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More Calls for Fed Governors Who Actually Saw Crisis Coming, Care About Consumers, and Tolerate, Um, Welcome Transparency

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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
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable Lawrence Summers
Director
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.

Sincerely,

Sherrod Brown
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.

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27 comments

  1. attempter

    Those are good in principle, which makes them contrary indicators from the Fed’s (and the system’s) pov.

    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.

    This is way too lenient. It seems to concede in principle that these traders had any right at all, ever, to take public money but not disclose to the public what they were doing with that money. Indeed that it was a matter of “national security”, as the government itself coached them to say.

    Now, we all know that the money was really stolen, and that two administrations have been the conscious, calculating bagman delivering this loot.

    But their rhetoric has been that it’s all about the “public interest”. Well, on its face the public’s interest is in sunshine. One of the standard bloats of Obama’s campaign rhetoric was that he’d bring greater “transparency”. And, their own neoclassical textbooks say that “markets” only work when everyone has all the material information. Obviously, how much taxpayer money has been leant, allegedly on the taxpayer’s behalf (though with a conspicuous lack of democracy), to a particular bank, on what terms, receiving what collateral, and what that bank is doing with that money, is material information to which all citizens are entitled, right from day one.

    So however we look at it, this secrecy was in principle anti-market, antisocial, unconstitutional, and redolent of crime. And by now we know that it was in fact in the service of massive capital crime. Any two-bit adviser who defrauded his investors the way this government has would be in prison.

    The fraud committed by the Fed and two administrations goes way beyond anything Madoff did.

  2. Glen

    Promptly screwed up into a ball, bounced around the office in hysterical laughter then slam dunked into the bin.

  3. fresno dan

    “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.”

    I would ask, what if it is not stale? And if the question is answered that the Fed is still afraid that it could have an effect, does it not follow that the Fed’s plan is not resolving anything? Oh, your right, we already knew that.

  4. Philo

    If faced with the choice of either being branded a fool or a fraud, most of us would rather be thought of as a fool.
    Being judged a fool doesn’t have serious, legal implications but being judged a fraud does.

    And so the final, ultimate deception in this huge con game is that the con artists convince us that they were merely hapless fools.
    Hapless fools avoid prison and get to keep the loot. Frauds don’t.
    But they’re not incompetent fools, they’re highly competent liars. Please let’s get this straight.

  5. Sai

    Reading “Inside Man” by Joshua Green raised these thoughts.

    Russia default marked by LTCM eventually and soon enough led to fall of Russia. Will the current crisis lead in the near soon lead to some sovereign defaults and some sovereign fails?

    And a guy like Tim G can succeed in government not just because he is smart, but first and primarily he is submissive, compliant, acquiescent. Also by qualification and work experience, he is not an economist or aware of the inner, detailed working of capital markets, and such is the situation with almost all treasury secretaries across countries.

  6. DownSouth

    The most disturbing part of this episode is that it shows to what extent Senator Brown has all but abdicated to the Fed his role and responsibility as politician. His letter, at best, is milquetoast.

    Here’s how Hannah Arendt characterizes the ideology of the Senator Browns of the world “in which the political realm has withered away and is being replaced by that ‘administration of things’ which Engels predicted”:

    [A]ll political questions in the welfare state are ultimately problems of administration, to be handled and decided by experts, in which case even the representatives of the people hardly possess an authentic area of action but are administrative officers, whose business, though in the public interest, is not essentially different from the business of private management.

    […]

    They agreed that the end of government was the welfare of the people, and that the substance of politics was not action but administration.
    –Hannah Arendt, On Revolution

    Thus the transition that Max Weber spoke of is complete. Both the traditional authority (of the Catholic Church and the state institutions it underpinned) and charismatic authority (of Protestant preachers and the like) are replaced by rational bureaucratic authority.

    But this sleight of hand has solved nothing. As Michael Allen Gillespie points out:

    [W]hile this transference does serve to moderate and ultimately eliminate the expressly theological debate that had been so contentious and violent, it also conceals the theological nature of the claims made by the contending parties. They thus cease to be disputable theological assertions and become unquestionable scientific or moral givens.
    –Michael Allen Gillespie, The Theological Origins of Modernity

    Or as the Christian theologian Reinhold Niebuhr so aptly puts it, modernism has achieved little more than replacing the kings of the ancien regime with a modern set of “scientist kings,” their claim to authority relying not on divine right but science or nature.

  7. gigi

    Anyone want to bet that these ideas will NOT prevail?

    There have been a number of good ideas throughout this mess that would have yielded much better results for the country and the world if heeded. Instead the path chosen was the one that was best for the banksters.

    The path chosen in the future will also be the one that protects, nay enriches, the banksters.

    We continue to place our trust with a group that has violated it, again and again and again.

  8. Len J

    Fat chance! The Fed is a criminal enterprise
    (counterfeiting, fraud) and such cannot withstand any
    sunlight ot they collapse.

  9. Siggy

    Help me with this. Was it not Senator Dodd who stalled several Federal Reserve appointments? Is this letter addressed to the wrong people?

    To assert that the Fed has paid excessive attention to the curtailment or mitigation of inflation strikes me as being absurd and not consistent with recorded performance.

    Is it not a fact that the current financial crisis is the product of easy money, abrogated regulatory responsiblity and fraud that exploits the abrogation of regulatory authority?

    A call for the enforcement of the regulations extant would have merit. This call to eschew the containment of inflation in favor of efforts to increase employment is a blatant request for actions that are an important cause of this crisis.

    This letter is propaganda. Arguing the efficacy of its points is precisely what the writer wants. A sideshow that avoids the hard truth that the Senate Banking Committee has failed in its responsibility to oversee the operations of the Federal Reserve System.

