Fed Uncertainty

The following is excerpted from John Mauldin's weekly newsletter, You can count on the blockheads in Congress to botch almost anything for political gain.
Continued

Good friend and fishing buddy David Kotok recently brought a very disturbing item to my attention, and feel I need to pass it on. Senator Chris Dodd, Democrat from Connecticut, he who aspires to be president, is seriously hampering the ability of the Fed to respond to the current crisis and threatening the independence of the Fed in the process, all for a little partisan gain. His fellow Democrats are going along with him.

Basically, there are two vacant seats on the Fed. President Bush has nominated two very qualified people with distinguished records and backgrounds who have hands-on experience in real-world banking, as opposed to being academicians. These are not political appointments, but serious economists.

Dodd refuses to allow these nominations, or any others, to move forward. Plus, Dodd has let it be known that he will not hold a confirmation vote on current Fed governor Randy Krozner, whose expertise is mortgage markets, when his term ends January 3.

Under current rules, since there are now just five Fed governors instead of the normal seven, you cannot have just three governors on a conference call, as that would be a violation of the public meeting rules, since three would constitute a quorum and potential majority. That clearly makes communication difficult. It also means that the current governors, who already have tight schedules, have to take on extra duties.

Why would Dodd do this? He has made it clear that he is not happy with Fed policy, as has his counterpart in the House, Barney Frank; so some of this is just personal pique. They want the Fed to respond to their political goals. But some of it is clearly partisan. If there is a Democratic president, they would be able to immediately nominate three new governors, and would not have to reconfirm Ben Bernanke as chairman, which means he would leave and the new president would appoint the chairman.

Dodd clearly wants a say in this, and wants a Fed that will pay attention to his politically driven needs. This would mean the Fed would be short-staffed for at least another 18 months, which is not a good thing. The Fed does more than just hold eight meetings and set monetary policy. They have real work that needs to get done.

Whoever the new president is, they will get to nominate who they like as governor terms come to an end. But to act as Dodd is currently doing threatens the independence of the Fed, which is a critical part of the economic world. You can criticize the Fed and their policies, and I often do, but every right-thinking person agrees that Fed policy should not be set in Congress and subject to political whim. The last time we had a Fed chairman who let politics suggest policy was William Miller under Jimmy Carter, and that did not turn out well.

Dodd is sending a message that is not appropriate. These should not be political appointments. These appointments have serious economic consequences. Shame on Dodd for holding hostage an economy which is in crisis for his own political advantage, and shame on a Democratic Senate leadership which goes along with him.