Key Man Risk and the Fed

Alex Jutca has some thoughts on Obama’s nominee for Fed Chair next year:

There is one problem with [nominating Bernanke], and it’s a lesson best exemplified in finance. In choosing firms to manage money, investors often discuss the need to guard against key man risk, which is the risk that an institution has become over-reliant on one person to drive results. The Fed has institutionalized that risk now, and has for some time, stretching back to the Greenspan and Volcker eras. It could mitigate the risk by limiting the discretionary powers of the FOMC by adopting Nominal GDP Level Targeting as its new regime. Or, as John Hilsenrath pointed out during the most recent FOMC meeting’s Q&A session, it could limit the terms of the chairman to 8-year periods as the ECB and BoE do, to which […] To be clear, I view term limits as an inferior policy solution to the problem of key man risk. However, it is an issue that is worth contemplating for the POTUS. As much good as Bernanke has done, if there is a clear candidate to make the transition to the next generation of Fed chairmen, perhaps January 2014 is the time for change.

There might be many good reasons for a change of guard, not the least that much-needed fresh ideas often come from newcomers, but the idea that “key men” will somehow hurt the Fed just seems very, very far flung.

Key man risk is comes from corporations like Apple which were defined by Steve Jobs. The job of a chief executive was not only managing the company, but serving as its ambassador to the world, inspiring investors and consumers with glitzy conferences. This domineering role is often found in large corporations. Indeed, companies wherein one figure dominated public imagination often don’t last as long as their more mundane counterparts.

But this misses the role Bernanke (or his successor) will play. The Fed doesn’t need to sell its brand or inspire investors (except in a very literal sense, of course). The Fed doesn’t need glitz and charm to market its product. The defining characteristics of a good central banker are competence, insight, and prescience. 

Indeed, the key man risk doesn’t even apply to central bank insofar as the general public (tell me, how many people can put Volcker, Greenspan, and Bernanke to their face). Of course, one can argue that there may be a similar interplay between the investing community and the central bank but, again, there’s no product to sell. The only virtue of the Fed is derived from the efficacy of its policy, not the aura thereof.

Of course, a very qualified version of the key man risk vis-a-vis the Fed may be the institution of market expectations which prevent rapid change towards another policy. As Jutca notes, targeting NGDP is one way of mitigating this risk.

So long as we have more than one profoundly competent economist, there is no “key man risk”.