On Wednesday, President Obama’s first nomination to the Board of Governors of the Federal Reserve, Daniel Tarullo, was sworn in, after being confirmed by the Senate by a vote of 96 to 1 on Tuesday. (The old curmudgeon Senator Bunning strikes again.)
The members of the Board of Governors serve 14 year terms, and because there are currently two additional vacancies on the seven-member Board and Chairman Bernanke’s four year term as Chairman is up on January 31, 2010, President Obama has the potential to effect a lasting change in the direction of the Federal Reserve within a year. While Chairman Bernanke’s full term lasts until 2020, a chairman who is not re-nominated to that post usually resigns from the Board of Governors fairly quickly.
Who is Daniel Tarullo:
Perhaps most obviously, he was one of Obama’s economic advisers during the campaign, and a man with a history of working for Democrats. He has been a Professor of Law at Georgetown University since 1999, but prior to that he served in the Clinton administration as Assistant to the President for International Economic Policy. The Wall Street Journal says, “He is expected to play a key role in rebuilding international regulation of financial markets and banks.”
Prior to his service in the Clinton Administration he served in the Antitrust Division of the Department of Justice and as Chief Counsel for Employment Policy for Senator Kennedy.
Professor Tarullo is also the author of the recent book, Banking on Basel: The Future of International Financial Regulation, in which he expresses considerable skepticism about the utility of a regulatory system that focuses too narrowly on capital regulation and monitoring bank risk management systems as epitomized by the International Basel I and Basel II Accords.
It is important to note the prevalence of giddy optimism about the ability of risk management systems during much of the last decade among the academics and regulators who focused on the financial regulalatory system. The greatly discredited Credit Default Swaps were commonly seen as a powerful tool for managing risk.
One Timothy Geithner, then the president of the Federal Reserve Bank of New York, said this in remarks to the Global Association of Risk Professionals as recently as February of 2006.
“We have seen dramatic changes in the U.S. and global financial system over the past 25 years, and we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management, the increased role played by nonbank financial institutions in capital markets around the world, and the much greater integration of national financial systems.
These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries.”
For people with this mindset banks with the proper levels of capital and the proper risk management systems barely needed to be regulated at all.
But the intellectual credibility of this philosophy has come crashing down to the point where even that most fervent deregulator, Alan Greenspan, had to make at least a partial mea culpa in his appearance last fall in front of Henry Waxman’s House Oversight Committee.
"I have found a flaw," said Greenspan, referring to his economic philosophy. . . . "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."
Greenspan’s deregulatory philosophy held sway at the Board of Governors during his years as chairman. Regarding the regulation of subprime lending, much of which the Federal Reserve could have eliminating by using its powers to prohibit unfair and deceptive practices, he insisting on wielding a light regulatory hand. The Wall Street Journal interviewed Clinton appointee to the Board, Edward Gramlich, shortly before his death and wrote about his interactions with Greenspan:
Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.
"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.
"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.
As we begin to hear discussion of an expanded regulatory role for the Federal Reserve over the whole range of non-banks that affect the financial markets, it is important that we build in rules that protect consumers and the taxpayers and that we have a majority on the Board of Governors on our side. We can’t just have one lone voice in wilderness like Gramlich, we need at least four strong advocates for responsible regulation of consumer law and the safety and soundness of financial institutions.
Take a minute to write a note or make a call to the President to let him know that we in the grassroots care about the quality and ideology of his Federal Reserve appointments.
You can call the White House Hotline at 202-456-1111.
Or write a note on the White House contact page.
I’ve even provided a draft comment that you can steal or borrow from.
Dear Mr. President:
Thank you very much for appointing Daniel Tarullo to the Federal Reserve. Because there are two remaining Board of Governor vacancies at the Federal Reserve you have an immediate opportunity to bring on Governors who support bringing strong consumer protection and robust safety and soundness regulation back to our financial system. It is important that you begin to change the hands-off regulatory culture that now characterizes the Federal Reserve.
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