The Fed Vacancies Are Dangerous, but Senators Aren't Concerned

By Daniel Indiviglio

The Senate is just too busy. Too busy, it seems, to perform even one of the most basic aspects of its job: to confirm nominees for various federal positions that require its seal of approval. Delaying the confirmation of some of these posts might not be such a big deal. If a few federal judges have their appointments delayed, then that just means a bigger backlog of cases to work through eventually. But the Senate's failure to confirm nominees is has begun affecting an entity that is utterly essential for the nation's economic stability: the Federal Reserve. But apparently, the Senators aren't so concerned.(See note below.)

The Fed's Board of Governors currently has three vacancies -- out of seven. President Obama announced his nominees in April, now nearly five months ago. These positions sitting vacant might not sound like the end of the world to those who don't follow the central bank and its duties. But earlier this week, the Economics of Contempt blog explained that these vacancies could lead to very dire consequences. If some market shock were to hit that debilitated the financial system, the Fed would be powerless to use its emergency lending authority* (See note below):

The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama's three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).

While no crisis is expected in the next several months, no crisis is ever expected. That's why it's a crisis. So it's very important that at least one of these nominees be confirmed. Yet, the Senate isn't particularly interested in bothering to do its job here. The Wall Street Journal's Real Time Economics blog reports Senate Banking Committee Chairman Christopher Dodd as saying on Tuesday:

We've got a limited amount of time here, I don't know if there's going to be any appetite to deal with these Fed nominees.

"No appetite" to "deal with" them? What exactly does that mean? It sounds a lot like he's saying that Senators don't really feel like doing their job -- in fact a very fundamental part of their obligation as Senators. This would be like a police officer was to say, "Oh I don't really have much appetite to turn on my radio to hear emergency calls today." He would be fired.

If the Senate is so busy writing laws that they can't satisfy the core responsibility of confirming nominees, then they should take a break from legislation and hearings for a while. They can resume pleasing special interest groups and lobbyists once they've made sure that the Fed can effectively respond to economic emergencies by filling these vacancies. That, after all, is a lot more important than most of the bills they bicker over.

* Note: As Brian Peters points out in the comments, technically 13(3) can be used if all four of the current governors are in agreement. According to Section 11 of the Federal Reserve Act. So while not quite as serious a problem, these are still very important vacancies are they consist of the leaders of the most important financial regulator in the U.S. Moreover a 4 to 0 vote is very different than a 5 to 2 vote. If a controversial, but ultimately necessary and vital, action must be taken, it's possible that a majority of four would be hard to obtain, so a 4 to 0 vote is still not nearly as desirable in a time of crisis as the weaker 5 to 7 standard that the law is prudently written to require. 

This article available online at:

http://www.theatlantic.com/business/archive/2010/09/the-fed-vacancies-are-dangerous-but-senators-arent-concerned/63009/