President Barack Obama’s nominee for Federal Reserve Chair Janet Yellen stands in the State Dining Room of the White House in Washington, Wednesday, Oct. 9, 2013, where the president announced he is nominating Yellen to be chair of the Federal Reserve, succeeding Ben Bernanke. (AP Photo/Charles Dharapak)
Let’s be blunt. Barack Obama is still in denial about the sorry state of the economy, and so are both parties in the stalemated Congress. The government is consumed by wrong arguments about the wrong crisis, while the Federal Reserve keeps pointing out discreetly that the economy is still sick. Prosperity is not just around the corner.
Obama has a way to break out of this mess. Instead of wrangling with know-nothing Republicans over how to cut spending and make things worse, the president should make his “grand bargain” with the Federal Reserve. Together, they can develop an aggressive agenda to stimulate job creation and create the new demand the stagnant economy needs. The president’s explicit support would give the Fed the political cover it needs to use its powers of money creation and directed lending for unusual intervention in the economy. The central bank created $3 trillion in new money to refloat the financial system. It should do something similar, but more modestly, to restore the real economy.
It seems unlikely that Obama will make such a dramatic departure. A year ago, Fed chair Ben Bernanke began to explore some unorthodox interventions, but he ran into fierce attacks from the right and even resistance within the Federal Reserve System. He backed off when he realized the White House and Treasury would be cool, even hostile, to his initiative. But Obama might change his mind if economic conditions continue to grind people down. And progressive Democrats can rebel against Obama’s passivity—the president felt their sting when they fought his choice of Larry Summers as the new Fed chair.
That fight is not over yet. As it happens, in the next few months, Obama will name up to five of the seven governors of the Federal Reserve Board. His choice to succeed Bernanke as chair is Janet Yellen, currently vice chair and a strong Bernanke ally. Yellen is a real pro—not a bomb thrower and moderately liberal, with the emphasis on “moderate.” If the Senate confirms Yellen, she would be the first woman to run the Fed in its 100-year history.
In recent years, the Federal Reserve Board has been short on original thinkers who stray from conservative orthodoxy. The other openings present an opportunity for rank-and-file Democrats to promote fresh thinking. Wall Street interests lobby for their appointments; why shouldn’t progressives? In that spirit, here are some recommendations—smart, skillful and independent-minded people with promising ideas about retooling monetary policy.