Kenneth H. Thomas, Lecturer in Finance at Wharton, was kind enough to allow us to reproduce portions of his research. “Fed Chief’s Calendar Includes More White House Face Time.” This was originally published in American Banker, and referred to in the previous Barron’s discussion, below.
Here are Thomas’ findings:
“One reason we have so much trust in the Federal Reserve – and Chairman Alan Greenspan – is its political independence in maintaining price stability.
This independence, which was a cornerstone of the Fed when it was founded in 1913, is critical. Otherwise, short-term economic gains such as rapid growth to help an incumbent President get reelected might be sacrificed for long-term pains such as inflation and deficits.
We try to insulate the Fed from politics by having it self-funded and also by having senior Fed officials appointed for long terms, overlapping presidencies.
These and other efforts can fail if the Fed chairman gets too close to the administration and there is the reality or even perception that the Fed is responding more to political rather than economic winds.
In 1999 I began research to attempt to answer the question: How political has Mr. Greenspan become? Each year I made a Freedom of Information Act request to the Fed for his personal calendar, showing all political meetings since 1996. (See table.) These private meetings are usually not disclosed at the time they take place, nor is any record made public of the discussion that occurred.
A certain amount of political meetings is necessary for the chairman to do his job. For example, he averaged 96 such meetings, or about 1.8 per week, over the 1996-98 period, which might be considered a “normal” amount.
However, this number jumped to 128 and 116 in 1999 and 2000, or 2.5 and 2.2 times per week, respectively. This was nothing compared with the huge rise in such meetings, especially at the White House, when George W. took office.
Mr. Greenspan had 149 political meetings in 2001 – 2.9 per week. This grew to 161 (3.1 per week) in 2002 and 170 (3.3 per week) in 2003.
Thus, the most recent three-year period of 2001-2003 averaged 160 meetings, or 3.1 weekly, compared with just 96, or 1.8 weekly, during 1996-98. This can be interpreted to mean that Mr. Greenspan has become 67% “more political” over this period.
This is a significant finding.
In the 1996-2000 period it was apparently necessary for the chairman to visit the White House about 12 times per year, or once per month. For no apparent reason, Mr. Greenspan’s visits to the White House tripled from just 12 in 2000 to 37 in 2001, when Bush took office. Starting in January 2001, the same month Mr. Greenspan began cutting rates and flip-flopped on the Bush tax cuts, he visited the White House at least three times per month, with the only slowdown in June and July of that year.
What were previously monthly meetings continued to skyrocket to over one per week in both 2002 (55 meetings) and 2003 (68 meetings).
These White House meetings since 2001 were with officials at the highest level, something Mr. Greenspan did not do in 2000 or apparently since 1996 based on his monthly meetings there. For example, in 2003 he met with the President once, Vice President Cheney seven times, Condoleezza Rice six times, and Chief of Staff Andy Card three times. In March 2003 he had 14 White House meetings, and in July 2003 he met with six members of the Cabinet, including Colin Powell.
Such increasingly frequent meetings at the most senior level, including the Oval Office, are appropriate for a politician but not a central banker, whose political independence is paramount. The noteworthy increase in these meetings since 2001 is puzzling and problematic.
In all fairness to Mr. Greenspan, who has been one of our best Fed chairmen ever, he is a product of his political environment in Washington.
I have long argued that we should follow the lead of the Germans, who have one of the most independent central banks in the world, by relocating the Fed from our political to our financial center (New York). This way, it would not be so easy for the Fed chairman to take his limo to lunch at the White House.
At 78 years old, Mr. Greenspan is our oldest chairman and second-oldest Fed board member ever. With his term as chairman ending this June and his board term ending in 2006, when he would be 80, the Fed, like all organizations, needs a firm succession plan.
Though both Bush and Kerry have indicated they would reappoint Mr. Greenspan, neither should be allowed the luxury of remaining silent on whom they would chose to succeed him if he unexpectedly retired. Again, we should take a cue from the Europeans, who eliminated uncertainty and speculation in this regard by having a well-publicized succession plan in place for their central bank, which recently got a new president.
The Fed is too important to ignore proposals that would reduce its politicizing and the uncertainty over a succession plan for its chairman.
Mr. Thomas is a lecturer in finance at the Wharton School of the University of Pennsylvania.
Thanks Ken, terrific stuff.
Fed Chief’s Calendar Includes More White House Face Time
By Kenneth H. Thomas
Lecturer in Finance at Wharton,
American Banker, Friday, April 23, 2004
http://www.bankinfo.com/article.html?id=20040422SZWAGCTD& (subscription req’d)