Tag: fed governor

Diamond Not Qualified for Fed Board

Tuesday the Senate Banking Committee meets for the second time to consider the nomination of Peter Diamond to a seat on the Federal Reserve’s Board of Governors. Since Professor Diamond was first nominated, he has been awarded the Nobel prize in economics.

Putting aside his academic qualifications, and his misguided views on Social Security, Professor Diamond is not qualified to be a Fed governor for one very simple reason: he is from a Federal Reserve district that already has representation on the Fed.  Paragraph 10-1 of the Federal Reserve Act requires that:

In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.

Mr. Diamond’s Senate paperwork states he is from Massachusetts, which is also the case for sitting Fed governor Dan Tarullo.  In fairness this provision of the law has been ignored and violated in the past.  In fact, both current Fed Governors Duke and Raskin are both from the Richmond district.  As Duke was there first, it would seem clear from a reading of the law and Raskin’s bio that Raskin is serving in violation of the statute.  But then given the actions of the Fed over the last few years, the Fed has certainly shown that it doesn’t feel constrained by statutes.

Bloomberg reports that despite what Diamond’s paperwork says, the White House claims he’s from Chicago.  Not that he’s ever lived there, but because he once gave a lecture at Northwestern.  Next I suspect the White House will claim an extended lay-over at O’Hare is sufficient for residency.

For perhaps the first time in history, all the Federal Reserve governors are from coastal states.  Also every single Fed governor is from a state that Obama won.  Only one governor is from west of the Mississippi river.  How anyone can believe the current make-up of the Board is a “fair representation” is beyond me.  Perhaps this is one explanation for the currently low public opinion of the Fed; it has become more a Cambridge-Wall Street-Washington echo chamber than anything else.

Fed Governor Starting to Make Sense

Despite still defending the Fed’s bailouts, Fed Governor Kevin Warsh gave a speech this morning offering a few insights about reforming our financial system that seem to be lost on both Obama and Bernanke.

A few highlights:

The mortgage finance system is owed far stricter scrutiny to gather a fuller appreciation of the causes of the crisis. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, for example, were given license and direction to take excessive risks.

One has to hope that both Bernanke and Obama are listening.  The silence of the Obama administration on fixing Fannie and Freddie is nothing short of shocking and irresponsible.  Any commitment to real reform has to include the GSEs.

Granting new powers to resolve failing firms in the discretionary hands of regulators is unlikely, in the near-term, to drive the market discipline required to avoid the recurrence of financial crises.

…Some newly-empowered and untested regulatory structure is not likely – in and of itself – to be sufficient to tackle institutions that are too-big-to-fail, particularly as memories of the crisis fade. Regulation is too important to be left to regulators alone.

I believe these two points cannot be stated more strongly:  what we need is more market discipline, rather than less.  Putting the entire weight of our financial system on the backs of our financial regulators is a crisis just waiting to happen.  Sadly the direction of both President Obama and Congress seems to be in undermining market monitoring of firms and relying solely on regulators to “get it right” – the very same regulators who were asleep at the wheel prior to the last crisis.

Embracing Bushonomics, Obama Re-appoints Bernanke

bernanke1In re-appointing Bernanke to another four year term as Fed chairman, President Obama completes his embrace of bailouts, easy money and deficits as the defining characteristics of his economic agenda.

Bernanke, along with Secretary Geithner (then New York Fed president) were the prime movers behind the bailouts of AIG and Bear Stearns. Rather than “saving capitalism,” these bailouts only spread panic at considerable cost to the taxpayer. As evidenced in his “financial reform” proposal, Obama does not see bailouts as the problem, but instead believes an expanded Fed is the solution to all that is wrong with the financial sector. Bernanke also played a central role as the Fed governor most in favor of easy money in the aftermath of the dot-com bubble – a policy that directly contributed to the housing bubble. And rather than take steps to offset the “global savings glut” forcing down rates, Bernanke used it as a rationale for inaction.

Perhaps worse than Bush and Obama’s rewarding of failure in the private sector via bailouts is the continued rewarding of failure in the public sector. The actors at institutions such as the Federal Reserve bear considerable responsibility for the current state of the economy. Re-appointing Bernanke sends the worst possible message to both the American public and to government in general: not only will failure be tolerated, it will be rewarded.

Would Summers Be Any Worse than Bernanke?

