There are three vacancies on the Federal Reserve Board of Governors. That’s a big deal – maybe the biggest deal for economic recovery you’ve heard almost nothing about in the mainstream press.
The economy has been growing for most of the past year, but data from the second quarter of 2010 are showing new signs of a slowdown. Unemployment hasn’t come down, and may be showing signs of inching up again. All this is great news for Republicans heading into the fall elections. Their biggest fear is that voters might see signs of recovery and jobs growth, and scuttle Republican chances for big gains in November.
But how do Fed nominees play into the Republican equation for electoral victory?
The Fed is the only body that can now take serious action to boost the economy. Thanks to Republican obstructionism, and misplaced hysteria over the short-term budget deficit (the solution is putting people back to work, paying taxes and growing the economy), nothing more will come out of Congress this year. So what better for Republicans than to ensure continued gridlock at the Fed, guaranteeing continued high unemployment at least until after the November elections?
Obama has nominated three highly qualified candidates to fill vacancies on the Fed Board of Governors: Janet Yellen, president of the Federal Reserve Bank of San Francisco has been nominated as vice chair; Sarah Raskin is currently the Maryland commissioner of financial regulation; and Peter Diamond is a Massachusetts Institute of Technology economics professor (an former professor of Fed Chairman Ben S. Bernanke). All three candidates were voted out of the Senate Banking Committee last week, clearing the way for action by the full Senate.
Diamond is an expert on economic risk. This background would be central to Fed efforts to develop policies and make decisions to avoid future financial crises. He is an expert on Social Security, pensions, and taxation issues. Raskin, a former counsel to the Senate Banking Committee would increase the Fed’s expertise on financial regulation, an area that clearly was lacking under “Bubbles” Greenspan’s leadership. Raskin’s expertise includes consumer issues, which will be important as the Fed implements new regulations approved under financial reform. Yellin, with a long history on the Fed, has said that regulators were “slow” to crack down on risky banking practices that led to the 2008 financial crisis. She and Raskin agree that the Fed needs to pay more attention to curbing speculative excesses in the economy going forward. Yellin says the Fed must place a high priority on job creation in crafting monetary policy.
Yellin and Diamond are both considered “doves” on monetary policy. As such, they are currently more concerned with high unemployment than with rising inflation. Rightly so, given that deflation is now a much bigger threat than inflation. Deflation means falling wages, prices, profits, investment, consumption, and production. The economic consequences are devastating, and it is a cycle that is much more difficult to reverse than inflation.
A number of conditions pointing to deflation are currently in play, with excess capacity in the form of unemployment and underemployment; slack consumer demand; and underutilized capital resources as companies and banks hoard cash. Producer prices and consumer prices are both barely in positive territory, which is a concern. Over the past year, a large proportion of the components of the CPI have in fact been negative, particularly related to consumer discretionary spending. Core inflation could be well under 1% for 2010, which is in dangerous territory. With a still-extant debt overhang, especially mortgage debt, deflation would be devastating to ordinary Americans.
And the deflation dynamic could be further complicated if the dollar appreciates relative to other currencies (especially the euro, where sovereign debt is a concern in some countries); if oil prices decline; if housing prices enter a second dip.
Yet, like old generals still fighting Communists, inflation hawks continue to dominate the policy debate.
Modest inflation, perhaps up to 3.5 to 4.0%, would actually be a big plus for ordinary Americans laboring under mortgage and credit card debt. Wouldn’t you rather pay your 5% mortgage back with cheaper dollars? A lower valued dollar and mild inflation would unleash additional discretionary spending and make U.S. exports more competitive. That would get the economy moving in the right direction.
All this means the Fed needs precisely the expertise of the nominees that President Obama has ordered up. Filling these vacancies now is crucial as the Fed steers the economic recovery, which remains extremely fragile and vulnerable to shocks.
So what happened this week in the Senate? Peter Diamond’s nomination was sent back to the White House for “reconsideration,” because of objections from Republican lawmakers. The action was taken without debate before the Senate left for recess. The action was likely the result of Alabama Sen. Richard Shelby’s comment that Diamond “may not be qualified to make decisions on monetary policy.” Republican hostility emerged during committee hearings, when Diamond rightly said he is currently more concerned about deflation than about inflation.
Raskin and Yellin’s nominations are still alive, but those, too could be scuttled when the Senate reconvenes in September.
With the Federal Open Market Committee scheduled to meet in a few days, it is unclear when there will be a full complement of governors. There have been two vacancies going back to January 2009, and August 2008, leaving the board short-staffed during a critical period.
It is not clear that Obama could appoint Diamond while the Senate is in recess, but it is certain he will not do so, as it would create tremendous ill-will, even among some Blue Dog Democrats. Hopefully, he will at least stand firm, and resubmit the nomination for Senate consideration. And he ought to make this an election issue. Republicans know that the longer the Fed remains in its current log jam, the longer the economy remains flat and unable to reduce unemployment. Republicans are once again playing politics at the expense of ordinary working Americans. Obama needs to loudly call Republicans out on this…yet another act of political and economic sabotage by the party of “No.”