The destructive nomination politics surrounding Warren and Diamond

By Felix Salmon
June 6, 2011
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.

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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 The same thing, tragically, has happened with Peter Diamond, who has now formally withdrawn his nomination from the bully pulpit of the NYT op-ed page: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.

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14 comments so far

It’s all Obama’s fault. He could avoid the problem entirely by not nominating anyone. That would be the bi-partisan solution. He has only gone halfway on that by nominates fewer nominees than any president to date. He should go the whole way, or perhaps have the Republican Senators nominate acceptable people.

Posted by msobel | Report as abusive

Ron Paul is responsible for setting US economic policy? I’m starting to think a US default is more likely than not and am very concerned. If that happens what will the US and world economy look like in the fall of 2012? What happens of we get a Republican president?

Posted by frit | Report as abusive

Two quick points:

1. Fascinating that we have government now by whichever party can say no.
2. Another example is healthcare. Companies pay a lot to manage their healthcare issues. We have staff, process paper and spend a lot of time at many levels evaluating bids and trying to control costs. Take healthcare out of the employer and those resources aren’t needed and can be redeployed elsewhere. We’d also then not have to worry about variability as we price our health-associated expenses, particularly those we choose to eat, into our products and services. What we think of as a burden might well take a different burden off our shoulders and improve our business.

Posted by jomiku | Report as abusive

@frit: You wrote, “Ron Paul is responsible for setting US economic policy? I’m starting to think a US default is more likely than not and am very concerned. If that happens what will the US and world economy look like in the fall of 2012? What happens of we get a Republican president?”

Get ready for hell, that’s what’s going to happen.

Posted by pumpkin3142 | Report as abusive

“Ron Paul is never going to be reasoned with, when it comes to the Fed.”

The reason for this is that nobody can even come close to presenting justification for a central bank and it’s devious activities.

There are too many of us Americans that are now pushing for complete transparency, and we are not liking the small amount of info we have been shown so far. Bailing out foreign banks with U.S. citizens money?! What a bunch of crooks! Bailing out Wall Street at the expense of the average Joe?! Immoral and Despicable!

When will big government democrats and republicans get it? Perhaps never…maybe it is an incurable disease they have.

Please, wake up and see what is going on in your country…the government is sucking out the value of your hard earned dollars. Every time they print more money (with no commodity backing it), they are sucking out the purchasing power of each and every dollar. They are decreasing the value of any savings you may have. Why are we allowing this? Those who fought hard to create our great nation are rolling over in their graves.

Posted by Pyrometman | Report as abusive

The term “hawk” and “dove” are meaningless with respect to the Fed now. A Republican nominated Federal Reserve Board created the loosest easy money policy in US history. It is so loose, that the information released about who got money from the Fed since 2008 indicates that it was on the bounds of fraud and Ponzi-like.

This is pure politics of “Just Say No” on the part of Republicans. It is clear that they are willing to bring the entire US Government function to a standstill (except for pork barrel projects in their district of course) if they believe that it would enhance their ability to win an election.

US politics have gone the way of the bike racing and baseball a decade ago, where the politicians have to cheat with “Just Say No” steroids even if there are serious negative consequences down the road.

Posted by ErnieD | Report as abusive

We are at the point where recess appointments should be the rule rather than exception. As the Senate proliferates the number of positions subject to political wrangling, removing them from the process is the most constructive action that the executive can make. Sure they will complain, but it is not like not doing so will prevent them.

Posted by MyLord | Report as abusive

Have Democrats agreed to not block any nominees the next time there is a Republican president?

Posted by dow_der | Report as abusive

I do fully understand the rejection of Diamond. He is dovish, and there is no question that continuing Q.E. is enabling the deficits and pushes the needle toward future inflation.

The Fed can spur inflation and thus the Fed has the power to tax. Inflation is a tax, as Buffett has said many, many times. It makes perfect sense that this has become political football. It is also clear that the Obama administration itself is playing political football itself by pushing candidates known to favor weaker money.

The administration takes nominations very seriously and wins big when it gets the people it wants. Sonia Sotomayor affirmed before Congress that she recognized the right to bear arms before almost immediately denying that right in a landmark case. She lost that landmark case in a 5-4 vote, but it was eye-popping how rapidly she did an about-face. I suspect this is one reason why there is such mistrust now towards Obama’s nominees generally.

As an aside on judges, liberals mock originalists and consider the Constitution a ‘living document’ but the reality is that it already is a living document. The people have the power to amend the Constitution and they have done so many times. The amount of arrogance needed to take this process into one’s own hands is impressive.

Posted by DanHess | Report as abusive

Political self interest? Say it isn’t so?

Senator Shelby is ranking member of the Banking, Housing, and Urban Affairs Committee. He wouldn’t want regulations and good people to get in the way of his pork belly entitlements…

5/9/11 — Sen. Shelby returns to Alabama with HUD secretary Shaun Donovan to further asses housing needs in the wake of the tornadoes. 5/3/11 (from his site)

Americans do need to assess what is behind them when this “financial gatekeeper” is working for “them.”

Posted by hsvkitty | Report as abusive

Folks, it’s time to put your money where your mouth is. Dr. Paul is not going to be able to run in 2016. Further, if Dr. Paul DOESN’T win, you’re going to have a lot more on your plate than a race for president. I’ve coughed up $500 or so this season in contributions and endorsed him online a lot, but if we (the faithful) don’t get some help soon he’s not going to take New Hampshire. If he doesn’t, they’re just going to marginalize him again like they did last time. For you own good, do what you can support him. If he can just get the nomination, winning against Obama will be easy – indeed he’s the only Republican certain to win against him.

Posted by lnardozi | Report as abusive

Obama finds it difficult to negotiate with opposition. Most of his appointments were Czars that by passed the process. He had super majorities in both houses, and instead of passing a budget, crammed ObamaCare down our throats. He appointed a debt commission, and his next budget didn’t have one of their suggestions in it. He’s finding out he cannot vote present any more. He cannot blame Bush anymore. He’s in a race for last with Carter

Posted by BlueOkie | Report as abusive

“Meatpackers hated the Meat Inspection Act of 1906″

While they hated two particular provisions, the American Meat Packers’ Association supported the bill: 02/readings/kolko_meatinspection.pdf

Posted by buermann | Report as abusive

“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.”

When you have defined either party by its most extreme wing, you’re an ineffective legislator, and should resign. Surprisingly enough, in the Senate and the House, Republicans disagree with each other, and vote on opposite sides of many bills because the sponsors of those bills knew that part of their job was to garner broad enough support to pass comfortably. Stating, baldly, “If you’re not with me you’re against me” is the surest way to get a response from those same legislators of “And who the hell are you?”

In other words, you’re being intellectually lazy. Spend a little more time with the next article.

Posted by ArnoldWilliams | Report as abusive
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