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The understaffed Fed

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Speaking of the government's confirmation crisis, what does it mean for the Fed's vice chairman and two of its governors to be tied up in the Senate? Well, nothing good:

Each of the Fed governors has some administrative responsibility over a key area of the central bank. Banking expert Dan Tarullo, for example, oversees bank supervision, and Elizabeth Duke oversees consumer protection matters. Kohn, who was vice chairman until June, had a particularly large portfolio. He was in charge of the research divisions of the Fed -- the economists in monetary affairs, research and statistics, and international divisions who prepare the analysis that Fed leaders use to make policy decisions. And he also oversaw matters involving the regional Fed banks across the country, approving their budgets, major operational decisions, and who would be on their boards of directors. If the vacancies persist, it would cause significant operational strains as the remaining governors are stretched thin, and important administrative aspects of running an institution with almost 2,000 employees in Washington (and another 16,000 around the country) could easily fall by the wayside.

Then there's monetary policy, the Fed's core function. There is now a strange situation in that the institution in charge of guiding the U.S. economy has only one PhD economist among its top officials, Chairman Ben S. Bernanke. The other three currently serving governors are not monetary policy specialists (they are Tarullo, a former law professor, Duke, a former banker, and Kevin Warsh, a financial markets expert). Two of Obama's nominees are economists, San Francisco Fed president Janet Yellen and MIT professor Peter Diamond. This is, as it happens, a pretty terrible time for the Fed not to have as many smart economists in its upper ranks as possible; the central bank faces a massively consequential decision over the coming months of whether to undertake new steps to try to boost the economy.

Though as Tim Fernholz also pointed out, it's not in fact true that the Federal Reserve can't undertake extraordinary measures without five of its governors present and voting. The institution made a rule after 9/11 allowing the Fed to take action without a quorum. That rule, which was supposed to protect the central bank from a terrorist attack that killed multiple members, is now protect ng us from the consequences of Senate dysfunction.

Photo credit: By Brendan Smialowski

By Ezra Klein  |  September 17, 2010; 11:33 AM ET
Categories:  Federal Reserve  
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Comments

Ezra, at some point you have to give up this attention with Fed. The reality is unless Economy picks up and some inflation is visible, Fed is NOT in the PLAY. The only things we need from Fed are:
- stay pat and do not increase the rate pre-maturely; and
- provide the 'stop-back' of buying Treasury bonds if we again enter into double dip.

I believe both of these things are promised by Bernanke and there is no reason to doubt that. I did not support Bernanke Term for the second time when President Obama nominated him in Jan 2010. But that is 'water under' the bridge and let that guy run his institution as he dims fit. He is an accomplished adult who knows the game quite well and at the end of the day, still there is no one in this country who has done more than him in last few years to save us from the total dumpster.

Agreed, you are talking about filling positions at Fed and not about Bernanke Fed Policy. But I keep seeing references to what Fed can do in this crisis, again and again. That is fruitless.

The real fight, as you know, is all about Congress, Tax Cuts and exposing 'lunacy' of GOP & Tea Party when they propose 'unlimited entitlements with unlimited tax cuts' kind of total 'voodoo economics'.
Regan Budget Director is on WSJ claiming spending reductions AND tax increases. Greenspan - the greatest hack & damager who backed Bush Tax Cuts - is asking from Tax Increase also. Funny thing is WSJ publishes all this on their front pages but continues to editorialize about 'tax cuts for rich'.

Job for wonks like you is to expose all this all the time and keep telling us in how many different ways 'a Tea Party lunatic' can dance on the budget book.
Everything else - not useful; including all this wonkery about Fed.

Posted by: umesh409 | September 17, 2010 12:05 PM | Report abuse

I think now is a good time to reiterate that while I think it's important to clean up the confirmation process to allow nominees to get an up or down vote much quicker and without endless holds, I think judicial appointees are different. Presidents should expect that they can staff their agencies with appointees in a reasonable time frame. The government needs to be able to run. Judges, however, have lifetime appointments where they will make important and lasting interpretations of state and federal law. It's important that we don't have a situation where judicial nominees are dropping out because nothing's happening with their nomination, but it's very important that both sides get as full a hearing and weighing of the issues as is reasonably possible.

Posted by: MosBen | September 17, 2010 12:07 PM | Report abuse

Why isn't the admin making any noise about this?

Posted by: newsjunkie10 | September 17, 2010 1:02 PM | Report abuse

Obama should screw them sideways and recess appoint.

Posted by: zosima | September 17, 2010 3:24 PM | Report abuse

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