Yesterday, the always-fantastic anonymous lawyer behind the blog Economics of Contempt made a discomfiting observation: With only four members on the Federal Reserve's Board of Directors, the central bank couldn't use its emergency powers -- which require five directors -- in case, say, an international crisis like the recent Greek episode caused a run on an American money-market fund. That's a very scary prospect, especially given how critical the Fed's intervention had been during the 2008 crisis. Without Fed backstopping, a financial crisis could spin out of control.
"All the more reason why the Senate should approve the president's nominees," Treasury spokesman Steve Adamske says.
Should a crisis strike, the government would have a few other options, including tapping into the Exchange Stabilization Fund, as then Treasury Secretary Bob Rubin did to end the Mexican Peso crisis in the 1990s. It turns out, however, that legislative changes after 9/11 make it possible for the Fed to use its emergency powers without a quorum -- a unanimous vote of the board will do. Now, that's still problematic -- perhaps not with this current board, but you can imagine, given the splits in the monetary policy committee, how troublesome an undermanned, divided board would be during a crisis. The consequences of unconfirmed nominees have grown from a less-effective government to conditions that could be actually dangerous during a crisis.
The Senate is set to consider President Obama's three nominees -- Janet Yellen, Peter Diamond, and Sarah Bloom Raskin -- this week after punting the issue over the summer. This is one more reason they should act expeditiously.
-- Tim Fernholz
