The Wall Street Journal-20080131-Credit Crunch- Fed Official Is on Shaky Ground

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Credit Crunch: Fed Official Is on Shaky Ground

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WASHINGTON -- The credit-market turmoil could produce an unexpected casualty: Federal Reserve governor Randall Kroszner.

Mr. Kroszner, a former senior Bush administration official with a deregulatory bent, runs the Fed committees that formulate policy on bank regulation and consumer protection. In both areas, the Fed has come under fire for not acting more aggressively to forestall mortgage-lending practices.

Mr. Kroszner was the point person on a proposal released in December to rein in those practices. But congressional Democrats criticized the measure as weak, belated and halfhearted.

Since then, the 45-year-old Mr. Kroszner has become a lightning rod for Democrats frustrated with the central bank and the White House approach to economic policy. His term expires today, and Senate Banking Committee Chairman Christopher Dodd has suggested he will block the White House's nomination of Mr. Kroszner for a 14-year Fed term.

"Many people -- myself included -- wondered whether Mr. Kroszner . . . was a good choice for the job," said Rep. Carolyn Maloney, the New York Democrat who heads the House Financial Services Subcommittee on Financial Institutions. "I think our concerns have panned out."

Mr. Kroszner declined to respond directly to the congressional criticism. He has said that his statements and positions are based on economic research, not ideology.

The central banker's predicament illustrates Washington's slow disengagement from the "less is more" regulatory philosophy that for years prevailed at the Fed under Alan Greenspan, the former chairman. Democrats, consumer groups and others have argued that today's rising home foreclosures and falling house prices could have been forestalled by a firmer hand.

Mr. Kroszner, who holds a Ph.D. in economics from Harvard University, taught for more than 10 years at the University of Chicago's Graduate School of Business before coming to Washington in 2001 as a member of President Bush's Council of Economic Advisers. He joined the Fed in March 2006, serving two years of an unexpired term left by a departing board member.

He is best-known for his lengthy academic papers, many of which argued against more bank regulation. One, from 1999 -- "Will Regulators Catch Up With the Market?" -- said changes in financial- services regulation should "not raise any new regulatory barriers." He recommended eliminating a rule that prohibits banks from controlling more than 10% of the nation's deposits after an acquisition.

"My general approach is whenever there is regulation, you've got to think about the costs and the benefits and try to get things right," Mr. Kroszner said in a recent interview.

Some former White House officials speak highly of Mr. Kroszner's experience and commend his work amid the current financial turmoil. He is also well-regarded in academic circles as a creative and collegial thinker.

"There's nothing idiosyncratic about his economic views," said Harvey Rosen, former chairman of the Council of Economic Advisers, who joined the White House several months after Mr. Kroszner left in 2003. "He's an excellent mainstream economist -- very sensible, a good listener."

Mr. Kroszner's main stumbling block is Mr. Dodd, the powerful Senate chairman who must bless his nomination before it can advance. The two haven't met in months, and Democratic aides say Mr. Kroszner hasn't arranged visits to sell any of his policies. He took nearly two months to respond to questions following an August 2007 hearing on his nomination, a delay some on Capitol Hill viewed as a lack of interest.

Last week, Mr. Dodd went on the attack, referring to comments Mr. Kroszner made at the August hearing that suggested the credit-market turmoil hadn't affected the broader U.S. economy. Some data supported Mr. Kroszner's position: gross domestic product rose 4.9% in the third quarter. But the day after his comments, the Dow Jones Industrial Average fell 280 points, in part because of credit-market worries.

"Even a casual observer of the markets over the past five months understands that such a sentiment was at best wishful thinking, and at worst economic malpractice," Mr. Dodd said. He is holding up pending nominations of Mr. Kroszner and two others for central-bank posts.

There are currently only five people on the Fed's seven-member board. As of Friday, there will be four members serving current terms. Mr. Kroszner can stay at the central bank until another board member is confirmed.