Bush Needs to Send in Reinforcements to the Fed: Kevin Hassett
2008-10-20 04:01:59.0 GMT
Commentary by Kevin Hassett
Oct. 20 (Bloomberg) -- In 2004, when the war in Iraq was
going sour, Defense Secretary Donald Rumsfeld responded to
criticism that our troops were badly equipped with the now-
famous line: ``You go to war with the Army you have, not the
Army you might want or wish to have at a later time.''
We are now battling a financial crisis that is the economic
equivalent of war, and we aren't doing it with an army that
anyone would choose.
Individuals at Treasury and the Federal Reserve are doing
their best in difficult circumstances. But both organizations
are woefully undermanned. There is too much work to do and too
little manpower to do it. The result is that government rescue
plans are progressing too slowly, and market turmoil persists.
Washington is understaffed for two reasons. First, it is
very difficult to persuade the best and the brightest to serve
in a lame-duck administration. At one point in Bush's second
term, a senior Treasury official told me that he had offered a
key post to 23 individuals, and each had declined. Second,
Democrats in the Senate stopped confirming President George W.
Bush's nominees long ago, and key positions are vacant.
This has led to the unbelievable outcome that the key
Washington institution at the center of the financial storm, the
Fed, is navigating this crisis without a full crew. There are
seven positions on the board of governors of the Fed. There now
are four members -- Ben Bernanke, Elizabeth Duke, Kevin Warsh
and Donald Kohn -- serving normal terms. Incredibly, the Senate
has failed to confirm individuals for the other three positions.
The Fed is able to function even with the vacancies, in
part, because Governor Randall Kroszner, a University of Chicago
professor, agreed to stay and help during this crisis in spite
of the Senate's refusal to confirm him after Bush re-nominated
him in May 2007. The other two chairs at the table are empty.
There is no question that economic historians studying this
financial crisis will harshly judge Senator Christopher Dodd,
Democrat of Connecticut, for the indefensible role he played
defending Fannie Mae and Freddie Mac. But to my mind, his
unwillingness to send reinforcements to the Fed at this troubled
time is, given the current storm, an egregious partisan act that
will live in infamy.
Dodd's callousness has been remarkable. Back in June,
concerns were raised that the Fed would be short-handed in the
midst of a financial crisis with only four sitting governors.
``I don't accept the argument. It's not a worthwhile
argument to tell me they can't operate,'' Dodd said. He added
that ``the decision on Bear Stearns, JPMorgan Chase was done
with four. They can operate with four.'' And now the market
groans as the understaffed Fed struggles with the Treasury to
respond to this crisis in a timely fashion.
What justification could the Democrats have for forcing the
Fed to work short-handed? ``There's one nomination here that
would be for somebody (for) 14 years,'' Dodd said to reporters
at the time. ``We're frankly getting down to less than a year
away from the election. On nominations of that length, I'm
In other words, let's hold up the appointment just in case
a Democrat wins in November. Who cares if the Fed is going to
battle without body armor?
There is so much work to be done right now, from designing
auctions to deciding which assets to purchase, that as much
brainpower as possible should be drawn into the process.
At a time like this, a president should call the very best
and brightest men and women and ask them to drop what they are
doing and come to Washington to serve their country. And he
should go beyond petty partisanship and rely on individuals
because of their expertise, not their political affiliation.
For example, I would sleep better at night if Alan Blinder,
the brilliant macroeconomist -- and former Clinton
administration economic adviser, and then Fed vice chairman --
were involved in everything right now. I could think of a number
of other experienced and worthy economists, including Christina
Romer of University of California, Berkeley; John Taylor of
Stanford University; Glenn Hubbard of Columbia University; and
Jeffrey Frankel of Harvard University.
There is a well-established procedure for filling vacant
slots when the Senate is out of session, as it is now. So-called
recess appointments have been used many times in the past to
fill slots. The White House should make this move, since recess
appointments are permissible for the Federal Reserve. Former Fed
Chairman Alan Greenspan himself was once a recess appointment.
The president should select two superstars, perhaps one
from each party or two who have impeccable credentials and no
party affiliation, and give them recess appointments to the Fed.
It's not too late to assemble the army we want.
(Kevin Hassett, director of economic-policy studies at the
American Enterprise Institute, is a Bloomberg News columnist. He
is an adviser to Republican Senator John McCain of Arizona in
the 2008 presidential election. The opinions expressed are his