Jeremy Stein Champions Broad Regulation

Allegedly on President Obama’s shortlist to join the seven-member board of the Federal Reserve, Harvard Economics Professor Jeremy C. Stein would bring a wide breadth of experience in banking regulation and finance to a board of governors that only has two PhDs. But perhaps more importantly, Stein has staked out a series of positions that fall to the left of the Obama administration’s economic policy, which may make it difficult for Stein to gain confirmation before the Senate.

Stein, a Democrat, has been an active voice—and D.C. leader—in the discussions of restructuring the financial systems and crafting macroeconomic monetary and fiscal policy in response to the turbulent economy of the past three years.

If formally nominated, Stein will be returning to a familiar city. A former senior aide to University Professor Lawrence H. Summers when he served as director of the National Economic Council during the Obama’s administration, Stein worked for half a year on reforming the nation’s capital markets and regulatory system.

Stein’s colleague in the Economics Department Claudia Goldin was hesitant to offer premature congratulations, but she said he would be a strong asset, if he were nominated and approved.

“He would be excellent—I mean he is very intelligent, very judicious,” Goldin said. “It would be good for the country.”

Stein was an active critic of an early version of the Troubled Asset Relief Program—the $700 billion program that purchased mortgage-backed securities that played a key role in the 2008 financial crisis and exposed banks to potentially major losses.

The bill made the government a large, non-voting shareholder of preferred stock in the nine largest American banks. While the Congressional Budget Office estimated in late 2010 that the program would cost taxpayers approximately $25 billion, Treasury Secretary Timothy F. Geithner has defended the program by arguing that the investments in banks have largely paid for themselves.

At the time, Stein balked at the plan, arguing that the assets purchased by the government could have been over=priced. Stein also levelled criticism against the program in his academic work, in which he lambasted features of the plan that preserved dividends for shareholders in banks bailed out by the government.

“These dividends, if they are paid at current levels, will redirect more than $25 billion of the $125 billion to shareholders in the next year alone,” Stein wrote in an op-ed in The New York Times that he co-wrote  with Harvard Business School Professor David S. Schaferstein. “The government should close the door by putting an immediate stop to the dividend payouts of any banks receiving direct federal support. The purpose is not just to be fair or to avoid unsavory appearances, but to improve the health of the banks and the economy,” the two professors wrote.

In general, Stein has argued in favor of imposing stricter regulations on banks. In a July 2010 working paper, Stein argued in favor of a “macroprudential” approach to banking regulation—protecting the overall financial system instead of bailing out individual firms as was done during the 2008 financial crisis. In that paper, Stein also contended that financial regulation should not just apply to deposit-taking banks but also to other actors in financial markets, a view that calls for tighter regulation of institutions.

Stein’s positions in favor of increased regulation may draw the ire of Senate Republicans who have made a point of campaigning against White House nominees whom they view as too willing to interfere in free market systems.

According to the Wall Street Journal, Stein’s name rose to the fore as the White House narrowed down its search a few months ago. The White House is also reported to be considering a conservative nominee to pair with the more liberal Stein. Richard H. Clarida, a professor at Columbia University and an executive vice president of Pacific Investment Management Company, the world’s largest bond fund, is another name that has been mentioned for one of the two open spots in the Washington D.C. board, according to the Wall Street Journal.

The seven-member board joins a rotating cast of four regional Federal Reserve Bank presidents and the president of the Federal Reserve Bank of New York in comprising the Federal Open Market Committee, the Fed’s governing body.

—Staff writer Gautam S. Kumar can be reached at gkumar@college.harvard.edu.

—Staff writer Julia L. Ryan can be reached at jryan@college.harvard.edu.