Bending the law

Reflecting the cynicism of Mexico’s political class, a popular adage of political origin asserts that the law was made to be broken . The joke evolved into a cultural trait, which helps explain why everyone does as he pleases, which in turn helps explain why the country is mired in underdevelopment.

Take, for example, the appointment of Mony de Swaan to the crucial chairmanship of the Federal Telecommunications Commission (Cofetel). The law states clearly and logically that to become a Cofetel commissioner, of whom there are five, the candidate must have ample expertise in the telecoms sector.

De Swaan’s only claim to telecoms expertise was that he presumably made many phone calls as chief of staff to Communications and Transport Secretary Juan Molinar. Zero experience as a regulator. But Molinar happens to be a presidential favorite, and thus, against all odds, de Swaan became not just a commissioner, but the chairman of Cofetel. He’s a quick learner , quipped Molinar unabashedly.

This shameless twisting and bending of the law is hardly exclusive of a developing country like Mexico. Take the case of Peter Diamond, the Nobel Prize-winning economist nominated for the Federal Reserve Board by President Obama, even though the chief executive knows fully well that his candidate fails the legal requirements test.

Mark A. Calabria, director of financial regulation studies at the prestigious think tank The Cato Institute (where my esteemed colleague and ardent Boilermaker Roberto Salinas León is an associate), says that Diamond should be rejected by the Senate and sent home to Massachusetts. There, where he is a professor at MIT, he can do the least harm to monetary policy.

The Senate Banking Committee voted 16-7 last week to recommend Diamond to the full chamber. The opposition came from Republicans led by the panel’s ranking member, Sen. Richard Shelby of Alabama. Obama nominated Diamond in September, after an initial bid to place him on the Fed board was blocked in August in a procedural move.

Here’s the meat of the matter: The problem with Diamond is both legal and political. By law, Diamond isn’t qualified to join the Fed’s board with its current makeup, and his academic background, according to Calabria and other analysts at both end of the spectrum, isn’t what the central bank needs right now.

According to Section 10-1 of the Federal Reserve Act, the next member of the Board of Governors may not come from a Fed district that already has representation on the board. As both common sense and his Senate paperwork confirm, Diamond is from Massachusetts. So is Fed Governor Dan Tarullo. Unless Tarullo is resigning, Diamond is ineligible.

The punch line is that to get around this quandary, the White House says Diamond is actually from Chicago. The basis of this claim is that he has lectured at Northwestern University. To believe that giving a lecture at the school, located in Evanston, makes one from Chicago displays contempt for the law that is unique even for the Obama administration.

Calabria points out that since 1960, Diamond has resided in Massachusetts, except for a few years at the University of California at Berkeley. There is no plausible reading of the law which should allow Diamond’s candidacy to proceed. The fact that Calabria is an assistant to Sen. Shelby does not demerit from the hard facts of the case.

Objecting to Diamond’s nomination on these grounds is no mere technicality. It is rooted in the very substance of the statute. The creators of the Federal Reserve System rejected a structure based solely in Washington and run by technocrats. There are 12 regional Fed banks for a good reason: so that voices throughout the country can be heard in managing monetary policy.

The Congress in Washington didn’t stop with regional considerations when seeking balance in the creation of monetary policy. The law also requires that the president’s choice of board members have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.

True, Diamond has a doctorate in economics, but what is sorely needed at the Fed is the perspective of individuals who have actually worked in the real world. The central bank already has a staff of thousands of Ph.D.s.

As with the imminent replacement of Guillermo Güémez when his term ends this year as vice-governor of Banco de México, the designation of another candidate to replace Diamond’s candidacy must be made solely on considerations of what’s best for monetary policy.

rmena@eleconomista.com.mx