Why Shortening the Fed Chairman’s Term May Be Important to Avoid Future Financial Crises

The Federal Reserve erstwhile Chairman, Alan Greenspan has come in for a lot of criticism concerning the recent recession. Critics have spoken against the Fed’s policy of keeping interest rates at all time low for an extended period. They believe that this led to over zealous borrowings, which was completely unsustainable. Borrowers soon began to default on repayments, more and more homes began to come in for foreclosure and the housing markets crashed.

While there were other factors which also worsened the situation, it is the Fed’s lack of foresight in keeping rates low, which is being blamed for the most part. Greenspan has also accepted making mistakes in judging the future markets. These criticisms have brought into focus the question of whether the extended term of office of the Fed Chairman is becoming an underlying cause of complacency within the system.

The Fed Governor has a 14 year term and the Chairman can also serve for a maximum period of 14 years in 4 year renewable terms. In Greenspan’s case, he was also asked to complete the un-served term of his predecessor, Paul Volcker. Chairman Greenspan was responsible for the Fed’s policies until 2006 when Bernanke replaced him.

Considering that the Fed Chairman wields immense power over the state of the US’s finances and economy, it is critical to ensure that the person in this position is restricted to a time limit which is shorter than is possible now. Critics believe that a 10 year maximum term would work a lot better than the current system. Although the Chairman does need some settling in period given the magnitude of his or her responsibilities, a 10 year term is considered adequate.

Long tenure encourages those in power to continue with tried and tested strategies instead of keeping themselves open to innovative approaches to problems. This leads to predictability within the system, critics point out. Market players may take advantage of such predictability and structure their dealings and operations in accordance. This enables an unhealthy concentration of power among few top players.

What is required in order to avert a second recession is a periodic change of leadership at institutions like the Federal Reserve, which impact the nation’s economy. Such changes in the leadership will ensure that policies do not become stale and ineffective and that the Fed retains an updated perspective on current issues at all times. The lack of predictability in policy will also ensure retention of a healthy sense of caution among corporate players in America.

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