In memory of Dr. Andreas Höfert

Reflections on the toughest economist’s job on earth

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“I think Ben Bernanke’s done an outstanding job. [He’s]…already stayed a lot longer than he wanted or he was supposed to.” When US President Barack Obama said this three weeks ago, many Federal Reserve watchers interpreted it as the official pink slip for the Fed chairman, whose term expires in January 2014.

Now the shortlisting game has begun in earnest. Among the names being bandied about to succeed Bernanke as the agency’s 15th chairman are Janet Yellen, currently Fed vice chairman; former Treasury secretaries Timothy Geithner and Lawrence Summers; and current Treasury chief Jack Lew. Also not a far-fetched candidate in a world where top regulators switch from one central bank to another as Mark Carney has is Stanley Fischer, the Central Bank of Israel governor until a couple weeks ago.

If Bernanke leaves in January, he will have been chief for eight years, slightly longer than the average stay of seven years, which ties him with Arthur Burns (1970-78) and Paul Volcker (1979-1987) for the fourth-longest tenure in office. Alan Greenspan (1987-2006) and William McChesney Martin (1951-1970) each served more than twice as long.

Whoever takes over will inherit the toughest economist’s job on earth. Many pundits are likely to judge Bernanke’s two terms as the most challenging a Fed chairman ever faced. Greenspan initially called the 2007-08 financial crisis the “worst in a lifetime” before he revised it to the “worst in a century” and finally the “worst ever.”

However, previous Fed chairmen also confronted daunting challenges. In the long Greenspan reign alone, labeled in hindsight “the Great Moderation” by mainstream economists although Greenspan himself refers to it as the age of turbulence in his memoirs, crises included the 1987 stock market crash, the savings and loan crisis of the early 1990s, the 1991 recession, the bond market crash of 1994, the Asian crisis, the Russian crisis that triggered the Long Term Capital Management bankruptcy, the millennium bug, the dot.com bubble and the subsequent 2001 recession.

Greenspan’s predecessor Volcker had to deal with the Great Inflation of the late 1970s, which he reduced at the cost of successive recessions in 1981 and 1982 that at the time were considered the worst since World War II. Other chairmen and crises worth mentioning include Eugene Meyer, in office at the beginning of the Great Depression before resigning due to clashes with President Franklin D. Roosevelt; Marriner Eccles, who took over from Meyer and conducted Fed policy during the later years of the Depression and World War II when the bank’s independence from the federal government was questioned; and finally Burns, who ran the Fed when President Richard Nixon abolished the gold standard, precipitating the subsequent Great Inflation.

One of the calmest Fed chairmanships was also the longest. Martin, head of the Fed during the Mad Men era of the 1950s and 1960s, is currently remembered for restoring its independence in 1951 and defining his job as “tak[ing] away the punch bowl just as the party gets going.”

Trying to assess, which one of the chairmen was the most successful is rather difficult. One must remember that the Fed has a dual mandate of controlling both inflation and unemployment. Moreover, Wall Street looks at the stock market’s performance under a chairman’s reign. According to those metrics Bernanke has done an average job. In his term unemployment never reached the heights it did under Eccles, nor did inflation approach the rates Burns and Volcker dealt with. However, such numbers can be deceiving. Eccles inherited a dreadful unemployment situation post-Great Depression, which improved quite significantly during his term. The same can be said of Volcker, who as mentioned before vanquished the Great Inflation.

Moreover, when it comes to a Fed chief’s place in history, several years need to pass before a definitive assessment can be made. Consider Greenspan. At the time of his 2006 retirement he was hailed as the greatest central banker ever, nicknamed the “maestro.” Since then he has been vilified because his overly loose monetary policy, extreme belief in unregulated self-correcting market forces and denial of a possible housing bubble are claimed to have led to the 2007-08 disaster. On the opposite side is Volcker. He left the Fed in 1986 with a reputation as an inflation hawk responsible for the double-dip recessions of the early 1980s. Since his retirement his standing has improved and he is now regarded as one of the best Fed chairmen ever.

How will Bernanke fare? It is too early to say. You can argue that his unconventional monetary policy prevented the world from falling into a Great Depression after the financial crisis. But you also need to acknowledge that the job is only half-done: we do not yet know what the price of his ultra-lose monetary policy in form of three quantitative easing programs will be. Needless to say, whoever becomes the next chairman will be confronted with challenging times. As usual, that is part of the job description for the toughest economist’s job on earth.