The destructive nomination politics surrounding Warren and Diamond
Jim Surowiecki has a good column on Elizabeth Warren this week, explaining that over the long term she and the CFPB, like most financial regulators, are likely to be good, not bad, for those they regulate.
Over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.” Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.
It hasn’t happened yet, but anybody going to a fintech conference will tell you there’s a very real chance that at some point in the next few years, the banking and consumer-finance industries really will be disintermediated and disrupted by new, smart, and transparent online competitors. The CFPB is set up to address the real problems of today — but in doing so it might well help the banks get onto a much firmer footing, competitively speaking, over the long term.
The problem with Warren, of course, is much more political than it is substantive: she stands for What Obama Wants, and therefore the Republicans will close ranks against her. The same thing, tragically, has happened with Peter Diamond, who has now formally withdrawn his nomination from the bully pulpit of the NYT op-ed page:
In April 2010, President Obama nominated me to be one of the seven governors of the Fed. He renominated me in September, and again in January, after Senate Republicans blocked a floor vote on my confirmation. When the Senate Banking Committee took up my nomination in July and again in November, three Republican senators voted for me each time. But the third time around, the Republicans on the committee voted in lockstep against my appointment, making it extremely unlikely that the opposition to a full Senate vote can be overcome. It is time for me to withdraw.
I blame the 2012 election — everything that any politician does for the next 17 months is going to be focused on the all-important question of who can win what on November 6, 2012, and how. Just check out the response to the news from Richard Shelby, Diamond’s fiercest opponent in the Senate:
It would be my hope that the President will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”
This makes no sense at all, from an economics point of view. The budget is set by Treasury and Congress, not by the Fed. Joe Weisenthal thinks that Shelby is signalling here that he’s looking for a hawk rather than a dove, but that’s not really the case: Obama could probably renominate Volcker himself and not get him through.
Meanwhile, the job of setting US monetary policy has now become so political that Tyler Cowen actually welcomes Diamond’s withdrawal, saying that “what is needed is someone who can help push some fairly simple and already well-understood ideas through Congress,” and that an important criterion for any Fed-board nominee is that he or she be able to serve as the Fed’s ambassador to Ron Paul.
I disagree: Ron Paul is never going to be reasoned with, when it comes to the Fed. And for the next 17 months, all Republicans are going to act like Ron Paul, because doing so is in their political best interest.
This puts the White House into something of a bind. The right thing to do from a policy perspective is to get the likes of Warren and Diamond into important positions in the pantheon of bank regulation. Politically, however, that’s extremely difficult, if not impossible. So what’s the alternative? Is it even possible, at this point, for the Obama administration to nominate someone who the Republicans won’t automatically oppose on the grounds that he or she is an Obama nominee? And if it’s not possible, does the whole stalemate just become a shouting match? I’m not sure I can cope with a year and half of unproductive debate — but that seems much more likely, right now, than anybody actually achieving something substantive.