WASHINGTON — Two economists being vetted for slots on the Federal Reserve Board already have strong opinions on various financial services issues, including international capital rules and ways to reinvigorate the economy.
Jeremy Stein and Richard Clarida are likely to be nominated soon for the open Fed seats, according to published reports. Stein is a Harvard University finance professor, while Clarida teaches economics and international affairs at Columbia University and is an executive vice president at the money manager PIMCO. Both men have also held senior positions at the Treasury Department, and Stein was a staffer for the Obama administration's National Economic Council.
The selection of Stein, a Democrat, and Clarida, a Republican, would be the administration's latest attempt to break the logjam over regulatory jobs. In June, Senate Republicans rejected the last Fed nominee, MIT economist Peter Diamond. It is unclear whether Stein and Clarida would be greeted more warmly. But a lawmaker interested in the two economists' policy views could find many of their opinions published in recent academic papers, news articles and opinion pieces.
Here are some of their positions on regulation, the impact of the financial crisis and the Fed's recent monetary policy moves.
Stein has often taken a strong position on Basel capital rules, arguing that regulators should not leave too much to banks to decide how to meet capital requirements.
In September of last year, he criticized how much time global regulators gave large banks to comply with Basel III, the new set of capital and liquidity requirements devised in response to the crisis. The rule includes a transitional period that leaves a final deadline of 2019, but Stein and a colleague said in a Financial Times op-ed that that was too long.
"These transitional concerns are understandable, but a long phase-in period is unnecessary and potentially harmful," Stein wrote with Harvard professor David Sharfstein. "Instead, a much shorter period should be implemented, with regulators forcing banks to meet the new requirements by going to the market to raise fresh capital."
While supporters of a longer transition worry that implementing the rule too soon could spur banks — trying to raise capital ratios — to shrink their assets too quickly and tighten lending, Stein and Sharfstein argued regulators should force banks to use other means to meet the requirements so their asset size is untouched.
"Rather than simply granting a long phase-in period, the regulator would encourage these banks to raise fresh capital — perhaps by forbidding dividend payments or limiting executive compensation until they did so," they wrote. (Stein had previously argued during the height of the financial crisis for dividend restrictions.)
Stein similarly said in a research paper earlier this year that banks should not be left to their own devices in constructing capital plans. While an institution will often choose reducing assets as the simplest way to meet capital requirements, Stein said with two other colleagues that regulators should make it standard practice to give banks incentives "to raise incremental dollars of new capital." They said that approach worked well in the so-called "stress tests" conducted by the Fed in 2009.
"Here is a case where a strong regulatory hand appears to have had highly beneficial effects," he wrote in the Journal of Economic Perspectives along with Harvard Ph.D. candidate Samuel Hanson and University of Chicago professor Anil Kashyap. "Indeed, by being tough and giving banks no choice, regulators probably made it easier for banks to do the capital raising."
In the same article, they also echoed the view of Fed Chairman Ben Bernanke that regulation should not miss the forest for the trees.
"If one takes a macroprudential view, the overarching goal of financial regulation must go beyond protecting insured depositories and even beyond dealing with the problems created by too-big-to-fail nonbank intermediaries," they said. "Instead, the task is to mitigate the fire-sales and credit-crunch effects that can arise as a consequence of excessive short-term debt anywhere in the financial system."
Stein has also called for measures to curb the risk that heightened regulation of financial institutions will drive business to the shadow banking system.
To prevent less regulated firms from benefiting from new regulation, the focus of rules "should not be just on banks, or even just on all bank-like institutions," he said in comments on a Brookings Institution paper about the crisis written by former Fed chief Alan Greenspan last year. "Rather an effort must be made to impose similar capital standards across a given asset class, no matter who winds up holding the asset."
In a 2010 paper for the academic paper Daedalus, Stein similarly advocated for steps to curb regulatory arbitrage.
"To mitigate the incentives for regulatory evasion, and to help reduce the fragility of credit creation no matter where it takes place, a systematic effort must be made to impose similar capital standards on a given type of credit exposure, irrespective of whether it is a bank, a broker-deal firm, a hedge fund, or any other entity holding the exposure," he wrote.
While most of Stein's recent work has focused on the ongoing debate over capital requirements in Basel III, Clarida has paid more attention to the still-stalled economy, and specifically why no policy to spur growth to date has worked.
In a 2009 analysis piece for PIMCO, he said President Obama's $800 billion stimulus package, with tax cuts and credits to boost disposable income, would not be effective without the credit markets fully recovering from the crisis.
Clarida said the financial turmoil of 2008 and "the damage caused to the system of credit intermediation through banks and securitization" meant tax cuts or government spending could not be leveraged by the financial system as they normally would be. That puts a tremendous amount of pressure on the Fed to solve all of the problems in the financial system, he said, explaining some of the extraordinary steps taken by the central bank to try and provide an economic boost.
"Officials are coming to recognize these challenges and are now committed to or are seriously considering 'non-traditional' policies that combine monetary and fiscal elements," Clarida wrote.
But he also indicated the Fed's actions to date have not gone far enough, suggesting he supports some continuation of the Fed's bond-buying policy known as "quantitative easing." The central bank has held two rounds of the bond-purchase program, but has so far resisted calls for a third.
While he did not go so far as to question the Fed's cutting its benchmark interest rate to near zero, he said the rate-cutting cannot work by itself.
"It is the most striking example of 'pushing on a string' I have witnessed in my lifetime." Clarida said in the PIMCO report.
"The private securitization channel, which at its peak was intermediating nearly 50% of household credit in the U.S., has been destroyed. Banks are hunkering down in the bunker, hoarding capital as a cushion against massive losses yet to be recognized on the trillions of dollars of 'legacy' assets that they have been unable to sell, or unwilling to sell at the deep discount required to attract private investors."
While central banks, including the Fed, have sought to fill the vacuum by lending directly to the private sector, Clarida argues the asset purchases so far have not been enough.
"While these sums may be necessary to prevent an outright economic collapse that extends and deepens into 2010, 2011, … it is not clear to me that they are sufficient to turn the economy around to the extent that it will return to robust growth," he wrote.
In a November 2010 story in Bloomberg News, Clarida was quoted as saying the Fed may need to commence more asset purchases if the second round — known as "QE2" — did not sufficiently boost growth. (The second round was set to expire in June.)
"A year from now, if unemployment is 9, 9.5% or 10%, we are going to see more," he said. "It may take a different form; it may be concentrated in different assets, but the Fed can't cut interest rates. They are at zero at the short-end. If they are going to ease policy, they have to do it through these quantitative measures."
