Ben Bernanke's bad example

The recent announcements that former Federal Reserve Chairman Ben Bernanke has accepted a position as a senior adviser at Pimco and a similar position at hedge fund Citadel have raised questions about whether the "revolving door" between government and private sector jobs ought to be restricted.

Perhaps, for example, Federal Reserve officials should be subject to a five-year waiting period before they can take jobs in the financial sector. The idea would be to reduce the chance that bank regulators could be influenced through formal and informal ties to previous Fed officials.

My concern is somewhat different: The incentive for Federal Reserve Board members to step down before their terms are up and accept lucrative private sector positions has the potential to damage the Fed as an independent institution.

The Federal Reserve was set up in a way that's supposed to prevent any one U.S. president from stacking the seven-member Board of Governors with people of a particular political persuasion or particular views about monetary policy. The board, if it acts in unison, can dominate monetary policy because it has a majority of the votes on the monetary policy making committee, or the FOMC (Fed Open Market Committee).

If board members serve their full 14-year terms, a U.S. president can appoint only two board members during a four-year term in the White House, and four members during an eight-year term -- not enough to constitute a majority of votes on the FOMC.

However, in recent years this safeguard hasn't always worked as planned. Some board members haven't served their full terms, and both President Bush and President Obama have been able to appoint all seven members of the Board of Governors.

Still, Bush and Obama haven't been able to exercise complete control over the board because the Senate must approve board member appointments, which has served as an effective check on the board's political composition. And the insistence that Obama appoint "balanced" board members -- for example, that he appoint members from both parties or members that hold views about monetary policy that agree with Republican ideas -- is one of the reasons that several board positions remained vacant during the financial crisis and subsequent recession, a time when the nation needed the board to be at full strength.

However, the Senate is no guarantee that a Board of Governors can't be stacked. If the White House and the Senate are controlled by the same political party, and if there's a filibuster-proof majority in the Senate, a president could name board members to suit his or her political preferences. That would seriously undermine the Fed's independence and threaten it as an institution.

The best insurance against this is for those who accept appointments to the Board of Governors to also accept that they're in it for the full term, to realize that serving all 14 years is part of the obligation they take on.

Bernanke's case is a bit different in that it's typical for the Fed chairman to step down once he or she loses the faith of the president (chairs serve renewable four-year terms). But Bernanke gave up the chairmanship voluntarily. As far as we know, the president didn't ask him to do. Also, Bernanke had enough time left on his 14-year appointment as a Fed governor to serve another four-year term as chair.

But his stepping down isn't the main problem. It's the idea that it's OK for a former Fed member -- and its chair, no less -- to take these kinds of jobs once you leave. If Bernanke had returned to academia or limited himself to his position at the Brookings Institution, that wouldn't be a problem.

However, if the chair can cash out, then other board members will also have an incentive to resign their positions as Fed governors after a few years to pursue financial interests in the private sector. Bernanke's acceptance of positions at Citadel and Pimco sets a bad precedent because it encourages other board members to do the same.

The Fed's independence was essential in allowing it to respond as necessary during the Great Recession, and board members must understand that when they fail to serve full terms it gives presidents the opportunity to stack the board. And that threatens the Fed's independence.