With the confirmation of Ben Bernanke for a second four-year term as Chairman of the Federal Reserve Board, many Americans who wanted reform of the Fed feel frustrated. Experts and laypeople widely agree that the Fed mismanaged the US economy in the years leading up to the current economic crisis, and while some feel that the Fed has done a better job since the crisis worsened, most feel that there is still much more to be done.
Yet the confirmation of Bernanke for a second term as Chairman does not close the door to the hope that the Obama administration will make lasting changes in the leadership of the Federal Reserve. There is another way that will be as effective as replacing Bernanke as Chairman would have been, and perhaps more so.
That path is to fill the two vacant seats on the Board of Governors of the Federal Reserve with strong voices who have shown awareness of the economic issues that the current leadership of the Fed has failed to demonstrate.
The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the twelve District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate for staggered, 14-year terms. The Board of Governors make up the backbone of the Federal Open Market Committee along with five of the Presidents of the twelve regional Federal Reserve banks. The FOMC is the primary organ of monetary policy in the United States, responsible for making key decisions on issues such as the monetary supply and interest rates. Since the twelve Federal Reserve banks are, per the Ninth Circuit Court of Appeals, "privately owned and locally controlled corporations", the members of the Board of Governors are the only members of the FOMC subject to democratic oversight.
Yet of the seven seats on the Board of Governors, two have been vacant for over a year, the entirety of the Presidency of Barack Obama. In this time of historic economic crisis, with all eyes on the Fed, we have allowed the chief monetary policy organ of the United States to go understaffed, and given up the two seat majority on the FOMC granted by law to those who have to be confirmed by the democratic process instead of selected by bank shareholders.
Of the five members currently on the Board, four were appointed by President George W. Bush: Chairman Bernanke, Vice Chair Donald Kohn, Kevin Warsh, and Elizabeth Duke. The fifth member of the Board, Daniel Tarullo, was appointed a week after Obama took office. Further imbalance on the Board is created due to only two of the five being trained economists – Bernanke and Kohn. Elizabeth Duke is a Virginia banker and MBA; Kevin Warsh is an MBA and lawyer who was Vice President of Morgan Stanley for merges and acquisitions; Daniel Tarullo was a Professor at Georgetown Law who specialized in international financial regulation and banking law. These are all important backgrounds deserving of representation on the Board of Governors. But they place important expertise in a very limited corner of the Board and may be an important reason why controversial decisions like the A.I.G. payout were approved despite serious dissent within the Board.
Therefore, I propose that we make it a priority to ask the President to nominate candidates for the two vacant seats on the Federal Reserve Board of Governors and that the Senate do everything within their power to promptly confirm these candidates, in order that we have democratic oversight of the Federal Open Markets Committee, sufficient expertise representing a wider spectrum of political and economic views, and the full capacity mandated by law to handle the diverse and urgent issues facing the economy of the United States.
Filling multiple vacant seats on the Board of the Federal Reserve is not without much recent precedent. George W. Bush twice filled multiple seats on the board on the same day; appointing Susan Bies and Mark Olson on December 7, 2001 and Bernanke and Kohn on August 5, 2002. In 2006, President Bush appointed three members of the Board in a single year, Mr. Warsh, Randall Krozner and Frederic Mishkin. Nor was President Bush abusive in his appointments; President Clinton appointed seven Governors in his eight years as President.
Yet filling these seats is not merely a method to get more balanced economic policy in the short term, but a fantastic way to influence policy in the long term. Members of the Board of Governors serve twelve year terms and cannot be dismissed without cause by statute. Few of them serve their full term, but many serve longer than eight years, including Kohn and Bernanke presently.
The Senate and the citizens of the United States of America accepted today that Mr. Bernanke will be the leader of the Federal Reserve for another four years, despite our shared reservations. We should demand that we also get the benefit of two strong voices in the vacant seats on the Board, and that those voices be among those who better foresaw our current predicament.
There are many worthy candidates who would do an excellent job on the Federal Reserve Board of Governors. However, in my opinion, the two most outstanding would be Nobel Laureate Joseph Stiglitz of Columbia University and Stanford University Professor John Taylor. You can read a case for John Taylor by the blog Zero Hedge here and a diary about Stiglitz’s indication that he would accept a Fed position by Cenk Uygur here.