace him."

Liberal economist Paul Krugman, the 2008 Nobel Laureate and New York Times columnist who was Bernanke's colleague on the economics faculty at Princeton, was quoted in The New Yorker profile as rendering this appraisal: "I don't think any other central banker in the world would have done as much by way of expanding credit, putting the Fed into unconventional assets, and so on. Now, you might say that it all hasn't been enough. But I guess I think that's more a reflection of the limits to the Fed's power than of Bernanke getting it wrong. And things could have been much worse."

Key Relationships – Within the Government:

Fed Governors
Secretary and Under Secretary of the Treasury
Chairman, Federal Deposit Insurance Corp.
Chair and members, President's Council of Economic Advisers
Comptroller of the Currency, Treasury Department
Director, Office of Thrift Supervision, Treasury Department

Key Relationships – Outside the Government:

American Bankers Association
Financial Industry Regulatory Association
Mortgage Bankers Association of America
National Association of Securities Dealers
Institute of International Finance
Securities Industry and Financial Markets Association

Nomination Referred to:

Senate Committee on Banking, Housing, and Urban Affairs

Current Position Profile:

Ben S. Bernanke, Ph.D. (Confirmed 2006). Former chairman of President George W. Bush's Council of Economic Advisers. Fed governor since 2006. Former economics professor at Princeton University. Expert on Great Depression.

Recent Position Profiles:

Alan Greenspan, Ph.D. (1987-2006). Former chairman of Council of Economic Advisers in Ford administration. Began career as analyst for the National Industrial Conference Board. Co-author and colleague of Ayn Rand. Chaired bipartisan commission that helped solve 1983 Social Security crisis.