Obama's Chance to Shake Up the Fed
By early next year, all seven members of the Federal Reserve's Board of Governors will have been appointed by President Barack Obama. Too bad that so far he hasn't taken advantage of the openings to pick someone with a background in markets rather than academia.
Not that there is anything wrong with two of the people he has recently selected, first Lael Brainard and now, according to Bloomberg News, Stanley Fischer. Both come with stellar backgrounds and important experience, and are eminently qualified to serve on the Fed. But a third appointment needs to be made in a few weeks and Obama should use it to nominate John Geanakoplos, who though he is an economics professor at Yale University has also worked in financial markets for more than two decades.
As Bloomberg View's editors wrote in August, Obama had a unique opportunity to remake the Fed. The central bank was complacent about rising consumer indebtedness and the housing bubble, and missed the financial sector's shenanigans during the so-called Great Moderation. One reason: the narrow backgrounds and training of the people setting policy. But instead of picking people who operated outside the consensus that got things so dangerously wrong in the years before the financial crisis, Obama has mostly opted for safe, establishment picks.
Until last month, Brainard was a top official at the Treasury Department, where she worked on international affairs. She had also served as an economic adviser in Bill Clinton's administration. Fischer just recently retired from running the Bank of Israel. There he aggressively intervened in the currency markets during the crisis to suppress the value of the shekel and experimented with regulations in an attempt to cool the nation's white-hot housing market since then.
Fischer has a remarkable resume, having worked at the World Bank, the International Monetary Fund and Citigroup Inc. Perhaps most interesting is the list of people Fischer has advised on their doctoral theses when he was a professor at the Massachusetts Institute of Technology. In addition to Ben Bernanke, the Fed's current chairman, Fischer was also the thesis supervisor for William English, the Fed's top staff economist. For all of his talent, in other words, Fischer will not be bringing a new or different perspective to the Fed.
The Fed board as a whole should contain a range of opinions, backgrounds and areas of expertise. Yet the central bank still doesn't have enough people who understand the financial system. Although there are many out there who would be valuable additions to the Fed's debates on monetary policy and financial regulation, I keep coming back to Geanakoplos for the one remaining spot.
In addition to being a respected academic (he became a full professor at Yale when he was only 30 years old), Geanakoplos has experience working in the thick of the financial markets as a bond trader, mostly at his own hedge fund. This mix of experience helps explain how he developed one of the best accounts of what caused the housing boom and bust. (If you don't want to read the whole paper, my colleague Mark Whitehouse wrote an excellent summary four years ago.)
Geanakoplos would be a useful bridge between the academics who now reign supreme at the Fed and the people who translate the Fed's policy into actual economic outcomes -- the traders and bankers who determine the price and quantity of credit.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)