[OPE] The role of the individual in history: why did Frederic Mishkin quit the Fed?

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sat Jun 28 2008 - 17:33:53 EDT

The most whacky thing in American politics - from the point of view of a European observer - is that, precisely at a very critical time for US financial policy, Mr Mishkin, an intellectual heavyweight in financial affairs capable of writing comprehensible textbooks on this difficult subject, and an ally of Mr Bernanke, should decide to quit his responsibility in order to... resume teaching at university, while - this is even more whacky - the Fed Board is already understaffed. Presumably you'd want to have the best brains in the business in there just now. This raises the question of why he did so, but no journalist has investigated this in depth (the best reporting was by Reuters). What really happened there? I do not know, but let's try to work something out from sundry press reports.  

In his resignation letter to President Bush, Mr. Mishkin gave no reason for his early departure. http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080529/REG/930213306  His Fed term would have expired January 31, 2014. http://www.wallstreetweather.net/2008/05/mishkin-resigns-from-federal-reserve.html  Mishkin's resignation leaves only four governors left out of seven seats on the Board, at a time when the Fed has been challenged with the credit crunch, a slowing U.S. economy and inflation pressures. http://network.nationalpost.com/np/blogs/fpposted/archive/2008/05/28/fed-member-mishkin-resigns.aspx

1. Economic ideology?

Chairman Ben Bernanke is known to agree with Mishkin about [the desirability of] inflation-targeting. However, the political reality of the Fed's so-called dual mandate to promote growth as well as control inflation means that Congress is highly resistant to any change. There's little support for what would be portrayed as abandoning the mission of keeping Americans employed just to pursue hard-core inflation targets seen as a boon to financial markets. http://www.forbes.com/afxnewslimited/feeds/afx/2008/03/27/afx4824553.html  Like his fellow Board members and former Chairman Greenspan, Mishkin cannot recognize bubbles and even if he could, believes that for the most part the Fed should ignore them. Bubbles were the topic of Mishkin's latest speech on May 15 entitled, "How Should We Respond to Asset Price Bubbles?".  (...) Mishkin concluded his bubble speech by saying: "Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good." http://www.wallstreetweather.net/2008/05/mishkin-resigns-from-federal-reserve.html  ``He was a pretty important supporter of the move toward aggressive rate-cutting this year,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who used to work at the Fed. http://www.nakedcapitalism.com/2008/05/fed-governor-mishkin-resigns.html "His resignation shifts the balance a little bit . away from rate cutting, which we already knew," says Brian Wesbury of First Trust Advisors in Illinois. "This will clearly give the regional banks more power." Gramley says the change won't make an enormous difference, given that the Fed was already moving away from rate cuts. http://www.oddamerica.com/archives/284

2. Style?

For example, because Mishkin was traveling and unreachable the night the Fed worked out an emergency loan to Bear Stearns on March 14, the central bank had to invoke a law that allows it to take such urgent action without the minimum five votes. http://www.washingtonpost.com/wp-dyn/content/article/2008/05/28/AR2008052803154.html#

3. Financial self-interest?

Mishkin was an academic economist making a very healthy amount of money: $300,000 a year from Columbia, on top of (in 2006 alone) $242,632 in consulting fees, $434,000 in royalties from Pearson Publishing, and a $75,000 advance on a new book. Add it all up and you get a seven-figure income. Let's say that Mishkin, pace DeLong, was rationally seeking to maximize his income and saw no reason why it should top out at a million per. And was invited to become a Fed governor on a salary of $168,000 per year - something which would involve giving up his Columbia salary and his consulting gigs, but not his book royalties. http://www.portfolio.com/views/blogs/market-movers/2008/05/29/the-economics-of-rick-mishkin  Meanwhile, Mr. Mishkin may be giving up a say in monetary policy, but his return to the academic world will surely be more lucrative. His financial disclosure report, released in 2007, shows that in the year before joining the Fed in 2006, he made a tidy sum dispensing advice to central banks, governments and business groups around the world. He collected a $134,858 consulting fee from the Icelandic Chamber of Commerce; http://www.chamber.is/news.asp?id=555&news_ID=484&type=one8 from the Riksdagen, or Swedish Parliament, who hired him to co-write a report on the Swedish central bank; $15,600 from the Central Bank of Chile, $15,575 from the Bank of Korea, $9,161 from the Bank of Spain and $4,250 from the Bank of Canada. That was all in addition to his salary from Columbia University. http://blogs.wsj.com/economics/2008/05/28/mishkin-resigns-a-look-back/

