The Importance of the New York Fed

Ben Bernanke thinks losing the President of the New York Fed in 1928 left policymakers rudderless when the markets crashed in 1929:

In the run-up to the Depression, Bernanke argued, better leadership could have made a difference. In a November 2002 speech honoring the economist Milton Friedman, Bernanke, already serving on the Fed's board of governors, recounted the tale of Benjamin Strong. As head of the Federal Reserve Bank of New York in the 1920s, Strong opposed the Fed's attempt to curb Wall Street speculation by tightening monetary policy when "there was not the slightest hint of inflation," Bernanke said. But Strong died of tuberculosis in 1928, and his views lost sway.

"We don't know what would have happened had Strong lived; but what we do know is that the central bank of the world's economically most important nation in 1929 was essentially leaderless and lacking in expertise," Bernanke lamented. "This situation led to decisions, or nondecisions, which might well not have occurred under better leadership. . . . And associated with these decisions, we observe a massive collapse of money, prices, and output."

Of course, if current New York Fed President Tim Geithner becomes the new Treasury Secretary, we won't lose his experience or leadership. But given the vital role the New York Fed plays in policymaking, I doubt Obama will be willing to risk moving Geithner to Treasury while the markets are still in such a precarious position.