Peter Diamond, the Nobel Prize-winning economist struggling to win confirmation to the Federal Reserve Board, said his research helps inform monetary theory and gauge risks to the financial system.
Diamond shared the 2010 Nobel Prize in Economic Sciences in October with Dale Mortensen and Christopher Pissarides for research into the difficulties of matching supply and demand, particularly in the labor market.
The work is a “starting place for applied research in a wide variety of areas,” including “monetary theory and analysis of the capital market,” Diamond, a Massachusetts Institute of Technology professor, said today in testimony at his second Senate Banking Committee nomination hearing in nine months.
Diamond stepped up the defense of his scholarship after Alabama Senator Richard Shelby, the panel’s senior Republican, said the professor was not qualified to join the Fed because of insufficient knowledge of monetary policy.
“The varying speeds between the occurrence of surprises to financial firms and their abilities to respond is a central element in the development of financial crises, making search theory an important part of understanding how to avoid and limit future shocks to the financial system,” Diamond said in today’s testimony.
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, which next meets March 15, voted 11-0 on Jan. 26 to maintain its unconventional-stimulus plans and buy $600 billion of Treasuries through June.
‘Way to Go’
Diamond, responding to questions during today’s hearing, said the Fed’s asset purchases aimed at lowering long-term rates with the short-term rate near zero are an “appropriate way to go.” He said he doesn’t expect economic demand to spark rapid inflation, and that the Fed has tools to allow a “smooth exit” from record monetary stimulus.
The White House renominated Diamond, 70, in January, marking a third try at confirmation after the Senate adjourned in December without approving him. Diamond’s initial candidacy was returned to the White House in August under a procedural objection.
Today, Shelby reiterated and amplified his opposition to Diamond, saying that while he’s a “very accomplished academic and economist,” he lacks experience in areas a Fed governor should have, including conducting monetary policy, bank supervision and crisis management. In addition, Shelby objected to what he said is Diamond’s support for monetary and fiscal stimulus backed by the Fed and White House.
“It is clear to many of us that he does not possess the appropriate background, experience or policy preferences to serve on the Board of Governors,” said Shelby, who didn’t ask Diamond any questions during the hearing.
Rhode Island Senator Jack Reed, the panel’s No. 2 Democrat, countered that Diamond is “superbly qualified” for the job and suggested that he could provide the central bank with different economic perspectives.
Since Diamond’s renomination this year, Fed Governor Kevin Warsh announced his resignation, opening a second vacancy on the central bank’s board. The White House has yet to pick a replacement. The nomination of Diamond for a term ending January 2014 was held up by Republicans last year.
Diamond faces a larger Republican minority this year that could block his nomination again after the party took seats from Democrats in November’s midterm elections. Last year, while Obama’s two other Fed nominees were approved by the Senate, Republicans questioned Diamond’s expertise and the nomination’s compliance with a law that bars having two governors come from the same region of the U.S.
The White House designated Diamond as being from the Chicago Fed district to comply with the law. In a Nov. 30 interview, Diamond, a professor at MIT since 1966, defended his professional connections to the region, saying it was sufficient for the provision. He 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 to schools in the region.
Shelby said today that he believes Diamond is “legally not eligible to serve” because of the geographic restriction in the law. “I encourage the President to withdraw this nomination and look beyond the Boston-to-D.C. corridor for a new nominee,” Shelby said.
‘Lot of Opposition’
Speaking with reporters after the hearing, Shelby said he expects “a lot of opposition” to Diamond’s nomination. Asked if he would try to block a vote by the full Senate, he said, “let’s see how the process works. A lot of us have differences.”
Diamond testified today along with two other witnesses, Katharine Abraham and Carl Shapiro, who are nominated for President Barack Obama’s Council of Economic Advisers.
Abraham, a University of Maryland professor, said she would aim to “provide economic insights and analysis that will help with the formulation of policies conducive to broadly shared growth.”
Shapiro, who has recently served as chief economist in the Justice Department’s antitrust division, said that if confirmed, “I hope to contribute my expertise to the development of policies that promote economic growth by creating a business environment that encourages private-sector innovation and investment.”
Banking Committee Chairman Tim Johnson, a South Dakota Democrat, asked the candidates to respond to written follow-up questions “as soon as possible so that we can move your nominations in a timely manner.” He didn’t set a date for a committee vote to recommend the nominations to the full Senate.