Should Biden bring Jerome Powell back? It depends on his theory of change.

President Biden faces an important decision and deep divisions among his allies . Should he re-elect Jerome Powell as head of the Feder...


President Biden faces an important decision and deep divisions among his allies. Should he re-elect Jerome Powell as head of the Federal Reserve when Mr Powell’s term ends early next year, or choose a replacement more aligned with the Democratic political agenda?

Pro-Powell forces Argue that he has shown himself to be exceptionally determined to generate a robust labor market that will lead to better conditions for American workers. Those who oppose the renewal say it was too soft a regulator of banks and other financial institutions, and that it is insufficiently engaged to use the powers of the Fed to fight climate change.

But there is a more fundamental question for President Biden: what is his theory about how change happens?

Credit…Ann Saphir / Reuters

One theory of change is that when a party wins the presidency and the Senate (albeit narrowly), it should put in place appointees who are full adherents of its platform. These appointees will then move this program forward with all the possible tools at their disposal. If they make a lot of enemies or see their most aggressive actions overturned by the courts – or generally appear as polarizing forces – so be it.

If Mr Biden took this approach, he could seek a brand for the top Fed position, betting that the candidate could both secure confirmation in a tightly balanced Senate and steer the country’s central bank into a more position. activist on a range of liberal priorities.

A reappointment of Mr Powell would follow the reverse theory of change. In this version, there is great value in the appointees who have the biography and political skills to make urgent policy changes seem sane and reasonable, not scary. This strategy, according to logic, will make possible more aggressive political action. And it could also make it more sustainable in the face of legal challenges and changes in government control.

Another prominent candidate for the job, Lael Brainard, 59, would essentially split the difference between these approaches. She has been governor of the Fed for seven years, working closely with Mr. Powell and other senior central bank officials.

She is hardly a brand; his speeches are carefully crafted and his positions fit well into the mainstream economy. But it is a democrat who donate to Hillary Clinton’s 2016 presidential campaign and who dissident on many moves to ease banking regulations championed by those Trump appointees. She also expressed public alarm on the economic implications of climate change.

He’s a very different background and personality from Mr. Powell, a 68-year-old Princeton graduate who worked as a Wall Street trader and private equity executive. He served in the administration of George HW Bush and was appointed head of the central bank by President Donald J. Trump.

He has also become, in recent years, a full convert to the religion of full employment. This is the view that the Fed should allow the economy to function sufficiently so that this opportunity opens up to people in American society, including historically marginalized groups.

This view is more commonly adopted by the political left. But Mr Powell got there in the second half of the 2010s, as the labor market improved to levels far beyond what the Fed’s own business models envisioned without spurring unwanted inflation. .

His management of the Fed is, in this sense, the 21st century American embodiment of the concept of “conservative men, Whig measures”.

The phrase, taken from a 19th century novel by Benjamin Disraeli, who was to become British Prime Minister, refers to a government in which stubborn conservatives (the Tories) nonetheless implement ideas from the center-left (Whig ). circles, aimed at improving the lives of the masses.

What would it mean if Mr. Powell was appointed for a second term as Fed chairman starting in early 2022?

That would mean that the major overhaul of the Fed’s approach to the job market would continue to be led by a registered Republican whom 84 senators voted to confirm in 2018. Ms Brainard was confirmed with 61 votes in 2014, including 11 Republicans.

Part of the argument for Mr. Powell’s reappointment is that his mere presence – his credibility on both sides of the aisle in Congress and on Wall Street – would be a boon to the administration’s broader economic project at one. an era of rampant inflation and bubbling financial markets. . The fact that he’s not an ally of Biden, or a Democrat at all, becomes a feature rather than a bug.

“Part of the Biden mantra has been to restore civility and minimize partisan tensions,” said Sarah Binder, a professor at George Washington University who has written extensively on the Fed’s place in US politics. “It is somewhat fortuitous for Biden that if he wants to re-elect Powell, he can do so under the guise of restoring the independence of the Fed even if Powell fits his views on monetary policy perfectly.”

Under Mr. Powell’s chairmanship, the Fed weakened many restrictions on large banks, easing capital and liquidity requirements on them, among other measures. It has also enabled the completion of several major bank mergers.

Ms Brainard’s dissent on regulatory measures were unusual for the consensus-driven Fed. When she was the only vote-to-action in 2018, no governor had opposed one in seven years. She would go to dissent 20 times over the next three years.

When it comes to regulatory policy, Fed leaders traditionally defer to elected leaders while aiming to maintain a wall of independence around monetary policy making. And that was enough to make Presidents ready to fire the other party’s Fed leaders even when they disagree over the regulatory approach.

Fed Chairman Ben Bernanke, for example, was appointed by Bush. He backed regulatory changes made by Obama-appointed Fed Governor Dan Tarullo, and President Obama then re-elected Bernanke. Notably, as governor of the Fed, Mr. Powell did not oppose any regulatory measures defended by Mr. Tarullo.

And while these inter-party term renewals have parallels to this moment – see also Ronald Reagan / Paul Volcker and Bill Clinton / Alan Greenspan – there may be an even closer historical parallel.

In the 1930s, Franklin Delano Roosevelt turned not to any of the brilliant New Deal economists for advice on policy, but to a Utah banker named Marriner S. Eccles.

Mr Eccles embraced deficit spending and loose monetary policy to help propel the nation out of the Great Depression, but presented himself as a mere pragmatic businessman recommending a reasonable course. He distances himself from the more academic intellectuals linked to the administration.

“Eccles served a very important purpose for the Roosevelt administration because he was a millionaire who espoused policies favorable to what Roosevelt wanted to do,” said Eric Rauchway, historian at the University of California, Davis, and author of “Why the New Deal is Important.”

In public appearances, Mr Eccles stressed that he arrived at his point not by reading John Maynard Keynes or other influential intellectuals of the time, but by working on his own. And while Mr. Eccles was closely tied to Roosevelt’s inner circle on macroeconomic management, he was more wary of other administrative policies involving extensive government control of the economy. And that’s why, Mr Rauchway said, he was placed with the Fed instead of the White House or the Treasury.

Mr Biden is weighing a move that will shape the economic environment for the remainder of his term. The question is whether the political logic that led Mr Roosevelt to Mr Eccles – and which led several other presidents to renew central bankers from the opposite party – applies in a world of high polarization and exceptionally high stakes. students.

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Newsrust - US Top News: Should Biden bring Jerome Powell back? It depends on his theory of change.
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