Nobel laureate Peter Diamond faced Republican opposition in his first chance to be approved for a seat on the Federal Reserve Board. Now he may run afoul of a dead Democrat called Alfalfa Bill.
Diamond, whose nomination will come before the Senate Banking Committee tomorrow for a second time, is a professor from the Massachusetts Institute of Technology who was grilled about his monetary-policy qualifications in July, before he won the Nobel Prize in economics. This time he’s at risk of being tripped up by a provision that no two board members may be from the same Federal Reserve district.
President Barack Obama, like some of his predecessors, has interpreted that clause loosely. The White House says Diamond, who was born in New York and lives in Massachusetts, is from the Fed’s Chicago region because the Boston district is taken by another governor. The designation hasn’t been publicized and isn’t mentioned in Senate nomination papers.
“It’s tough not to confirm somebody who just won the Nobel Prize,” said Vincent Reinhart, a former Fed monetary-affairs director who is a resident scholar at the American Enterprise Institute in Washington. “But it’s the Senate. The Senate can drag out anything.”
Geography’s role in Diamond’s Fed bid is the legacy of a 1913 proposal by William Henry David Murray, a representative from Oklahoma whose nickname was Alfalfa Bill. Murray was known for his advocacy of the pasture crop and for the motto, “Civilization begins and ends with the plow.”
Made His Mark
Murray, who later became governor of Oklahoma and died in 1956, also made his mark in the debate over the creation of the central bank and his desire that its overseers reflect America’s economic diversity.
“This board, if selected east of Washington, would know little and care less about the agricultural and other interests in the Western and Southern states,” Murray said in a Sept. 16, 1913, speech on the House floor.
Republican and Democratic administrations alike have taken liberties with the requirement that presidents nominate members of the board, “not more than one of whom shall be selected from any one Federal Reserve district.” Still, senators could invoke the clause to block Diamond’s nomination, said Mark Calabria, a former aide to Alabama Senator Richard Shelby.
Shelby, the senior Republican on the Banking Committee, questioned Diamond’s qualifications in July. Even after Diamond shared the Nobel on Oct. 11 with two other economists, Shelby said in a statement that the Nobel committee “does not determine who is qualified to serve” on the U.S. central bank.
“The law requires geographic diversity among members of the Board of Governors to ensure that no one region gains too much influence,” Shelby said in a statement last week to Bloomberg News. “We should follow the law.”
Diamond’s nomination papers sent to the Senate don’t mention Chicago and instead say he’s “of Massachusetts,” according to Republican aides who declined to be identified. He can’t represent the Boston district, which is taken by Fed Governor Daniel Tarullo. Vice Chairman Janet Yellen has San Francisco and Kevin Warsh New York. The three each spent large parts of their lives in their designated districts. There are 12 Fed districts in all.
Matt Vogel, a White House spokesman, said Diamond has taught and lectured at Northwestern University in Evanston, Illinois, received its Erwin Plein Nemmers Prize in Economics and presented “numerous seminars” at Northwestern and the University of Chicago.
“We believe that his addition to the Board of Governors in Washington is in the national interest,” he said in an e-mail.
Red Sox Fan
Diamond’s MIT resume lists one Northwestern lecture and says he’s been a professor at MIT since 1966. He’s an “avid” fan of the Boston Red Sox baseball team, according to an MIT press release from February, and threw the ceremonial first pitch before a game at Fenway Park in April. Diamond didn’t respond to a voice-mail message last week seeking comment.
The Fed addressed the requirement in an Oct. 28 letter to Bloomberg News responding to a Freedom of Information Act request. “The home district of each member of the Board is determined by the President,” Robert Frierson, the Fed board’s deputy secretary, said.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, expects Diamond to be approved again by the panel this week and by the full chamber “as quickly as possible thereafter,” Sean Oblack, a Dodd spokesman, said in a statement to Bloomberg News last week.
“The White House concluded that his connections to the Chicago area provided a sufficient basis for his designation as a member of the Board from this district, and Chairman Dodd is confident he will represent well the views of that district,” Oblack said.
Calabria, now director of financial regulation studies at the Cato Institute in Washington, said Diamond’s Chicago connection is “flimsy,” though “that section of the law has been ignored so many times in the past.”
Diamond, 70, was initially approved in committee for one of seven Fed board seats on July 28, along with Yellen and Sarah Bloom Raskin. The 16-7 vote for Diamond represented the slimmest majority among the three candidates, with all of the opposition coming from Republicans. The following week, at least one unidentified member triggered a procedural rule that sent his bid back to the White House. Obama renominated Diamond on Sept. 13.
Adding Diamond to the Fed may buttress Chairman Ben S. Bernanke’s efforts to reduce unemployment after his Nov. 3 decision to buy an additional $600 billion in Treasuries ran into criticism from Republican politicians and foreign governments. Today, a group of 23 people including economists and money managers issued an open letter urging Bernanke to halt the program.
U.S. presidents have stretched Alfalfa Bill’s provision in various ways to get their candidates onto the Fed board, and senators have acquiesced.
In 1973, Richard Nixon designated Robert Holland, a senior Fed staffer in Washington for 12 years, as from the Kansas City District, where he was born and went to college. In 1997, Bill Clinton decided Roger Ferguson would be from Boston. Ferguson grew up in Washington, attended Harvard University in Cambridge, Massachusetts, and worked in New York.
In 2002, George W. Bush placed Bernanke, then a Fed governor, in the Atlanta district, where he was born, even though he grew up in another Fed region, went to college in a third and worked and lived in three others.
“The president has ignored the regional restriction for many years,” said Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh. “There is no standard by which someone is said to be a resident. Since we claim to be a government of laws, we should define residency or repeal the restriction.”
Senator Tim Johnson, a South Dakota Democrat who’s set to succeed Dodd as head of the Banking Committee in January, said “there is value in having a broad cross-section of representatives on the Fed.”
Even so, “Peter Diamond is an enormously qualified individual,” Johnson said in a statement to Bloomberg News. “We’ll have to wait and see if objections will be raised or if we can finally fill this spot and move on to other matters.”