    Where’s that State of the Union guy who shouted . . . ‘You Lie’? This letter is his cue!

  10. NotTimothyGeithner

    I think the basic problem is we have elevated “specialization” over critical thinking. Sometimes I feel like we are in the Middle Ages and whenever there is a problem we call an alchemist or a priest, and no one ever notices their only solution is to drown a cat or something equally insane.

    1. Philo

      “We call the priest and he drowns a cat.”
      That is an awesome observation.

      We do live in a dark time.
      If only I didn’t know it. If only I could unlearn it.

      If we can’t be ignorant again, can we at least pretend?
      We were happier then.

  11. kssong

    dear senator,
    how about carrying the torch from jacob coxey and get the congress to get back to the system of debt-free government-issued dollars?
    otherwise the person who fill up the respective positions will be just as useless even with divine help.

  12. Slasher

    How about adding some DIVERSITY in the Federal Reserve?? Why is this not in Yves’ or anyone else’s requirement? Why does everyone who is selected into the Fed’s BOG or Presidentship require the right last name? How about anyone other than Kohn, Plosser, Mishkin, Fisher, Hoenig, Warsh, Blinder, etc.? How about an ordinary sounding American from the remaining 98% of the population that does not have the right sounding last name to belong in Da Club?

    This is the big elephant in the room that even very courageous bloggers like Yves will keep ignoring because they will be labeled “racists” while it’s the Federal Reserve that continues to be a racist organization and keeps hiring within its inner circle.

    I have pointed out how the recent Fed President appointment at the Minneapolis Fed was an appointment in the right direction of more diversity at the Fed. See http://www.minneapolisfed.org/about/whoweare/president.cfm

    I am not angry or bitter but just annoyed that we are not trying to get more behind this call for diversity. It would not solve all our problems, but at least it will reduce the GroupThink and Club-like feel of the Fed that most of us on the outside feel it is.

    Please chime in and don’t shoot the messenger…

  13. walter_map

    Good luck with that. Your overlords (and overladies) in the global banking imperium would never allow it, and they’re the ones who are calling the shots. All of them. They’re likely to skim off another trillion or two just because some uppity government slave had the audacity to make it a serious proposal. Maybe even arrange for a couple of more wars, just to remind you who’s the boss here.

    Carroll Quigley is bound to have the last laugh here. He’s already giggling from the grave. The situation with the global economy can be fully expected to continue to deteriorate until you start imprisoning banksters, but nobody wants to talk about that.

  14. sgt_doom

    Yves here….I shall spend all my future time, as I did my past time in making everything as murky as possible and obfuscating the real facts.

    Yves out — time to get back to my shill advisory firm.

  15. Hugh

    “Sometimes I feel like we are in the Middle Ages and whenever there is a problem we call an alchemist or a priest, and no one ever notices their only solution is to drown a cat or something equally insane.”

    That is one of the best descriptions of the world we live in that I have seen. I call it the Age of Stupid.

    I also agree with DownSouth, Brown’s ideas are good ones but his letter represents an abdication of authority. This is endemic in government nowadays but in particular with the Fed. The whole concept of the Fed is an abdication of Constitutionally mandated responsibility.

    1. NotTimothyGeithner

      I’m going to go slightly meta, but I don’t know if its stupidity in the same way “Two and Half Men” is stupid. I think we have this idea that we have to be trained to understand something, so a lot of people go, “I thought that, but the doctor said this. Now I think this, too,” without any actual analysis of why the doctor might be right. Yes, the doctor might have the best ideas on how to treat your specific illness, but at the same time, they went crazy with anti-biotics and hospitals are diseased-cess pools now.

      We have become as a society very good at linear thought, but non-linear items are almost avoided like a plague. A lot of people are pushing the line “we need to help those 48,000 dying” and the 31 million uninsured and then we’ll build on that. Even if the proposed bills actually accomplished covering everyone without any cost controls, the problem with healthcare isn’t limited to that. The problem is in 7 years our 70 year old population is going to triple. People in their 70′s need the most medical care, and we are going to need to triple the resources to treat them at the rate we are treating that age group now. (Obviously smoking rates and diets will distort these numbers, but I’m ballparking here).

      The problem isn’t the 48,000 dying every year because of a lack of insurance today or the people going bankrupt. If those are the problems in 5-10 years of so, we will have been relatively successful, because the demographics are going to kill us.

      Lets ignore specialization of Doctors and assumed the same percentage of graduating MDs today became primary care physicians as they did before Supreme Court ruled the ABA couldn’t control the supply of Lawyers, we would still have a problem because that Court ruling is around 40 years old, and since then, universities have started law schools because all you need is an attorney, some state codes, and a building versus the start-up costs for a med-school.

      The NOMINAL number of MDs graduating has remained the same since 1968 when the population was 175 million maybe more versus today of over 300 million. Since then we have seen Doctors leave to pursue specialization and cosmetic fields.

      Title IX basically forced Med schools to start graduating 50/50 gender based classes. In 1968, the breakdown was closer to 90/10 male/female. Why is this important? Because at the end of a Doctors career, a female Doctor will have seen 60% of the patients the male Doctor saw or worked 3/5 of the days because they took time off to be a mother. I’m not knocking that or female doctors in any way, but we created a policy that reduced the effective number of MDs while the population is growing.

      No one seems to be putting these things together in the Democratic Leadership. I believe a lot of people are very good at if X then Y, but they don’t really know what to do if X isn’t X or what X is in five years.

  16. Dirk van Dijk

    I nominate Bill McBride, A.k.a. Calculated Risk for one of the spots, as he seems to meet the criteria. Yves would not be a bad pick either.

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