The Obama administration announced its three picks for the vacant positions at the Fed last week. Not surprisingly, no one on the list was among those who had warned of the housing bubble. This is not surprising because there is virtually no overlap between the list of people who had warned of the bubble and the list of people who are politically acceptable as appointees to the Fed.
It may not be possible to get someone who could see an $8tn housing bubble before its collapse wrecked the economy as a member of the Fed's board of governors. However, before the Senate approves these picks it should make sure the new appointees can at least recognise the housing bubble and its significance after the fact.
Specifically, the Senate should insist that the nominees give their account of the run-up to the crisis and explain where the Fed make mistakes and what they would do differently with the benefit of hindsight. This line of questioning is especially important in the case of Janet Yellen, President Obama's nominee as vice-chair of the board of the governors.
Yellen's fingerprints are already on this crisis, having served as a Fed governor in the 90s and more recently as a president of the San Francisco Federal Bank. Yellen is on record as explicitly saying that the Fed lacks the ability to recognise asset bubbles like the housing bubble. She argued further that it lacks the tools to effectively rein in an asset bubble. And, she argued that cleaning up after the collapse of the bubble is no big deal. In terms of economic analysis, she hit a grand slam in getting it absolutely as wrong as possible.
Presumably, Yellen has changed her views of what the Fed can and should do about asset bubbles. The banking committee should give Yellen the opportunity to go on record explaining her new position and how the events of the last three years have led her to change her mind on these issues. Of course, if she still adheres to her earlier position, then she clearly is not an appropriate person to be vice-chair of the Fed.
The other Fed picks should be given this opportunity as well. It is not too much to ask that appointees to the Fed's top policymaking body have a clear understanding of the biggest monetary policy blunder in more than 70 years.
This line of questioning can be refreshing because there still has been remarkably little public acknowledgement of the fact that the country is suffering because of a combination of unbelievably inept economic policy and Wall Street greed. There is probably little that can be done to change the latter – the financial sector is all about making money – but we can in principle do something about the quality of economic policymaking.
The country lost an opportunity to make a big first step toward improving the quality of economic policymaking when the Senate approved Ben Bernanke for a second term as Fed chairman. Having sat as Fed governor since 2002 and as Fed chairman since 2006, no one other than Alan Greenspan bears more responsibility for the current economic crisis than Ben Bernanke. Yet, in spite of the trail of disaster – job loss, foreclosures, devastated retirement accounts – caused by his policy mistakes, Bernanke was rewarded with another four-year term as chairman. This fact is pretty hard to justify.
The new Fed appointees need to be reminded (as we all do) that tens of millions of people are out of work or underemployed today, not because they are too lazy to work or lack the necessary skills and experience. They are out of work because the people who manage the economy could not do their job right. None of the people in policy positions lost their jobs because of this failure.
We have to end a system in which those at the top are never held accountable for the harm they inflict on the rest of society. At the very least, the new Fed picks better have a story as to what they think went wrong and how these mistakes could have been prevented. If they can't provide an answer to this question, then they are in the wrong line of work.