Will Obama Follow Reagan's Lead on Fed Chair?

Will Obama Follow Reagan's Lead on Fed Chair?

By Lou Cannon - September 26, 2013

When iconic investor Warren Buffett was asked recently whom President Obama should name to head the Federal Reserve Board, he replied without pause: “Bernanke. You don’t take a .400 hitter out of the lineup.”

Despite having renominated Bernanke once already (in 2010), there’s no sign the president will heed the sage of Omaha, who backed him for re-election and supported Obama’s various tax-increase proposals. Ever since Larry Summers took himself out of the running, Fed vice chair Janet Yellen has been a heavy favorite to succeed Ben Bernanke when he steps down as chairman at the end of the year. According to Goldman Sachs, Yellen’s nomination could come early as next week.

Although Yellen has her critics, the appointment has surface political appeal. It would earn Obama style points with the liberal wing of his party, which would fight hard for her confirmation by the Senate. He’d also be making history by naming the first woman to head the central bank.

But if Obama wants to surprise the Wall Street wise guys, he could do worse than take Buffett’s advice. If he did, the president would be following in the footsteps of Ronald Reagan, one of the most effective politicians ever to inhabit the White House.

In 1983, near the end of his first term, Reagan faced a decision on Paul Volcker, a Wall Street economist who had been appointed to head the Fed four years earlier by President Carter. Although Volcker was respected in the White House, as Bernanke is today, almost every member of Reagan’s economic team had a candidate to replace him, in large part because they believed -- as former White House domestic adviser Martin Anderson later said -- that Reagan should put his own stamp on the Federal Reserve.

Volcker, as is true of Bernanke today, was more popular on Wall Street than he was in Washington.

Wall Street appreciated Volcker for getting the runaway inflation of the late 1970s and early 1980s under control. He’d done this painfully, by raising interest rates, which led to unemployment and other hardships. Volcker, whose feat is now appreciated by history, was then unpopular on Capitol Hill, where members of both parties were calling for his scalp.

Bernanke, 30 years later, faced an economy reeling from a financial collapse. He has nursed it back to modest recovery by keeping interest rates at rock bottom. Although the crisis Bernanke faced and in turn the policy he followed to cope with were the opposite to Volcker’s, the two economists are alike in sharing the conviction that effective monetary policy can make a difference and also in sticking to their guns when their solutions did not produce quick results.

Few of the pundits in 1983 expected Reagan to reappoint Volcker. Treasury Secretary Donald Regan, who had clashed with the Fed chief on Wall Street, opposed him. Presidential adviser Edwin Meese urged appointment of the Fed vice chairman, Preston Martin, a fellow Californian. Martin was not quite the overwhelming favorite that Yellen is today, but he was expected to get the job.

With his term expiring in August, Volcker met with Reagan on June 6, 1983, and discussed reappointment. He made it clear he didn’t want to stay for four more years, but did want to see his anti-inflation policies through.

To this day, it’s not entirely clear why Reagan decided to keep Volcker. The Fed chairman did have a champion in Sen. Paul Laxalt of Nevada, Reagan’s closest friend in Congress. Senate Majority Leader Howard Baker, who had complained after Republicans lost ground in the 1982 midterm elections that Volcker “had his foot on our neck and we’ve got to get it off,” seems to have come around to the view that the Fed chairman’s policies had staying power.

The Chicago Tribune’s William Neikirk, in a well-researched 1987 article, gave credit to Baker and Laxalt but came to the conclusion that it was Volcker’s popularity on Wall Street, more than anything, which led to his reappointment.

As a Reagan biographer, I’ve never been quite sure of why Reagan made the decision he did. In part it may simply have been that Reagan, an instinctive politician, liked Volcker and believed in him. The president, quintessentially optimistic, always thought that things would turn out right. In the case of the economy, he believed that the unemployment was temporary and would be followed by years of prosperity, as it was.

But the economic happy ending and Reagan’s re-election were not in sight in 1983. His approval ratings were in the mid-40s, about where Obama’s are now. Many despaired of recovery. Volcker told the president that the nation should stay the course, a phrase Reagan liked so much he used it as his own in countless speeches. When the turnaround came, Reagan took the credit, telling his audiences, “They don’t call it Reaganomics anymore.”

For his part, Volcker appreciated that Reagan had reappointed him and later said the Republican president gave him more backing than Carter ever did.

Whatever the reason, Reagan made the right choice. In baseball terminology, to use Buffet’s phrase, Volcker was .400 hitter. Reagan, a former sports announcer, knew better than to take him out of the lineup. 

Lou Cannon, who is traveling in Scotland, has written about the campaign for RealClearPolitics.

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