I’m sure you’ve heard that Nobel-Prize winning MIT economist Peter Diamond is withdrawing his name from nomination to the Federal Reserve, leaving Democrats and liberals frustrated with the lack of movement on nominees. People are shocked that it has come to this.
Diamond is leaving because it is clear that the Republicans in the Senate will continue to block the nomination. In particular Republican Senator Richard Shelby is opposing Diamond because of “Dr. Diamond’s policy preferences…He supports QE2…He supported bailing out big banks during the financial crisis.” Shelby also mentioned is his letter:
“For those who say that policy preference should not be considered, I will only point out that the re-nomination of Dr. Randy Kroszner to the Fed was blocked by the majority party because he was viewed as being too free market.
“Unlike Dr. Diamond, Dr. Kroszner is an expert in monetary policy and banking regulation. Yet, the majority party never even gave him a hearing.
Shelby wanted to see conservative-favorite Randy Kroszner nominated several years ago and the Democrats blocked it. So Shelby blocks liberal-favorite Peter Diamond. Ok, fine, we’re desperate. Maybe we can get Kroszner and Diamond together? Maybe Obama should just nominate this Randy Kroszner, because we know Shelby, Republicans and the conservative establishment will support him.
Or would they? It’s funny, because while Kroszner was no doubt to-the-right enough for conservatives pre-crisis, post-crisis he’s way to the left of where the party has ended up on monetary policy and the Federal Reserve. With their attacks on QE2, the denial of the financial crisis and the need for reform, their scapegoating of the CRA and community groups, and inflation-everywhere panicing guiding them, conservatives would certainly have to block Kroszner’s nomination.
Shelby: QE2 and Financial Sector
Shelby’s case against Diamond was primarily based on Diamond’s support for QE2. Where is Kroszner on QE2?
“I think it is very important for the Fed to be ahead of the curve. There’s a small chance of deflation…it is really important that the Fed prevent that from happening…insurance plan against downside risk of deflation….the main focus is trying to boost economic growth and prevent deflation.”
So he was down for doing QE2. Strike one! But I’m sure after seeing the devastation, or, alternatively, the uselessness of QE2, he’s recanted, and would work to isolate and discredit those who want to see more quantitative easing in the form of QE3 on the behalf of conservatives.
Kroszner: ”I think [QE2] was the right policy when they put it forward. I think the right policy now, and I think the data has been very much supportive of what the Fed’s been doing.
Interviewer: “Does that leave open the possibility of a QE3 if we have weak numbers like this?”
Kroszner: “It depends on where we are four or five months from now. If the unemployment rate has not ticked down at all, if we haven’t seen a little bit more job creation, then of course the Fed will have to see if it needs to do more support.”
Strike two. Diamond was also blocked by Shelby because of support for the bailouts. Maybe he’ll be comfortable saying the line that TARP/bailouts and the subsequent financial reform movement were both unnecessary, the way Taylor and Cochrane do it, right? Kroszner and William Melick, The Response of the Federal Reserve to the Recent Banking and Financial Crisis (my bold):
The actions undertaken by the Fed during the crisis to expand lending to non-traditional counterparties, broaden the acceptable collateral against which it would lend, and lengthen the maturity of its lending were an acknowledgement of the narrowness of the traditional tool set to deal with a modern financial crisis…As the tone of the previous sections makes clear, and with recovery seeming to take hold, we judge the combination of traditional and non-traditional responses to have been on balance successful in preventing the Great Recession from turning into a repeat of the Great Depression.
Of primary importance is improving the resolution regime for large financial institutions (see Kroszner 2009a).. Greater reliance on “living wills” would give greater clarity about how a troubled institution will operate as it winds down operations…Many other proposals have been put forward to enhance market resiliency and mitigate the interconnectedness problems in a modern financial system, such as central clearing of derivatives (see Kroszner 2009a).
So the bailouts stopped a second Great Depression. To top it off, we need financial reform that includes things like living wills and derivatives clearinghouses, both opposed by Republicans in Congress. That’s strike three. So Shelby would want to block him.
Think-Tanks and the CRA
But maybe the conservative think-tanks would come to his rescue? They tend to focus a lot on how community activists and the Community Reinvestment Act (CRA) caused the financial crisis. If Kroszner can help them out against reality-based commentators on this topic, they’d probably stand up for him.
Hey look, it’s Kroszner at a conference on the CRA from December 2008 (my bold):
“Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices….
“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”
Oh boy. It’s a big deal for conservative think tanks to say that the Community Reinvestment Act was a major driver of the housing bubble. And here’s Krozner being all reality-based about it, pointing out that it is nonsense. I can already hear the right-wing blogs calling him “shrill” for this if he’s nominated again.
Conservaties: An Enemy to Invisible-Inflation Is My Friend
Well, maybe he has a friend in those trying to get the Fed to raise rates because inflation is going to start spinning out of control any day now? Would the conservative regional Fed governors stand up for him, as they might see him as an ally in getting interest rates raised as soon as possible during this weak recovery?
Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential. In 1936-37, the Federal Reserve made a colossal mistake in its “exit strategy”. This time round it is crucial that central banks get their timing right.
Seventy-three years ago, fearing the large accumulation of reserves held by the banks at the Fed could result in an “uncontrollable expansion of credit in the future” if the banks decided to lend out those reserves, the Fed raised reserve requirements to absorb them. This sharp tightening of monetary policy stopped the robust recovery that had been in train since 1933, precipitating a “double-dip” contraction in 1937-38, which according to Milton Friedman and Anna Schwartz in their 1963 book A Monetary History of the United States, 1867–1960 “was one of the sharpest on record”.
Uh-oh. That’s not going to win him conservative friends. Even worse, here he is on Bloomberg TV, March 2011:
“It’s hard to see a lot of inflation pressures right now. If you look at the recent numbers that came out on inflation just earlier this week, the core rate, stripping out food and energy, is less than 1%. That’s dangerously close to Japan-style deflation problems. An even the headline rate, which includes food and energy is less than 2%. So we aren’t seeing enormous inflation pressures right now…inflation is well-anchored.”
Deflation, Japan, core-inflation not headline-inflation. It’s like I’m reading Krugman.
Two things to note: Between leaving the door open for QE3, acknowledging the financial crisis happened and that it needs a policy response regarding resolution and derivatives, using numbers and a reality-based approach instead of the conservative scapegoating approach to understanding the CRA and actually understanding Japan and inflation rates, I think this guy is awesome. But all those things going for him leaves him with no home on the Right or, as far as I can see, among conservative economists. For they have wandered deep into the Ron Paul gold-bug and rentier territory.
So I never thought I’d write this, but welcome to Team Shrill DFH Randy Kroszner.