President Biden will soon have an opportunity to appoint two new members of the Federal Reserve’s Board of Governors and renew or replace the chair and vice chair. These officials regulate many of our financial institutions. They play a central role in keeping prices in check and employment stable — no small order, especially amid the turbulent Covid-era economy.
With these appointments, Mr. Biden can do more than pick someone who follows ethics rules to the letter — a problem that has plagued the Fed and Jerome Powell, the current chair. Mr. Biden can reshape the way we think about who should safeguard the national and global economies.
Tradition dictates that the ideal governor is impartial and not beholden to the big banks or captured by special interests. This sort of high technocrat lives and thinks in the language of high finance — a classic smart person.
For the most part, the smart people have been white men like Ben Bernanke and Alan Greenspan, pulled from an exclusive club of graduate institutions like the University of Chicago, Harvard and Columbia. Their tight circle includes men like Jamie Dimon, chief executive of JPMorgan Chase, and James Gorman, chief executive of Morgan Stanley. In their minds, they do not represent an interest group. They do not have a culture or a political point of view. They are above the fray. The result: an exclusive class of central bankers blind to its own limitations.
As I have found in my work, those who breach the code of this exclusive club risk being ostracized. Referencing heterodox economic theories like modern monetary theory, feminist economics or environmental economic theory is verboten. Even suggesting that central bankers consult with ordinary investors in the real economy simply isn’t done.
One of the key lessons of the great financial crisis of 2008 was that such groupthink breeds disaster. Central bankers did not take seriously economic theories that predicted the financial crisis. Market participants and regulators, working from the same pool of limited information and shared assumptions, failed to heed the signs of a potential crash, including investors taking on astronomical risk they understood poorly, problems in the underlying “real economy” upon which credit markets were based and the undercapitalization of banks.
The smart guys missed the warnings then. With an opportunity to remake the culture of central banking, Mr. Biden should look beyond their tight-knit circle.
There’s a parallel here to the aftermath of the financial crisis that led to the Great Depression. Back then, brilliant generalists like James Landis, a young professor of law who had no experience in finance, were drafted by New Deal Democrats to help Congress create new securities legislation. Mr. Landis, with his broader perspective from outside the tight world of New York markets, dared to reimagine the relationship between government and markets altogether. He proposed then-unthinkable rules that are now foundational for our financial markets, such as civil and criminal liability for the directors of financial companies involved in fraud, as well as new institutions like the Securities and Exchange Commission, which he ultimately led. This is the sort of independent streak the country needs from the Fed’s next Board of Governors.
In addition, the Fed’s next leaders must be flexible and forward-thinking. Should the Fed join the digital currency parade or try to stop it? How do financial markets affect climate change? Considering such questions means grappling with ideas across a range of disciplines, from social and behavioral science to environmental engineering and international relations, not just economics.
These jobs also demand humility. In my research, I saw how the Bank of Japan fostered a sense of curiosity in its central bankers by sending its novices into rural parts of the country for a year to talk with shop owners and street vendors. They could see, up close, that the real economy lies out there — not in the inner sanctum of high finance.
With calls for green and socially responsible investing in the United States, citizens’ groups are also demanding that monetary policy align with larger national and social priorities. So the next Fed officials should embrace a robust vision of financial citizenship — one that embraces the idea that since central bank actions have social and political consequences, the public deserves to have a voice.
One way to do this is to seek out individuals whose life experience and training give them a different perspective on how the economy works and who matters most. Mr. Biden could appoint a tech industry veteran, or a leader of the green finance movement. Diversity — of race, religion, national origin, gender, socioeconomic and educational backgrounds — is also critical to challenge groupthink.
Americans do, of course, need expertise in financial economics and an understanding of the financial sector on the Fed’s board and in its chair. But a mix of conventional and unconventional perspectives would lend wisdom to the monetary policies that govern our collective financial future.
In recent days, much of the debate around Mr. Powell’s reappointment has been about ethics. But while that’s obviously important, we should also focus on breaking out of the narrow mold of Fed leadership.
Given that the chair must be chosen from the board of governors, we are most likely set for more of the same at the top: a distinguished insider with a narrowly focused résumé, who, whether he or she realizes it or not, sees things more from the perspective of the big financial players than ordinary citizens.
So for Mr. Biden the priority must be to lay the groundwork for the future. That means filling the board seats with people inclined toward unconventional thinking. In so doing, he can open the door to a new kind of Fed chair in the future.
Annelise Riles is the executive director of the Northwestern Buffett Institute and a law professor at Northwestern University.
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