Here’s a type of change I could have believed in: appointing people to federal offices with a proven history of knowing something about the field in which they are chosen to operate. No more Brownies, no more Bernie Keriks. Wouldn’t it be nice. But, at least when it comes to financial regulation, such an outcome is nothing but a dream.
Dean Baker, an economist who saw the bubble for what it was, points out that none of Obama’s choices for positions at the Fed saw the bubble coming”
The Obama administration announced its three picks for the vacant positions at the Fed last week. Not surprisingly, no one on the list was among those who had warned of the housing bubble. This is not surprising because there is virtually no overlap between the list of people who had warned of the bubble and the list of people who are politically acceptable as appointees to the Fed.
It is actually rather quaint that Baker would even suggest that competent people should work at the Fed. Why should the Fed be any different. Can you think of a single person who has consistently been right about their field of expertise who has managed to get and stay on the top? There must be some out there, but they are few and far between.
Baker is a realist. He isn’t asking that competent people be appointed, he is only asking that the incompetents be required to acknowledge the reality that they actively denied in the past:
Specifically, the Senate should insist that the nominees give their account of the run-up to the crisis and explain where the Fed make mistakes and what they would do differently with the benefit of hindsight. This line of questioning is especially important in the case of Janet Yellen, President Obama’s nominee as vice-chair of the Board of the Governors.
Yellen’s fingerprints are already on this crisis, having served as a Fed governor in the 90s and more recently as a president of the San Francisco Federal Bank. Dr. Yellen is on record as explicitly saying that the Fed lacks the ability to recognize asset bubbles like the housing bubble. She argued further that it lacks the tools to effectively rein in an asset bubble. And, she argued that cleaning up after the collapse of the bubble is no big deal. In terms of economic analysis, she hit a grand slam in getting it absolutely as wrong as possible.
Presumably, Yellen has changed her views of what the Fed can and should do about asset bubbles. The banking committee should give Ms. Yellen the opportunity to go on record explaining her new position and how the events of the last three years have led her to change her mind on these issues. Of course, if she still adheres to her earlier position, then she clearly is not an appropriate person to be vice-chair of the Fed.
Of course it’s always possible that Yellen has gotten religion, but for every zealous convert there are nine apostates in waiting.
People like Karl Rove must feel like they have been given a gift from heaven. The Democrats could have used the issue of the economy and Wall Street to beat Republicans over the head. Instead, they have opted for both bad policy and bad politics. Only the Democrats could ram defeat down the jaws of victory.
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