4. Politics?

The next president is likely to have an unprecedented opportunity to name a majority of the Federal Reserve's Board of Governors immediately after being sworn into office. These will be important decisions, given the battered state of the U.S. economy. It's even more critical considering that the central bank will probably assume more regulatory power over the nation's financial sector in the next few years. http://money.cnn.com/2008/06/02/news/economy/fed_election/index.htm  The Democratic-controlled Senate for nearly a year has refused to vote on President Bush's nominees to fill several open Fed slots. If the Senate delay continues, whoever is elected president in November will have a chance to quickly shape the policymaking arm of the central bank through new appointments. http://www.oddamerica.com/archives/284
The Fed is actually even thinner than the numbers suggest, as Fed Gov. Randall Kroszner, one of the five governors currently on the Fed, has a sort of provisional status. Kroszner's term expired at the end of January. Bush has nominated Kroszner to a full 14-year term, but Senate Banking Committee Chairman Christopher Dodd, D-Conn., hasn't acted on confirmation. Fed policy allows a governor to remain until a successor is named. (...) Aside from Kroszner, stalled Bush Fed nominees are Elizabeth Duke, former chief operating officer of TowneBank of Virginia, and Larry Klane of Capital One Financial, a major credit card issuer. http://www.oddamerica.com/archives/284  The Senate confirmed Elizabeth A. Duke on Friday as a member of the Federal Reserve, which has been battling housing, credit and financial crises with a short staff. http://biz.yahoo.com/nytimes/080628/1194789496373.html?.v=11  Some analysts believe the regional presidents are more inclined to raise rates to squelch inflation, and less accountable to Congress, because they are not subject to the confirmation process. The regional bank chiefs are chosen by boards of directors comprised of private-sector representatives, although the appointments are subject to approval by the Fed's Washington-based board. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20080528&id=8698629emocrats prefer to keep the slots available to be filled by a potential Democratic president in January and have expressed concern that the nominees would favor the interests of banks over consumers. http://www.washingtonpost.com/wp-dyn/content/article/2008/05/28/AR2008052803154.html#


Mr Mishkin doesn't need the money, he does what he does because he believes in it and he is in a position where he can do that. He's neither especially "hawkish" or particularly "dovish" in financial policy, he just believes in good financial policy which is scientifically credible, pragmatically appropriate and realistic as he sees it. But there's a dialectical contradiction. Basically, I think that he believes that the gigantic drop in public confidence in the economy is exaggerated, compared to the real situation, and in his eyes that it gets in the way of good policy. Lots of things can be solved, if only people would stop panicking. Yet, he has to deal with the global effect of that drop in confidence, meaning specifically that the politicians, who have to deal with this kind of thing happening in public life, begin to exert strong pressure and stack up their ideological support base. Financial argument is one thing, politics is another. As the shit begins to hit the fan, a whole political cauldron begins to seethe and boil, but that means that what he regards as sound financial policy has to bend to political expediency. Since politics is not really going his way, he'd rather get out. Is that responsible? My hunch is that his reasoning is, that if there's no hope of getting done in the job what you want to get done in future, you might as well do, what you do well instead. Ultimately, Mr Mishkin just isn't a hardcore politician, but an advisor.  

Any takers?



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