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.
The Fed also continues to be far more concerned with the prospects of inflation than with unemployment. Though the Fed Board is required by law to fight both of these economic fires, Bernanke and Greenspan spent years pursuing a radical right-wing policy that essentially ignored unemployment. Even today, with unemployment hovering near 10 percent, the Fed's primary economic engines are geared toward combating the potential for future inflation, rather than the existing, concrete crisis in the job market. Janet Yellen has long been a lonely voice in the Federal Reserve system demanding serious attention to jobs.
"Yellen is a good economist," says Dean Baker, co-director of the Center for Economic Policy and Research.
"I think appointing Janet Yellen is one of the best things Obama could do," according to William Black, a senior bank regulator from the savings and loan crisis who currently teaches law and economics at the University of Missouri at Kansas City.
That doesn't mean Yellen is perfect. Back in 2005, like nearly everybody at the Fed, she badly underestimated the severity of the housing bubble and misjudged the impact the bubble's bursting would have on the economy. In her speech before the Haas Gala in San Francisco, she said: "[The housing bubble bursting] could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock."
Despite this error, Yellen's policy prescription for the housing bubble actually turned out to be correct. While Bernanke and Greenspan were arguing that the Fed should never intervene on asset bubbles, Yellen emphatically argued that the Fed has an obligation to go after bubbles that appear particularly threatening. Just as important, Yellen stresses that monetary policy--the raising or lowering of interest rates—is the wrong tool for fighting the housing bubble. Raising interest rates inevitably results in job losses. Instead of shedding jobs to fix housing, Yellen argues the Fed should deploy its regulatory arsenal.
"[Raising interest rates] to deflate a housing bubble could impose substantial costs on other sectors of the economy that would lead to equally unwelcome imbalances," Yellen said. "It's possible that other strategies, such as tighter supervision or changes in financial regulation, would not only be more tailored to the problem, but also less costly to the economy."
Yellen was basically right. If we had regulated predatory mortgages and cracked down on banking excesses, the Fed could have eased the bubble out of existence without sacrificing jobs.
"You should target bubbles, as we did in the savings and loan crisis with commercial real estate in the Southwest—we deliberately popped that bubble," says Black. "But you should pop it by taking out the folks that are feeding the bubble, not by using huge macroeconomic policies like interest rates. Under that model, you have 8 percent unemployment when times are good. It's a bit like going in and fighting cancer with finely targeted radiation, versus just standing a person in front of a huge radiation source."
At a time when everybody at the Fed was publicly rejecting the value of regulation, Yellen was making a very unpopular and risky stand. Yellen's presence on the board, particularly as Vice Chairman, could significantly move the central bank's policies in the direction of economic sanity.
"We had major Fed officials who both privately and publicly expressed doubts about the usefulness of bank regulation, so we shouldn't be surprised when their regulatory efforts don't turn out very well," Raj Date says. "Anybody who fills those seats needs to seriously value regulation."
The third name the White House floated as under serious consideration is Peter Diamond, a relatively low-profile economist from M.I.T. who is occasionally mentioned as a potential Nobel Prize winner for his academic work. Diamond's only claim to fame in the political sphere is a book he co-wrote on Social Security with current Office of Management and Budget Director Peter Orszag. Unlike most books written by economists on the subject, Diamond actually believes Social Security is a good thing that needs to be preserved. In an era where budget hawks are salivating over the prospect of gutting the program, and even Fed Chairman Ben Bernanke has suggested implementing unnecessary cuts, Diamond would be a critical source of economic sanity.
"Within the mainstream, he's definitely one of the better people," says Baker.
Still, while Obama's picks are strong, they're clearly designed to avoid a Republican filibuster. Some of the other names Obama is considering less seriously for the Fed board seats actually have stronger progressive bona fides, namely AFL-CIO lawyer and current COP member Damon Silvers, and current Department of Labor Assistant Secretary William Spriggs. Nevertheless, Yellen, Raskin and Diamond are all intellectually honest public officials who actually believe in doing their jobs. For the Obama administration's economics crew, that's saying something.
"We're fourteen months in and most of Bush's wrecking crew has been left in charge or even promoted," notes Black. "This is as good as we're going to get."
"Given the limited pool of people that are thought of as acceptable for sitting on the Fed board, these are three of the best you can find," says Baker.