As the Chair of the powerful Senate Banking Committee, Senator Richard Shelby (R-AL) is one of the most important figures in Washington and Wall Street. Among his targets is reforming the Fed, including the Fed’s governance.
Recently, Senator Shelby has announced that he has a bone to pick with the Obama Administration on this score. In particular, the senator isn’t impressed with the Administration’s decision not to advance an appointment to the Fed’s Vice Chair of Supervision, a new position created by the Dodd-Frank Act five years ago. Until the Administration advances a nominee, Shelby hints that he will be in no particular rush to hold confirmation hearings on Obama’s nominees to fill the two vacancies on the Board of Governors. “I think it ought to be done,” Senator Shelby said in a C-SPAN interview, referring to the Vice Chair for Supervision. “I think the Fed needs all the help it can get.”
I haven’t thought much of Senator Shelby’s interference with previous Obama nominees to the Fed’s Board. In particular, he is responsible for what I would consider the most egregious abuse of the advice-and-consent function in the history of the Fed nominees. The Obama Administration nominated Peter Diamond, a legendary economist who had studied some of the very issues the Fed faces in navigating the waters of unconventional monetary policy (namely, labor economics with specific attention on aging populations living on fixed income). Shelby blocked the nomination, ostensibly because Diamond wasn’t enough of an expert. Ironically, Diamond won the Nobel Prize just as Shelby made clear that he wouldn’t budge on the nomination. Diamond withdrew soon after.
I’m thus primed to be skeptical of anything Senator Shelby might do to block Fed Governor confirmations. Except in this case, I must confess, that Senator Shelby is right. The Obama Administration is wrong. There is simply no excuse for failing to provide the public accountability that would come through the nomination of this important post.
To understand why, we need to know more about what Dodd-Frank did. Before Dodd-Frank (and after), the seven governors on the Fed’s Board each have statutorily identical roles, with two exceptions. First, the Fed Chair must testify before Congress twice annually, and otherwise supervise the Fed’s meetings. Monetary policy—what the Fed is most famous for—is conducted through the Federal Open Market Committee, including the research staffs at the Board and the twelve regional Federal Reserve Banks. But to take care of the rest of what Congress had mandated the Fed to do—from bank supervision to bank regulation, international economic diplomacy to consumer financial protection—the Fed’s Governors organized in committees. No one but the closest observers knew who was in charge of which committee, and it wasn’t at all uncommon for governors selected for their expertise in monetary policy (or their expertise in raising money for the President) to be in charge of areas well outside their expertise.
Dodd-Frank changed that, in two important ways. First, it created the Consumer Financial Protection Bureau to consolidate all of the Fed’s (and others’) authorities into a single identifiable bureau that would be politically accountable and recognizable as the agency in charge of consumer financial protection. Second, it created a second Vice Chair to focus exclusively on bank supervision. The crisis exposed the Fed’s failures in both departments; Congress rightly sought to bring more accountability at the level of administrative governance on those neglected areas.
We all know the story of the CFPB, that bugaboo of Republican and conservative politics. The Obama Administration wasn’t keen on the fight that an Elizabeth Warren nomination would bring, so it inadvertently gave rise to her senatorial career. But the Bureau has since had two Senate-confirmed directors. The Fed’s Vice Chair for Supervision has essentially been ignored.
Functionally, the Fed has followed its usual course and assigned one Governor the task that we might expect a Senate-confirmed Vice Chair for Supervision to do. That’s Daniel Tarullo, one of the most influential Fed Governors in history. But it’s not enough that there’s a Governor with expertise. The entire point of these kinds of governance changes is that there be public accountability at the level of personnel selection. The Vice Chair for Supervision is supposed to serve a four-year term, much less than the Governor’s standard fourteen years. Governor Tarullo has been in office for six years. And although I think he’s done a very effective job in his functional role, it would be better for the Fed, better for bank supervision, better for the democracy to have someone—be it Tarullo or someone else—in that statutorily required role.
In other words, Senator Shelby is right—the Obama Administration should have moved on this nomination years ago. Hopefully his public call to arms will stir some action.