As I have argued elsewhere, Bernanke’s record as both a Fed governor and Chair suggest we be better off with a new Fed Chair come January 2010, when Bernanke’s term as Chair expires. Outside of those who believe the bailouts have saved capitalism, two very reasonable arguments are put forth for keeping Bernanke at the helm:  1) in a time of crisis, the markets need certainty and dislike change; and 2) the alternatives, such as Larry Summers, would be worse.  Both these points have real merit, however I believe in both cases the pros of change outweigh the cons of staying the course with Bernanke.  I will save the “certainty” debate for another time, for now, let’s ask ourselves:  Would Summers really be any worse than Bernanke?

Before I make the case for Summers, I do want to make clear, President Obama, and the country, would best be served by a “Carter picks Volcker” type moment.  Go outside the Administration, go beyond the usual circle of easy-money, new Keynesians.  The Fed lacks creditability in two (at least two) important areas: bailouts and inflation.  And one doesn’t even need to go outside of the Federal Reserve System to find candidates.  Topping my list would be Jeff Lacker (Richmond Fed), Gary Stern (Minn Fed) and Charles Plosser (Philly Fed).  Any of these three know the workings of the Fed, have the respect of the Fed staff, and have taken strong positions on both “too big to fail” and easy money.  In the case of Gary Stern, it would seem especially appropriate, as his early warnings (see his 2004 book on bank bailouts) were largely ignored and dismissed.  If we want to reward and promote those who got it right, these guys are at the top of the list.

But let’s reasonably suppose that Obama wants someone close, someone he personally knows and will stick with tradition by picking a member of his own administration.  Without going into any detail, picking Romer would offer little substantial difference with keeping Bernanke.  The case for Summers is essentially that here is one instance where his enormous ego would be an asset.  One easily gets the sense that when Summers sits next to President Obama, Summers is thinking to himself just how lucky the President is to be sitting next to Larry Summers.  One can call Summers lots of things, starstruck is not one of them.  Given what we now need most in a Fed Chair is true independence, from especially the Administration but also from Congress, Summers is the only qualified economist close to the President who displays even the slightest streak of independent thinking.  Bernanke, in contrast, has endlessly pandered to the Administration and to Congressional Democrats.  Summers has been willing on occasion to actually defend the sanctity of contract (remember the debates over the AIG bonuses), a rarity on the Left, and more than Bernanke was willing to say.  

So forced to choose between Bernanke and Summers, the need for an independent Fed Chair willing to take on the Administration and Congress, when appropriate, makes Summers a far better choice.  That said, here’s to encouraging Obama go outside his comfort zone and pick someone who has the will to remove excess liquidity from the system before the next bubble gets going.

Bernanke’s Part in the Housing Bubble

bernankeRecent weeks have seen a swirl of speculation over whether President Obama will or will not re-appoint Ben Bernanke to the Chairmanship of the Federal Reserve Board, when his current term as Chair expires in January 2010. Almost all of the debate has centered on his actions as Chairman. This narrow focus misses an important piece: his actions, and words, as a Fed governor during the build-up of the housing bubble.

What should have been Bernanke’s greatest strength as a Fed governor and later chair, his understanding of monetary theory and his knowledge of the Great Depression, has ended up being a weakness. While correct in his analysis of the role of “debt deflation” – where the deflation increases the real burden of debts and correspondingly weakens the balance sheet of both households and businesses – in the deepening of the Great Depression; his obsession with slaying the Great White Whale of Deflation provided intellectual cover for the Fed’s ignoring and contributing to the housing bubble. Like the proverbial general, he was fighting yesterday’s battle, rather than today’s.

While core inflation was moderate and increasing at a decreasing rate between 2001 and 2005, this measure ignores the dramatic up-tick in house prices during those years. First, housing makes up the single largest expense for most households, ignoring housing, especially after one subtracts out energy and food from the definition of inflation, gives a narrow and distorted picture of inflation. Even if one were to focus solely on rents, the 2000s were an era of increasing housing costs.

Separate from the impact of housing prices on inflation is the role which housing plays as the collateral for the primary piece of household debt: a mortgage. Even were the US to suffer a bout of mild deflation and the real burden of their mortgages increased, this would likely have little impact on household balance sheets in an environment of increasing home prices.

Admittedly Bernanke was then only a “governor” and not yet Chair of the Fed, but he was the Fed’s loudest voice when it came to combating deflation and arguing for lower rates. Additionally there have been zero public acknowledgements by either Bernanke or the Fed that its policy earlier this decade contributed to the housing bubble and financial crisis. Without admitting to the occasional mistake, we have no way of judging whether Bernanke has learned from any of his mistakes, and hence less likely to repeat them.

In weighing Bernanke’s record at the Fed, judgement should not solely consider his actions as Chair, but also consider his words and deeds while the housing bubble was inflating. How one responds to a impending disaster is as important as to how one helps to clean up after the disaster has struck.