Obama's New Banking Nominees Have Surprisingly Progressive Creds

After a string of bad calls on major economic appointments, President Barack Obama is seriously considering three strong candidates to fill vacancies on the Federal Reserve's Board of Governors. The Fed is positioned to significantly expand its power under the financial reforms proposed by Senate Banking Committee Chairman Chris Dodd, D-Conn., making the news a rare and welcome surprise on economic policy from the administration.

"If anything close to what Chairman Dodd has proposed is enacted, we'll have a lot more riding on Fed competence and governance," says Raj Date, a former Capital One executive who now heads the Cambridge Winter Center for Financial Institutions think tank. "It better have a team of Fed governors who have a demonstrably better handle on bank regulation than the previous Fed governors have had."

The Fed Board is already an extraordinarily powerful body, with the authority to set interest rates, write bank regulations and bail out just about any company it wants to. Obama flubbed badly last year when he re-appointed Fed Chairman Ben Bernanke to another term as head of the board—like many of Obama's other economic appointees (Larry Summers, Timothy Geithner, etc.) Bernanke implemented truly destructive policies that helped create the financial crisis. To this day, he opposes sensible reforms like breaking up too-big-to-fail banks and establishing an independent Consumer Financial Protection Agency.

But the names the Obama administration is floating to fill the Fed Board seats have been consistent voices of reason on economic policy: San Francisco Federal Reserve President Janet Yellen, Maryland Commissioner of Financial Institutions Sarah Bloom Raskin and M.I.T. economist Peter Diamond. Moreover, each candidate would help counter fundamental shortcomings in the Fed's policymaking over the past decade.

The Fed has never been an effective bank regulator. Nearly every serious and effective bank regulator in the U.S. is currently working at the state level, and Raskin is one of the standouts. The banks she regulates haven't failed, and she has been a consistent advocate for regulations that work to help ordinary citizens, not bigwig bankers, and has objected to the deference federal agencies like the Fed and the Office of Comptroller of the Currency (OCC) have given to high-profile bank executives.

Here's Raskin testifying before the Congressional Oversight Panel for the Troubled Asset Relief Program in January 2009:

The states have sometimes perceived an environment at the federal level that was skewed toward facilitating the business models and viability of our largest financial institutions rather than promoting the strength of the consumer or our diverse economy.

Raskin is pinpointing the fundamental problem with the current slate of federal banking regulators, one that COP Chair Elizabeth Warren has highlighted over and over. The Fed and the OCC had the power to crack down on big, predatory banks, but they didn't exercise that authority because it would mean crimping bank profits and offending influential CEOs. Instead of protecting consumers from abuse, regulators have backed anything that bank CEOs said would score profits for banks. When the CEOs turned out to be wrong, consumers were forced to bail out the very banks who had been screwing them for years.

In the same testimony, Raskin also suggested that too-big-to-fail banking behemoths are simply too big to exist:

There may be some institutions whose size or complexity make their risks too large to effectively manage or regulate. Regulators and Congress should contemplate whether breaking up these institutions is in the best interest of the marketplace and the public.

Nobody on Obama's economic team except Paul Volcker has been willing to suggest breaking up the big banks, and even Volcker has recently backed away from such comments. But breaking up the big banks is the only way to deal with too-big-to-fail. Raskin actually believes in regulation, and she has worked effectively as a regulator. When banks are too big to regulate, Raskin believes they should be broken up. Those may all sound like intuitive, baseline requirements for anybody being considered for the Fed Board, but in the context of Obama's overall economic team, they are sterling credentials.