Bush Needs to Send in Reinforcements to the Fed: Kevin Hassett

Commentary by Kevin Hassett

Oct. 20 (Bloomberg) — In 2004, when the war in Iraq was going sour, Defense Secretary Donald Rumsfeld responded to criticism that our troops were badly equipped with the now- famous line: “You go to war with the Army you have, not the Army you might want or wish to have at a later time.”

We are now battling a financial crisis that is the economic equivalent of war, and we aren’t doing it with an army that anyone would choose.

Individuals at Treasury and the Federal Reserve are doing their best in difficult circumstances. But both organizations are woefully undermanned. There is too much work to do and too little manpower to do it. The result is that government rescue plans are progressing too slowly, and market turmoil persists.

Washington is understaffed for two reasons. First, it is very difficult to persuade the best and the brightest to serve in a lame-duck administration. At one point in Bush’s second term, a senior Treasury official told me that he had offered a key post to 23 individuals, and each had declined. Second, Democrats in the Senate stopped confirming President George W. Bush‘s nominees long ago, and key positions are vacant.

This has led to the unbelievable outcome that the key Washington institution at the center of the financial storm, the Fed, is navigating this crisis without a full crew. There are seven positions on the board of governors of the Fed. There now are four members — Ben Bernanke, Elizabeth Duke, Kevin Warsh and Donald Kohn — serving normal terms. Incredibly, the Senate has failed to confirm individuals for the other three positions.

Laying Blame

The Fed is able to function even with the vacancies, in part, because Governor Randall Kroszner, a University of Chicago professor, agreed to stay and help during this crisis in spite of the Senate’s refusal to confirm him after Bush re-nominated him in May 2007. The other two chairs at the table are empty.

There is no question that economic historians studying this financial crisis will harshly judge Senator Christopher Dodd, Democrat of Connecticut, for the indefensible role he played defending Fannie Mae and Freddie Mac. But to my mind, his unwillingness to send reinforcements to the Fed at this troubled time is, given the current storm, an egregious partisan act that will live in infamy.

Dodd’s callousness has been remarkable. Back in June, concerns were raised that the Fed would be short-handed in the midst of a financial crisis with only four sitting governors.

“I don’t accept the argument. It’s not a worthwhile argument to tell me they can’t operate,” Dodd said. He added that “the decision on Bear Stearns, JPMorgan Chase was done with four. They can operate with four.” And now the market groans as the understaffed Fed struggles with the Treasury to respond to this crisis in a timely fashion.

Why Delay?

What justification could the Democrats have for forcing the Fed to work short-handed? “There’s one nomination here that would be for somebody (for) 14 years,” Dodd said to reporters at the time. “We’re frankly getting down to less than a year away from the election. On nominations of that length, I’m fairly reluctant.”

In other words, let’s hold up the appointment just in case a Democrat wins in November. Who cares if the Fed is going to battle without body armor?

There is so much work to be done right now, from designing auctions to deciding which assets to purchase, that as much brainpower as possible should be drawn into the process.

At a time like this, a president should call the very best and brightest men and women and ask them to drop what they are doing and come to Washington to serve their country. And he should go beyond petty partisanship and rely on individuals because of their expertise, not their political affiliation.

Filling Vacancies

For example, I would sleep better at night if Alan Blinder, the brilliant macroeconomist — and former Clinton administration economic adviser, and then Fed vice chairman — were involved in everything right now. I could think of a number of other experienced and worthy economists, including Christina Romer of University of California, Berkeley; John Taylor of Stanford University; Glenn Hubbard of Columbia University; and Jeffrey Frankel of Harvard University.

There is a well-established procedure for filling vacant slots when the Senate is out of session, as it is now. So-called recess appointments have been used many times in the past to fill slots. The White House should make this move, since recess appointments are permissible for the Federal Reserve. Former Fed Chairman Alan Greenspan himself was once a recess appointment.

The president should select two superstars, perhaps one from each party or two who have impeccable credentials and no party affiliation, and give them recess appointments to the Fed.

It’s not too late to assemble the army we want.

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