Vacancy problem

Unfilled positions at the U.S. Federal Reserve are a global threat.

Not long ago, more than a few overly optimistic economists were silly enough to believe systemic problems of the past were largely licked due to sophisticated policy cooperation among major developed nations. These folks, as we now know, were as wrong as the Internet boosters who claimed a new economy had evolved and changed the rules during the dot-com rush.

Bogeymen from earlier decades have resurfaced with a vengeance, which is why monetary policy makers are still wetting their pants after months of firefighting. Oil shortages. Hyper inflation. Stagflation. Recession. Depression. Famine. War. You name it and the world’s central banks are staffed full of people worried about it — except the U.S. Federal Reserve, where vacancies at the highest level warrant as much concern as anything else that threatens the global economy.

Late last year, shortly after central bankers launched the biggest market intervention since the terrorist assaults in 2001, I wrote about how Fed chairman Ben Bernanke was like a quarterback who dropped the ball at a key moment in the game (“contained crisis” was his fumble) and had started calling Hail Mary plays with no time outs and just seconds left on the clock.

I noted “desperate measures require unhindered calculations, which is why it is absolutely insane that the head of America’s central bank can’t huddle with his key players whenever he wants to discuss the game plan.” At that time, there were only five sitting Fed governors because, in the words of U.S. fund manager David Kotok, Senator Christopher Dodd, chairman of the Senate Banking Committee, was doing some political “fiddling” while credit markets burned.

The Fed is designed to operate with seven governors. But Dodd’s committee was sitting on two nominations for the vacant seats, making informal gatherings of Fed governors more difficult to conduct.

With a full board, Bernanke can hold informal meetings with two other board members. Informal brainstorming is important because whenever a majority of governors meet, an official Fed gathering must be called, and that scares the crap out of markets. But with only five governors, three becomes an official crowd. As a result, while central bankers everywhere were scrambling to keep markets functioning last year, Bernanke was not legally allowed to brainstorm or ride an elevator with more than one of his key advisers.

Since then, Frederick Mishkin has resigned from the board, which leaves the Fed even more hindered. After all, some Fed actions require supermajority support of a board that is supposed to have seven members. That includes emergency advances to member banks looking to make firefighting loans. Dodd — who spent much of 2007 campaigning for his failed presidential bid — has never given a good explanation on why he has allowed this problem to exist by sitting on the Fed nominations. But critics blame a partisan plan to stack the board if and when a Democrat takes the White House. And that unprecedented desire to politicize the most important central bank in the world should be on your worry list.