Withdrawal of Fed nominee sets bad precedent
By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
WASHINGTON — Nobel laureate Peter Diamond won’t be joining the Federal Reserve’s board, and neither might anyone else for some time. Washington is making the U.S. central bank almost as much of a political target as the Supreme Court. The result could be lengthy vacancies and perhaps less independence.
Senate Republicans were looking to repay Democrats for blocking President George W. Bush’s reappointment of Randall Kroszner to the Fed in 2008. Many also wanted to use the nomination as a way of expressing displeasure over the bank’s bond-buying program and President Barack Obama’s fiscal policy. Opposing Diamond allowed them to tick all those boxes.
Despite his potentially valuable labor market expertise, the Massachusetts Institute of Technology economist’s support of the Fed’s quantitative easing and Obama’s stimulus spending provided the political rope needed to rationalize his rejection. Those positions enabled the GOP to rally conservative interest groups against a Fed nominee. The influential Club for Growth, for instance, threatened to rate poorly any Republican who voted for Diamond, terming him an “activist Keynesian.”
A disturbingly similar process unfolds when the nation’s highest court has an opening. Interest groups scour the records of potential nominees for any morsel of controversy. The frequent result is that it’s the jurist with the shortest or most easily defended paper trail being selected, rather than the best qualified.
With this mood also hanging over the Fed, it may be nearly impossible for Obama to fill the two current board vacancies, no matter what a potential nominee’s views or resumé. As the 2012 election nears, it will be tempting for the GOP to stall the process until 2013 when there might be a different president or greater Republican strength in Congress.
And if the slots ever get filled, the attacks on Diamond are more evidence that new board members will face a Congress showing less deference than in the Alan Greenspan or Paul Volcker eras. Republicans — at least those who don’t want to abolish the Fed — want the bank to focus solely on controlling prices. Democrats want the bank to do more to juice jobs, the other part of the central bank’s sometimes awkward dual mandate.
So perhaps Diamond shouldn’t feel too bad about returning to Cambridge, Massachusetts. His dream job isn’t what it used to be.