Federal Reserve
WASHINGTON (MarketWatch) — When the Federal Reserve System was set up more than a century ago, it was designed to be relatively impervious to political influence.
It must be working, because politicians from both parties are piling on with proposals to “reform” the Fed to make it more transparent and accountable — that is, more subject to political influence.
At a congressional hearing on Fed governance this week, it became apparent, as MarketWatch reporter Greg Robb noted, “neither Democrats nor Republicans sound pleased with Fed structure.”
The hearing before a House Financial Services subcommittee focused on the role of the Fed’s 12 regional banks, but had implications for the overall activity of the nation’s central bank, including its conduct of monetary policy.
While Democrats essentially want to fully nationalize the Fed — which currently is a public-private hybrid — Republicans, under the guise of defending regional bank independence, are seeking ways for Congress to restrict and second-guess monetary policy.
In both cases, it would mean bringing the rampant dysfunction of a politically polarized Congress into the Fed’s work of managing monetary policy and safeguarding financial stability.
Whatever faults critics may find with the Fed — and its failures both in monetary policy and financial supervision leading up to the 2008 financial crisis provide plentiful ammunition — it hardly seems like bringing congressional gridlock into the picture will improve things.
Take for instance the fact that the Fed’s Board of Governors, the top governing body that guarantees federal oversight because the president nominates and the Senate confirms its members, has not been at its full strength of seven members since August 2013.
President Barack Obama, who has never placed a high priority on this key institution, took months to get around to nominating replacements for the empty seats.
And when he finally named new members in January and July of last year, the Republican chairman of the Senate Banking Committee, Richard Shelby, decided he wasn’t going to proceed with confirmation hearings until Obama bowed to his will on appointing a Fed vice chair for supervision.
Shelby’s argument is that the Dodd-Frank financial reform created the new vice chair position, subject to Senate confirmation, to make up for the Fed’s failure to adequately supervise banks before, and the president has been negligent in not making the appointment.
It seems, however, that the administration is perfectly happy with the enthusiasm Fed Gov. Daniel Tarullo has brought to bank supervision even without the title, and is afraid that he would not get Senate confirmation if formally appointed to the vice chair position.
Wouldn’t it be great if we could extend that sort of political gamesmanship to the 12 regional banks as well?
Ultimately, the failures of the Fed have little to do with its governance or structure, and much more with factors well within the control of existing legislation.
The housing bubble and the wildly speculative derivatives trading that led to the financial crisis were due primarily to the bad judgment of Fed Chairman Alan Greenspan, who championed easy money and lax supervision because of his own ideological hobby-horses.
And yet, this Republican appointee was reappointed four times for four-year terms by presidents of both parties as mainstream media, lawmakers and the public fawned uncritically over the maestro’s wisdom.
Greenspan’s dominance of Fed policy making is in fact one of the biggest arguments for preserving the independence of the regional bank presidents and their ability to check the Washington-based board.
All of the regional presidents take part in the internal policy debates and five of them at any given time have a vote on the Federal Open Market Committee that makes monetary policy and can express a formal dissent.
The proposal by Democrats to strip commercial banks of their ownership role in the Fed regional banks and to remove them from the Fed banks’ boards of directors is a red herring in this regard.
For one thing, the commercial banks are not voting shareholders in the sense of normal company, making the Fed banks more like mutual institutions where owning stock is necessary for membership. For another, the role of the commercial bank directors on the board is already severely limited by law — they have no say in choosing the leadership of the Fed regional bank and are not involved in supervisory activities.
As it is, these regional Fed banks, with their own highly qualified staff of research economists and input from local business and community leaders, provide a counterweight to the board of governors, as Richmond Fed President Jeffrey Lacker explained recently in a Wall Street Journal interview.
“Preserving that diversity of views, preserving the independence of the reserve bank president’s role in monetary policy, is an exceptionally high value,” he told the Journal ahead of his testimony this week before the House panel.
The regional bank presidents, whose salaries are set by the individual bank’s boards and are significantly higher than the government salaries of the Fed governors, tend to stay in office longer, providing stability and expertise in monetary-policy debates.
Everyone from Fed Chair Janet Yellen on down realizes that the Fed needs more gender and racial diversity at all levels, but, as Lacker observed in his written testimony, “I believe our record in this regard, like that of many other organizations, shows a combination of substantial progress and areas where more can be done.”
Diversity, like transparency, is hard to legislate. The Fed under Yellen and her predecessor, Ben Bernanke, has moved substantially toward more of both.
New legislation under the guise of reform would only further politicize an institution that has successfully managed, with the checks and balances Congress has already implemented, to keep political influence to a minimum.
