A Seat At The Table Of Power

A growing number of analysts are taking seriously the possibility that the U.S. economy is heading back into recession.   No wonder President Roosevelt’s 1933 first inaugural address is getting heavy internet circulation.  Here is a snippet:  

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources. . . .

Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.

These are the lines of attack.

Sadly our government appears to have no interest in directly “recruiting” people and putting them to work meeting the needs of our country.  In fact, most Republican and Democratic party leaders refuse to support a substantial fiscal stimulus even if it would be used to encourage private production.

Right now, the only governmental body committed to expansionary policy is the Federal Reserve, the body that determines our country’s monetary policy.   However, it appears that the banking sector opposes even that effort and it remains to be seen how successful they will be in getting their way. 

Our Federal Reserve System is an odd creation.  It was created in 1913 and consists of a seven member Board of Governors and twelve regional federal reserve banks located in different cities throughout the United States. 

As the Federal Reserve itself explains:

The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.

Sounds pretty straight forward.  The odd part is the system of regional federal reserve banks. 

Each regional bank has a president who serves a five year term and may be reappointed.  The president is chosen by the bank’s board of directors–and here is where the issue of who gets to sit at the table of power becomes important. 

Each regional bank’s board of directors consists of nine members selected from three “classes,” A, B, and C. The three Class A directors are chosen by the private banks operating in the region to represent the interests of the member banks.  The three Class B board members are also chosen by the private banks; they are supposed to represent “the public.”  The three Class C board members are chosen by the Board of Governors and are also supposed to represent the public.

In short, private bankers are structurally placed to dominate the selection of the presidents of the twelve regional federal reserve banks, and through them, influence the direction of the country’s monetary policy. 

Monetary policy is made by the Federal Reserve Open Market Committee (FOMC).  The voting members of the FOMC include the seven members of the Board of Governors and five of the twelve federal reserve presidents (on a rotating basis).  Thus, representatives of the banking sector are legally empowered to sit at the table where decisions about monetary policy and our economic future are made. 

If you are wondering if this is wise, you are not alone.  Barney Frank, Congressman from Massachusetts, has long worried about this.  As he said this September:

The Federal Reserve (Fed) regional presidents, 5 of whom vote at all times on the Federal Open Market Committee, are neither elected nor appointed by officials who are themselves elected.  Instead, they are part of a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the President and confirmed by the Senate.

For some time this has troubled me from a theoretical democratic standpoint.  But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve.  In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate — specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.

In 2009, I asked staff of the Financial Services Committee to prepare an analysis of FOMC voting patterns.  It confirmed two points.  First, the great majority of dissents, 90 percent — from FOMC policy before 2010 — came from the regional presidents.  Second, the overwhelming majority of those dissents were in the direction of higher interest rates.  In fact, vote data confirmed that 97 percent of hawkish dissents came from the regional bank presidents and 80 percent of all dissenting votes in the FOMC over the past decade were from a hawkish stance.

One day before Frank issued his statement, the FOMC voted to modestly lower long term interest rates in an attempt to boost investment. The decision was supported by a 7-3 vote.  At present there are only five voting members of the Board of Governors; two seats remain open.  As Dean Baker explains:

What was striking about this vote was that all 5 governors voted for this measure obviously feeling that the potential benefits in the form of stronger growth and lower unemployment outweighed any risks of higher inflation.  However, 3 of the 5 voting bank presidents opposed the measure, apparently viewing the threat of inflation as being a greater concern than any possible growth and employment dividend.

This raises an obvious question about the interests being represented by the bank presidents.  Inflation is especially bad news for banks because it reduces the value of their assets.  On the other hand bankers may not be very concerned about unemployment. They have jobs, as is probably the case for most of their friends as well.

It is hard not to wonder whether the bank presidents voting against further steps to spur growth and reduce unemployment were acting in the best interest of the country as a whole or whether they were representing the banks in their districts.  If the latter is the case, then it is reasonable to ask why we are giving the banks a direct role in setting the country’s monetary policy.  There is no obvious reason that they should have any more voice in determining monetary policy than anyone else.

In April, Barney Frank introduced H.R. 1512, which would eliminate the voting power of the regional bank presidents.  This seems like a good step.  We might want to go further and restructure the way in which bank presidents are elected; we shouldn’t be relying on bankers to decide who represents the public interest.  

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