Republican Shelby roughs up Fed nominee Diamond

Professor Peter Diamond smiles while speaking to reporters after winning the 2010 Nobel Prize for Economics at Massachusetts Institute of Technology in Cambridge, Massachusetts October 11, 2010.

WASHINGTON (Reuters) - The top Republican on the U.S. Senate banking panel on Tuesday made clear he still opposes Federal Reserve nominee Peter Diamond, calling him an "old-fashioned" Keynesian supporter of big government.

The opposition from Sen. Richard Shelby to a nomination Republicans have already scuttled twice poses a challenge to President Barack Obama, who must decide how much political capital he wants to spend to push for Diamond's approval.

"It is clear to many of us that he does not possess the appropriate background, experience, or policy preferences to serve on the (Fed's) Board of Governors," the Alabama Republican said of the MIT professor and Nobel laureate.

Diamond won approval from the banking panel twice last year -- both on party-line 16-7 votes -- but Republicans blocked his consideration by the full Senate, which is needed before he can take a seat on the influential seven-member Fed board.

While Democrats control the Senate, a single senator can hold up a nomination and Obama was forced to renominate Diamond earlier this year.

Diamond would be a likely supporter of the Fed's easy money policies, which have been criticized by many Republicans, and would further strengthen the prevailing consensus.

"There's going to be a lot of opposition to Diamond's nomination for a lot of reasons," Shelby told reporters after the hearing. "Let's see how the process works. A lot of us have differences with him."

QUESTIONING DIAMOND'S CREDENTIALS

Shelby criticized Diamond for his lack of experience in monetary policy. He also said Diamond is not qualified to serve because another Fed governor, Daniel Tarullo, is from Boston, where Diamond currently resides.

Fed board governors are supposed to represent different parts of the country, but that requirement has in the past been interpreted loosely.

The Alabama lawmaker added that the panel had set a precedent by blocking the nomination of former President George W. Bush's choice to serve on the Fed, Randall Kroszner. Shelby said Kroszner's nomination foundered over his free-market views.

"Policy preferences of Fed nominees matter," Shelby said. "Dr. Diamond is an old-fashioned, big government Keynesian."

Democrats expressed support for Diamond based on his Nobel prize and his study of unemployment and how wages are affected by regulation and economic policy.

"The president has sent us ... extremely qualified individuals," said committee Chairman Tim Johnson, speaking of Diamond and two nominees to the White House Council of Economic Advisers. Johnson quoted economist and Nobel prize winner James Mirrlees as saying of Diamond: "No economist is smarter."

Another Republican member of the panel, Pat Twoomey of Pennsylvania, grilled Diamond over the Fed's extensive support for the economy. The Fed cut short-term rates to near zero in December 2008 and has embarked on asset-buying campaigns that will total $2.3 trillion by mid-year.

Diamond said the Fed's $600 billion bond-buying program has been an effective tool and played down concerns about inflation. "The issue is, going forward, are there signs that inflation might be picking up quickly?" he said in response to questions from lawmakers. "I view commodity prices as driven by micro factors, not general stimulation of the economy."

Johnson said he would like to move forward on the nomination as soon as possible but gave no date for when a committee vote would be scheduled. If the panel approves the nomination, as expected, it would face a final vote in the full Senate. The entire process could take months.