Nobel laureate economist Peter Diamond failed to gain U.S. Senate approval for a Federal Reserve Board seat, signifying that earning his profession’s highest honor wasn’t enough to overcome congressional politics.
The Senate adjourned yesterday without voting on Diamond’s nomination, which was first offered in April. The Obama administration now must consider whether to try again in the 2011 congressional session with a smaller Democratic majority in the Senate.
Diamond, 70, said in a Nov. 30 interview that he would accept re-nomination by the White House.
Republicans questioned Diamond’s monetary-policy expertise and compliance with a geographic provision of central bank law. The inaction deprives Chairman Ben S. Bernanke of intellectual support in Fed debates over his efforts to reduce unemployment through an expansion of record monetary stimulus.
“It helps if the chairman has a point person who can advance the arguments and participants feel it’s OK to criticize that person,” said Vincent Reinhart, a former Fed monetary-affairs director who’s now a resident scholar at the American Enterprise Institute in Washington. “So you get a lot of the issues aired without the chairman having to expose himself.”
The failure to approve Diamond leaves one opening out of seven on the Fed’s Washington-based board. All governors, along with five of the 12 regional Fed presidents, have a vote on monetary policy at each Federal Open Market Committee meeting. The FOMC voted 10-1 on Dec. 14 to maintain its unconventional-stimulus plans and buy $600 billion of Treasuries through June.
Diamond’s nomination had been held up by Senate Republicans and was returned in August to the White House, which nominated him again in September. Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, questioned Diamond’s qualifications on monetary policy and said his nomination violates a law that no two Fed governors can be from the same geographic region.
The White House designated Diamond as being from the Chicago Fed district to comply with the law. In the November interview, Diamond, a professor at the Massachusetts Institute of Technology since 1966, defended his professional connections to the region, saying it was sufficient for the provision.
Senator Christopher Dodd, a Connecticut Democrat who has been chairman of the Banking Committee for the last four years, said Nov. 16 that several Fed appointees over the past decade, including Bernanke, might have been disqualified if the law had been “rigidly applied” to their nominations. Congress didn’t intend the Fed law to be a residency requirement, said Dodd, who is retiring this year.
“Certainly, compared to the examples that Senator Dodd was citing from past appointments, I have enough of a connection to satisfy what the lawyers say is called for,” Diamond said Nov. 30 after a panel discussion at Sweden’s embassy with Dale Mortensen, who shared the Nobel in October with Diamond and Christopher Pissarides.
Diamond cited teaching for one quarter at Northwestern University in Evanston, Illinois; seminars at Northwestern and the University of Chicago and other visits for a few days apiece at schools located in the Fed district, including the University of Iowa, Iowa State University, the University of Michigan and Michigan State University.
First Nominated in April
President Barack Obama in April initially nominated Diamond and Sarah Bloom Raskin for Fed governor seats and Janet Yellen for vice chairman; the trio appeared together in a Banking Committee hearing July 15.
The panel voted July 28 to recommend all three for approval, giving Diamond the smallest majority, 16-7. The next week, the Senate returned Diamond’s nomination to the White House under a procedural rule because of an objection from at least one unidentified senator. Obama re-nominated Diamond on Sept. 13, restarting the process of his candidacy.
In the meantime, the Senate confirmed Yellen and Raskin on Sept. 29, and they were sworn in Oct. 4. When Diamond won the Nobel on Oct. 11, Shelby said in a statement that the Nobel committee “does not determine who is qualified to serve” on the U.S. central bank.
The Senate Banking Committee held a second vote on Diamond Nov. 16, giving him the same 16-7 margin. Shelby raised the issue of Diamond’s geographic compliance after Bloomberg News reported the White House’s Chicago designation.
“It’s not the stamp from an outside committee that drives decisions” in Congress, Reinhart said.