Mar 08 2011

Shelby: Diamond Is Not the Right Person for the Job

WASHINGTON, DC, Tuesday, March 8, 2011 – U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing to examine the nomination of Dr. Peter A. Diamond to be a Member of the Board of Governors of the Federal Reserve System.

Excerpts of Shelby’s statement are immediately below in bold, followed by the full text of his prepared remarks:

“In light of the inexcusable failures leading up to the recent crisis, I believe that the Senate needs to take a much more active role in ensuring that our financial regulators have the proper leadership.

“It is proper, therefore, that the Senate should take its Constitutional advice and consent duties for Fed nominees very seriously.  In my opinion, the nomination of a Fed Governor is the economic equivalent of a Supreme Court nomination and should be treated accordingly.

“Applying this standard to the nomination of Dr. Peter Diamond to the Board of Governors, I believe that Dr. Diamond should not be confirmed.

“Dr. Diamond is, of course, a very accomplished academic and economist.  Nevertheless, a reasonable comparison of the qualities of a Fed Governor should possess and Mr. Diamond’s background clearly demonstrates that he is not the right person for this particular job.”

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Committee on Banking, Housing and Urban Affairs

March 8, 2011

“Thank you, Mr. Chairman. 

“Today we are considering the nominations of three economists.  Two to be members of the Council of Economic Advisors and one to be a member of the Board of Governors.

“Dr. Katharine Abraham and Dr. Carl Shapiro have been nominated to be members of the Council of Economic Advisers (CEA).  The CEA is an agency within the Executive Office of the President that is charged with providing the President economic advice. 

“Although I do not share many of the policy preferences of these nominees, I am inclined to give greater deference to the President in his choices for his own personal economic advisers. 

“I do not believe, however, that the same deference should be given to nominations for our financial regulators.

“In light of the inexcusable failures leading up to the recent crisis, I believe that the Senate needs to take a much more active role in ensuring that our financial regulators have the proper leadership. 

“The poor job our regulators did in supervising our financial institutions was a key contributor to the crisis.  

“If we learned anything, it is that it matters who serves in these very important positions. 

“This is especially true of the Fed.  

“The Fed’s collective authorities make it one of the most powerful organizations in the world.  It supervises our largest financial institutions and has extensive regulatory authority over our entire financial system.

“The Federal Reserve’s inherent independence and the 14-year terms of Governors make it the least accountable agency in our government.  As a result, Fed Governors exercise immense power with very little oversight. 

“It is proper, therefore, that the Senate should take its Constitutional advice and consent duties for Fed nominees very seriously.  In my opinion, the nomination of a Fed Governor is the economic equivalent of a Supreme Court nomination and should be treated accordingly.

“Applying this standard to the nomination of Dr. Peter Diamond to the Board of Governors, I believe that Dr. Diamond should not be confirmed. 

“Dr. Diamond is, of course, a very accomplished academic and economist.  Nevertheless, a reasonable comparison of the qualities a Fed Governor should possess and Mr. Diamond’s background clearly demonstrates that he is not the right person for this particular job.

“The Fed’s responsibilities cut across three broad areas: conducting monetary policy, supervising our financial system, and responding to financial crises. 

“Any qualified nominee should have, at a minimum, some level of experience in at least one of these areas. 

“Let’s examine Dr. Diamond’s experience in each of these areas.

“Does Dr. Diamond have any experience in conducting monetary policy?  No. 

“In the written testimony Dr. Diamond provided for his first nomination hearing last July, he lists several areas of focus in his teaching and research.  Monetary economics is not on the list.  Instead, his academic work has been on pensions and labor market theory.

“Does Dr. Diamond have any experience in bank management or supervision?  No. 

“None of his professional positions or activities involves working as a bank regulator or even working in a bank.

“Does Dr. Diamond have any experience in crisis management?  No. 

“While his resume contains an extensive list of academic and policy activities, none of them suggest that he has any experience in effectively managing a crisis, let alone a world-wide financial crisis.

“In addition to a nominee’s expertise and experience, their policy preferences also matter. 

“A Fed Governor’s economic philosophy impacts not only how the Fed exercises its vast regulatory authority, but also the tenor of its policy debates because Fed Governors have a very powerful bully pulpit. 

“What are Dr. Diamond’s policy preferences?

“He supports QE2.

“He supported President Obama’s $800 billion stimulus package and has argued for additional fiscal stimulus.

“He wrote a paper with President Obama’s former budget director, Peter Orszag, arguing for higher taxes to fund Social Security.

“He supported bailing out big banks during the financial crisis.

“He supports the use of behavioral economics to help bureaucrats more effectively control the choices Americans make.

“He has even advocated the creation of a GSE modeled after Fannie and Freddie to subsidize health care.

“In short, Dr. Diamond is an old-fashioned, big government Keynesian. 

“Many of us believe that this is not the economic philosophy the Fed should be embracing at this point in our economic history.

“Our economy is already suffering from excessive government debt and misguided regulation.  Our financial regulators should be trying to take steps to strengthen our markets, rather than replace them with new layers of government. 

“For those who say that policy preference should not be considered, I will only point out that the re-nomination of Dr. Randy Kroszner to the Fed was blocked by the majority party because he was viewed as being too free market. 

“Unlike Dr. Diamond, Dr. Kroszner is an expert in monetary policy and banking regulation.  Yet, the majority party never even gave him a hearing.  Why?  Because they agree that the policy preferences of Fed nominees matter.

“Although Dr. Diamond is a skilled and accomplished theoretical economist, it is clear to many of us that he does not possess the appropriate background, experience, or policy preferences to serve on the Board of Governors. 

“Dr. Diamond may be a talented economic theorist, and he may be very well suited for a number of positions in this Administration.  But, he is not the best person for this position at this time.

“Before I conclude, let me address the issue of Dr. Diamond’s Nobel Prize.  Unquestionably, the Nobel is a major honor. 

“Yet, being a Nobel recipient does not mean one is qualified for every conceivable position. 

“Any private-sector human resource manager would likely say that Dr. Diamond would not be a good selection for a CEO of a large bank.  The skills needed to win the Nobel are simply not the same as those required to manage a large financial institution.  

“The same is true here.  The skills needed to win the Nobel are not necessarily the same as those needed to be a good Fed Governor.    

“I seriously doubt that many of Dr. Diamond’s supporters would have favored the appointment of Milton Friedman or Myron Scholes to the Fed simply because they won the Nobel Prize.   

“Finally, I am compelled to again point out that Dr. Diamond is legally not eligible to serve.  

“According to Section 10 of the Federal Reserve Act, no two members of the Board of Governors can come from the same Fed district.  Once again, Dr. Diamond’s nomination papers indicate he is “of  Massachusetts.” 

“Current Board member Daniel Tarullo’s nominations papers also indicated he was “of Massachusetts.”

“Dr. Diamond and Mr. Tarullo cannot serve at the same time and comply with Section 10 of the Federal Reserve Act.  

“We can debate the wisdom and historical application of this requirement at a later date, but, for now, it is the law even if prior Congresses have chosen to look the other way.

“There are plenty of good nominees that could be selected from historically overlooked districts like the Cleveland and Minneapolis Districts.   In fact, there has not been a Fed Governor from the Cleveland district in 65 years.  I would think my friend from Ohio might find that a bit concerning.

“Mr. Chairman, I encourage the President to withdraw this nomination and look beyond the Boston to D.C. corridor for a new nominee.  

“Thank you.”