Donald Trump is considering replacing Janet Yellen as the head of the Federal Reserve Bank, the agency that oversees the nation’s money supply and sets interest rates all over the country. It’s a position with a lot of power to affect the economy, so selecting a nominee is an important decision. So what should Trump be looking for?
Perhaps the most important quality in any government official is the recognition that he or she doesn’t know everything. The economy is a fantastically complex thing, and the idea that any one person could possibly know enough to manage it effectively is a delusion that has led to disaster in many countries. A Fed chair who thinks he can function as an economic savior is doomed to fail.
In his book, “The Courage to Act,” former Fed Chairman Ben Bernanke talks about his response to the Great Recession. Throughout the book, he expresses the view that it is better to do something than to do nothing in a crisis. This is a profoundly dangerous instinct where the economy is concerned. Intervention in economic affairs from the top down always makes things worse, as we saw when Bernanke’s efforts prolonged the Great Recession, making it one of the slowest recoveries in U.S. history.
- A diverse background in economics
Rather troublingly, Bernanke also admits that he basically has no idea what caused the Great Recession in the first place. And as any doctor knows, it’s a good idea to form a correct diagnosis before prescribing a cure. Bernanke, along with most people in the financial sector these days, subscribes to the Keynesian school of economics, which recommends aggressive government action to correct recessions. But the Keynesian school also contains no explanation for why recessions happen in the first place. On the other hand, the Austrian school of economics, to which many classical liberals and libertarians adhere, explains recessions by pointing to the false economic signals created by artificial intervention in the economy and recommends a hands-off approach. The Fed chair should be someone who is at least aware of these conflicting schools of thought.
- An appreciation for history
The Federal Reserve was founded in 1917, meaning that we now have a century of records of Fed action. A careful examination of when the agency acted and failed to act can reveal a lot about what works and what doesn’t. For example, the Panic of 1919 was extremely severe and yet ended very quickly. Why? An almost total absence of Fed action. On the other hand, the Fed intervened heavily after the stock market crash of 1929, and the economy took more than a decade to recover from the ensuing Great Depression. Those who don’t learn from history are doomed to repeat it.
- A desire to eliminate his own job
As Ron Paul, as well as his son, Sen. Rand Paul, has repeatedly pointed out, the Federal Reserve creates inflation, which is a hidden tax on the poor. It also exacerbates, and even causes, financial crises that hurt everyone. There is absolutely no need for a central government body to regulate currency; currency can regulate itself. My ideal Fed chair would work tirelessly to eliminate his own job by shutting down the Federal Reserve for good.