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)