Why is the Federal Reserve Board made up entirely of Bush appointees? Because Fed governors don’t serve out their terms

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Mark Thoma points out that the Federal Reserve Board is now stocked entirely with Bush appointees, which isn’t really how the Fed is supposed to work. But he doesn’t go into why.

Fed governors serve staggered 14-year terms, so clearly the idea is to keep any one president from appointing the entire board. But nowadays Fed governors almost always leave before the end of their terms. Or they end up getting appointed for a term that only has two or three years to run. Other than longtime chairman Alan Greenspan, the only Fed governor since the early 1970s who actually stuck around for a full 14 years was Edward W. Kelley Jr., who served from 1987 to 2001. (Here’s the full list of past board members.)

Why don’t they stick around? Maybe it’s the pay–$172,000 a year (the chairman makes $191,300). Which is surely a lot less than, for example, former Fed Vice Chairman Roger Ferguson (who quit in 2006) is making as a member of the executive committee and head of financial services products at Swiss Re. Still, Supreme Court justices make only modestly more ($208,100 a year) and they sure don’t quit after four or five years.

So maybe it’s the work. Much of what the Fed governors other than the chairman spend their time on is not monetary-policy glamor (such as it is) but regulatory drudgery. Also, in the Alan Greenspan era, the rest of the Fed governors were mostly just appendages when it came to the big decisions (former Vice Chairman Alan Blinder’s frustration with his treatment by Greenspan is well documented).

Blinder’s former Princeton colleague Ben Bernanke has been pursuing a consciously more collegial approach as chairman than Greenspan. I certainly can’t imagine him treating Don Kohn or Rick Mishkin like underlings. So maybe they’ll stick around for a while. And maybe Bernanke could think about offering free yoga classes and top-quality sushi in cafeteria. Or I’ve got it: Long-term incentive compensation! Fed governors could be given a stake in the performance of the Term Securities Lending Facility! Then again, maybe not.

Does the partisan makeup of the Fed matter? I agree with Felix Salmon that there is no clear partisan divide these days on some matters like monetary policy. Plus, half the current voting membership of the Federal Open Market Committee–which sets the all-important Federal Funds rate–is made up of regional Federal Reserve Bank presidents who are appointed not by the president of the United States but by local bankers and businesspeople.

Now that’s weird enough in itself, and is occasionally decried by populist critics of the Fed. But you certainly can’t call the bank presidents Bush appointees. They also get paid a lot more than Fed governors (as of Dec. 31, 2006, salaries ranged from $276,500 in Dallas and Philly to $381,000 in New York) and have swankier offices and more people they can order around, so they tend to stay on the job longer.

Where I guess partisan politics could matter most is in matters of regulation. The other three big banking regulatory agencies are more directly controlled by the administration in power (the Office of the Comptroller of the Currency and the Office of Thrift Supervision are part of the Treasury Department, and the FDIC is governed by a board consisting of the OCC and OTS chiefs plus three presidential appointees serving six-year terms). Long-serving Fed governors could presumably try to temper any radical changes in regulatory approach brought on by a new president.

Which brings to mind Ned Gramlich, a Bill Clinton appointee who urged tighter regulation of subprime lending. Except that he did this while Clinton was still in office, and was thwarted by another long-serving Fed governor–Greenspan.

In any case, though, Congress clearly intended in drafting the Federal Reserve Act Banking Act of 1935 for Fed governors to stick around longer than presidents. And now they hardly ever do. Which is mildly disturbing.

Oh, and by the way, can you tell I used to work for American Banker?

Update: More from Thoma.

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