Federal Reserve Board
The flabby thinking behind Obama's possible Fed nomination
For Fed chair, Obama could pick a woman who fought the good fight. Or he could pick an abrasive insider whose record is decidedly mixed.
Some time ago, I suggested that the 2012 election would hinge on three variables: the identity of the Republican nominee, the thrust of the Obama campaign’s reelection strategy, and the progress of the economy. While the first two have come into focus, the third presents a puzzle, because recent economic reports are not consistent with the forecasts for 2012. This is an analytical distinction that makes a political difference: If the forecasts are right, history suggests that the president’s reelection prospects are dicey at best.
Just a quick word about Jeremy Stein, the Harvard financial economist Obama is nominating to serve on the Federal Reserve Board. I suspect critics on the left (and perhaps on the right) will seize on the fact that Stein was close to Larry Summers, who brought him into the Obama administration to work at the NEC. For what it’s worth, I actually became pretty familiar with Stein’s track record while researching my forthcoming book on the Obama economic team. I can report that he’s an absolutely terrific choice.
My New Republic colleague Jonathan Cohn's otherwise excellent Sept. 21 post, about congressional Republican leaders' thuggish letter to Ben Bernanke telling the Fed chief not to engage in further economic stimulus, is marred, in its postscript, by an excess of fair-mindedness. Citing the Washington Post's Ezra Klein, Cohn concedes that yes, there was a time when Democrats were equally guilty of trying to interfere with the independent Federal Reserve Board. And so they were.
Economist Peter Diamond is not sitting on the Federal Reserve Board, thanks to GOP opposition. But, at least today, the republic’s loss is The New Republic’s gain. This week TNR.COM is running a symposium on creative economic ideas and Diamond has contributed to it. The headline on the article is “Want to Fix the Economy? Start With Social Security.” And that will probably surprise a lot of people. The expected shortfall in Social Security represents just a small portion of the liabilities that make up our future debt burden.
Ever since it became clear that the pace of the economic recovery was falling short of expectations, two competing narratives have vied to dominate our politics. Movement conservatives argue that the weight of a government that “spends too much, taxes too much, and borrows too much” is suffocating the private sector and that new laws and regulations have throttled investment and job creation by creating uncertainty about the costs of doing business.
Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget. The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years.
Lindsay Lohan turns out to be a hard money crank: With a vacant Federal Reserve Board spot open and Peter Diamond still unqualified, I wonder if Richard Shelby would consider appointing her. She has sound conservative views on monetary policy, a successful entrepreneur, and she appeals to the youth vote Republicans badly need. And she has appropriately skeptical views of labor: I also believe a Federal Reserve appointment would give Lohan the structure she needs to keep her life on track. It's win-win!
Nearly a day has passed since Peter Diamond announced he's withdrawing his nomination to the Federal Reserve Board in the face of intractable Republican opposition. I remain convinced that it's a travesty and I don't seem to be the only one. Via e-mail, here's Henry Aaron, the Brookings economist and quite possibly one of the most fair-minded people I know: I find it profoundly sad—for the nation and for the cause of reasoned debate on public policy—that a blocking minority of Senators has refused to permit Peter Diamond’s nomination to the Federal Reserve to come to a floor vote.
When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression: allowing a cascade of bank failures that both destroyed much of the country’s wealth and left the financial system badly crippled.