Who Should Be the New Head of the Fed?

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Why you should care

On the Fed’s 100th anniversary, it may be time to put an outsider at the head – and see if a fresh take can kick-start the economy.

Most people don’t spend too much time thinking about what the Federal Reserve is or does. But the powerful, seven-person body helps drive the U.S. economy — perhaps more than the president in some ways. It impacts whether unemployment rates go up or down and affects every price imaginable, from your food to your car loan to your mortgage and even the student loans you’re still paying off. In fact, the person who runs the Fed is often called the second or third most powerful person in America.

It’s not a stretch to say that the Fed has been a stodgy institution for much of its history, but it’s loosened up in recent years: Three of its seven members are now women, and the central bank’s leadership could change even more. President Obama will select a new Fed chair in the next few weeks, and now that Lawrence Summers has bowed out, the leading contender appears to be Fed vice-chair Janet Yellen. Yellen is a predictable, classical economist, she has the strong support of her peers and she’d be the clear consensus pick. Another name being tossed around is Donald L. Kohn, who has worked closely with current Fed chair Ben Bernanke. But is selecting an insider the right move?

The person who runs the Fed is often called the second or third most powerful person in America.

Sometimes the smart play is choosing an outsider with just enough inside experience to take a staid institution to the next level. Think of what President Eisenhower did in 1952 when he nominated California governor Earl Warren to be chief justice of the U.S. Supreme Court. Warren may have been an outsider to the judicial world, but he knew what it meant to govern, and he had a record of learning from his mistakes. As his state’s attorney general, Warren pushed for — and later deeply regretted — the World War II-era internment of Japanese-Americans. Significantly, just a few years later, he signed the nation’s first law banning school segregation — a preview of his evolving attitudes that would lead to his landmark opinion in Brown v. Board of Education.

Setting aside the practicalities and challenges of steering the Fed nominee through the Senate approval process, here are several of my favorite outsiders who might be precisely what the Fed needs right now.

How about thinking outside our borders? After all, the world’s top-rated central bankers aren’t American.

For starters, consider Barney Frank, the pugnacious former head of the House Finance Committee. He understands the minutiae of central banking but also has a progressive’s optimism about the potential for smart financial reform. Then there’s newly elected Elizabeth Warren, a member of the Senate Banking Committee who’s been a tireless crusader for consumer protections, which would dovetail well with the Fed’s so-called dual mandate to maximize employment while keeping prices stable.

My next pick is Jim Yong Kim, who went from protesting about the World Bank to becoming President Obama’s choice to head that global development institution. In between he co-founded Partners in Health, which provides health care in poor communities around the world, and served as president of Dartmouth College. He knows when to shake up institutions and when to use them to achieve laudable goals, whether dealing with climate change, fighting drug-resistant TB or working to promote the sort of growth that can lift people out of poverty.

And how about thinking outside the box by thinking outside our borders? After all, the world’s top-rated central bankers aren’t American, and the U.K. recently sent shock waves through the finance world by appointing a Canadian to head its central bank. It’s unlikely that a global A-player like Malaysia’s Zeti Akhtar Aziz, who deftly orchestrated her country’s response to the Fed’s quantitative easing, could land in the Fed chair. But what about Israel’s former central banker and World Bank chief economist Stanley Fischer? He has a stellar reputation, an MIT professor’s pedigree — and a U.S. passport. In fact, Fischer served as Bernanke’s Ph.D. thesis adviser and mentored European Central Bank director Mario Draghi.

So how about it, Mr. President? Are you ready to go rogue?

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