FOMC Governor Litmus Test
As noted earlier this month (Geithner, Summers Lead FOMC Vacancy), there are 3 vacancies on the Federal Reserve — two Governors and a Vice-Chairman. Fed Governors are appointed by the President, and require Senate confirmation. They serve 14-year terms.
I placed a significant amount of blame on the Federal Reserve for the financial crisis. The ultra low rates pushed by Greenspan in response to the dotcom collapse was aimed at bailing out traders and speculators, not the country as a whole. 1% Fed rates jump-started an upwards spiral of prices in houses, food, oil, and gold, along with excess speculation across all asset classes.
That aspect is well understood. What people seem to understand less is how else the Fed failed. The Federal Reserve states its responsibilities are:
1. Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices;
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
4. Providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems
How’d they do?
Not very well.
Recent history shows us the Fed was nearly exclusively focused on #1 — monetary policy. They did a terrible job at #2 — regulating banking institutions. Their failure as bank regulators led to #3 — total instability of the financial system (although I credit Bernanke’s out of the box thinking with pulling the system back from the abyss). As to #4, the Fed (and especially, the NY Fed) seems to forget about their disclosure duties.
One way to prod the Fed to perform its own duties and responsibilities is to make sure that any new Fed Governor or FOMC Vice-Chair has a firm commitment to these responsibilities. Greenspan’s Randian ideology prevented him discharging nos 2, 3 and 4.
Thus, I suggest a litmus test for any nominee to the FOMC board. Senators should ask each participant the following questions:
-Are you willing to put all of the AIG emails into the public domain?
-Did you warn about the housing bust and credit crisis BEFORE it happened?
-Do you believe that the Federal Reserve should address bubbles in real time, or merely clean up after they pop?
-Do you believe the government should protect consumers, investors, and savers?
-Is that a proper role of the Federal Reserve, or another agency?
These are just a few questions I would hope to see answered satisfactorily before we approve any nominee for the Federal Reserve Board of Governors . . .
>
courtesy of Gallup Polls
Previously:
Do-Nothing Fed Regulator = Huge Bank Victory (March 3, 2010)
http://www.ritholtz.com/blog/2010/03/do-nothing-fed-regulator-huge-bank-victory/
Sources:
Frequently Asked Questions: Federal Reserve System
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#3
The Federal Reserve System: Purposes and Functions
Board of Governors of the Federal Reserve System
June 2005
http://www.federalreserve.gov/pf/pdf/pf_complete.pdf
See also:
Kohn exit could herald several years of easy money (Reuters)
The Fed’s stuck in the penalty box (Fortune)
Dissent and Disagreements at Future FOMC Meetings? (Northern Trust)
Fed appointments hold key to exit strategy (FT)
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March 8th, 2010 at 7:39 am
I don’t have the time or the space to go through the entire diatriabe, but the reality is this:
The Federal Reserve is not the government. It is run by the banks themselves. They cannot regulate or supervise themselves. I have no other proof except basic human nature and recent history’s financial crises.
Put it this way, by logical extension, if the Federal Reserve is capable of regulating the U.S. financial system, then we need neither laws, police, nor prisons. We can do it ourselves. Not only do I think that wouldn’t work, I don’t think the Federal Reserve can or will work either.
The fact that the new regime contemplated includes the Federal Reserve maintaining or expanding its control over the financial system despite its recent horrific track record is indicative of the degree to which any semblance of government independance from manipulators has vanished…
March 8th, 2010 at 7:46 am
Although The Federal Reserve engaged in some questionable tactics, a total depression hasn’t happened yet. I worry about the long term consequences of TBTF and wish we had started a program called TBTS which would-have-stood-for TOO BIG TO SUBSIDISE. Schumpeter would be disappointed.
President Obama had too many problems upon arrival but that’s already history.
March 8th, 2010 at 7:52 am
Increasing the scope of their authority in any way is INSANE! BB never should have been reappointed and I think eventually court cases will bring enough stuff to light to force his resignation “great job Bennie”
A comprehensive, independent audit of the Fed is a must, not an eyewash exercise approved and controlled by BB. Targeted investigations can follow the audit.
Complying with FOIL and comprehensive audits of the Fed will be like spotlights on the cockroaches in the corner breaking up the cozy relationship between congress and bankers and sending them all scurrying.
March 8th, 2010 at 8:05 am
Find three guys with a ton of cash. They will be highly incentivized to keep short rates very high.
…of course the only guys with lots of short term money are angry Tea Partiers who missed the rally of a generation. So they’re clueless.
A true dilemma.
March 8th, 2010 at 8:10 am
Who were the ‘traders and speculators’ that Greenspan bailed out?
In amongst them would that include Goldman Sucks? Lehman Brothers? Bearn Stearns? who stood to gain the most by his concerted effort? And how did they get that leverage over him?
March 8th, 2010 at 8:35 am
Litmus test?
Knowing the bankers, they’ll want the taxpayer to hold the test strip.
March 8th, 2010 at 10:16 am
[...] more discussion on the Fed’s performance, The Big Picture has a recent post worth [...]
March 8th, 2010 at 4:22 pm
[...] Fed: two governors and a vice chairman. To find the proper candidates, FusionIQ CEO Barry Ritholtz offers his own “litmus test” for potential [...]
March 9th, 2010 at 6:10 am
You suggest as a litmus test for any nominee to the FOMC board includes the question -
“Do you believe that the Federal Reserve should address bubbles in real time, or merely clean up after they pop?
to address bubbles in real time, the Fed should enforce a regulatory measure – a CYCLE AVERAGE COLLATERAL EVALUATION RULE, which kicks-in automatically to limit the value of assets serving as collateral in booming markets. The result – lowering automatically the LTV ratios as asset prices increase, thus, disrupting the feedback process, of repeatedly appreciating asset prices enabling ever expanding credit, “secured” by such overpriced assets.
A detailed proposal available from – rubinamo@netvision.net.il
March 9th, 2010 at 12:53 pm
[...] What questions should we ask of forthcoming Federal Reserve governor nominees? (Big Picture) [...]