One of the bizarre things that occurs whenever particular high profile slots are up for grabs is that the discussion rapidly devolves into which candidate A Lot of People Have Heard Of should get it, rather than focusing on selection criteria (which is how most managers go about filling jobs).
In addition, some of the evident selection criteria for heavyweight roles look pretty dubious. A former Fed economist and hedge fund manager who can claim to have invented swaps, but for some odd reason doesn’t (he will lay claim to caps and collars, however) commented dryly when Bernanke was appointed Fed chairman: “The record of academic economists in that job is pretty poor” and then proceeded to dissect Arthur Burns’ record. By contrast, Kevin Warsh’s presence in the Board of Governors (a favorite hobbyhorse of Doc Holiday) seems quite unfathomable.
The letter below, from Senator Sherrod Brown, chairman of the panel that oversees Fed monetary policy, thus puts the focus on the right foot. I agree with the criteria he sets forth, namely, having anticipated the crisis, having a pro-consumer stance, and being willing to release AIG-related e-mails. I’d actually go a bit further and would like someone who supports transparency in areas outside monetary policy (where I can see reason for the Fed to need to insulate itself from political pressure). For instance, the Fed’s refusal to provide information as to who used its various facilities during the crisis is without merit. If the information is sufficiently aged (say released a year in arrears) it will be stale from a trading/counterparty risk standpoint, and hence would pose no danger to market participants, but would be very useful from an analytical perspective.
Text of Sherrod’s letter follows:
March 10, 2010
The Honorable Timothy Geithner
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
The Honorable Lawrence Summers
National Economic Council
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500
Dear Secretary Geithner and Director Summers,
I write to you today to express my concern about the vacancies at the Federal Reserve, both on the Federal Open Market Committee (FOMC) and soon in the Vice Chairman’s office. This is the financial equivalent of leaving open vacancies on the United States Supreme Court, and it is essential that we fill these positions.
As Chairman of the Senate Banking Committee’s Subcommittee on Economic Policy, with jurisdiction over the Federal Reserve System’s monetary policy functions, I am acutely aware of the importance of monetary policy at the Fed. Both the full Banking Committee and the Economic Policy Subcommittee have examined the causes of the financial crisis and the resulting effects on lending, access to credit, and employment. The evidence presented to the Committee about the role that Fed policy decisions played in the financial crisis and the economic downturn has led me to conclude that the Fed’s monetary policy has focused almost entirely on controlling inflation rather than maximizing employment and that the Fed has too often put banks’ soundness ahead of its other responsibilities. In light of this experience, there are several other important qualifications that I would urge you to consider in selecting the new Vice Chairman and new members of the FOMC:
1. Recognition of the causes of the financial crisis before it occurred.
Many economic experts, including some at the Federal Reserve, failed to anticipate the impending economic crisis. However, there were exceptional people who sounded alarms about the rapidly inflating housing bubble, the proliferation of subprime lending, and the packaging, selling, and investing in toxic financial products by Wall Street. Unfortunately, regulators, including the Fed, ignored or attempted to discredit many of these courageous individuals, rather than heeding their warnings. We need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged.
2. Demonstrated dedication to protecting consumers and maximizing employment.
For years, the Federal Reserve’s monetary policy has maintained an almost single-minded focus on inflation. This has been detrimental to the Fed’s other core missions, particularly maximizing employment and protecting consumers. The results of this fixation speak for themselves. The national unemployment rate is more than double the Fed’s statutorily mandated 4 percent unemployment target. The Fed also failed to act on repeated warnings about predatory mortgage lending and credit card abuses. Consumer protection experience is particularly important if the new consumer protection entity were to be housed at the Fed. Our economy will benefit from renewed attention to all of the Fed’s priorities.
3. Commitment to releasing e-mails related to the Fed’s involvement in the AIG bailout.
A growing number of experts – including economists, academics, and former regulators – have called upon the Federal Reserve to release all e-mails, internal accounting documents, and financial models related to AIG’s collapse. The American taxpayers now hold the majority of AIG shares, and they have a right to know how their money is being spent. Providing greater detail about the AIG bailout is particularly important because that episode continues to taint the Fed’s reputation. Focusing on candidates committed to full transparency related to this particular economic event would help to restore the Fed’s stature and credibility in the eyes of many Americans.
The American public has lost a great deal of confidence in the Federal Reserve. Selecting a Vice Chair and FOMC members with the above qualifications will send the message that the Federal Reserve has learned from the financial crisis, and that the Fed’s weaknesses are being addressed with more than just cosmetic changes.
I would be happy to discuss specific candidates with you at your convenience. Thank you for considering my views, and I look forward to working with you to address these vacancies at the Fed.
United States Senator
Yves again. I note the similarity between his criteria and those from Barry Ritholtz , and have heard similar ideas from others in policy circles. Hopefully sound ideas like these will prevail.