Embarrassing Fed Ethics Scandal Promotes More Surveillance | Business

The Federal Reserve’s most embarrassing ethics scandal in years has put the spotlight on the world’s most powerful central bank and the independent governance of its 12 regional branches.

Their leaders are among the most influential public servants in the United States, helping to set borrowing costs to the economy of $ 23 trillion.

But the process of selecting and evaluating their performance against them has long been shielded from public scrutiny and accountability, which is now attracting growing criticism.

When Dallas Fed Chairman Robert Kaplan stepped down last month following revelations about his trading activity, his board said his investment was in compliance with the rules and praised his contribution.

Jerome Powell took a different tone.

“Nobody is happy,” the Fed chairman told reporters days before the news of Kaplan’s departure and Boston Fed chief Eric Rosengren, who retired due to a bad news. health after its transactions also came under scrutiny.

Powell ordered a system-wide ethics review and has since asked the Fed’s Inspector General to examine the trade of “certain senior officials.”

The contrasting answers refer to a question that has been present since the creation of the Fed: who really governs its semi-autonomous regional branches?

As questions about financial transactions have widened – Senator Elizabeth Warren has included the transactions of Fed Vice Chairman Richard Clarida in urging the Securities Exchange Commission to investigate possible insider trading – the regional Feds remain at stake. center of attention.

“The notion of a private quasi-public institution with a direct vote on monetary policy and such a low level of transparency undermines democratic accountability,” said Sarah Binder, senior researcher at the Brookings Institution.

She said the Fed needs a degree of transparency that matches its growing footprint in the economy, which grew further during the pandemic.

The search for new leaders in Dallas and Boston, which said Tuesday it has started looking for a new president, could transfer more influence in that process to Washington.

Democrats such as Senator Robert Menendez of New Jersey are urging Powell to improve diversity among Fed leaders: Regional presidents are currently almost all white and only three are women.

Republicans wrote to the boards of the two reserve banks on Tuesday, urging them to remain independent from partisan politics and choose candidates who adhere to the Fed’s “narrow statutory mission” regardless of political pressure.

The struggle for hold over the central bank and its influential regional branches dates back over a century and is as complicated as its distinctive public-private structure.

Created in 1913, the Fed’s system was a compromise. Banks wanted a safety net after suffering a series of damaging financial crises. Populists were suspicious of Wall Street, and President Woodrow Wilson wanted a Washington supervisory board.

The result was a network of a dozen regional banks – each with shareholders and directors – and a seven-member politically appointed board of governors.

“The Fed still lives with this original sin: it is not clear to whom the reserve banks are responsible,” said Kaleb Nygaard, senior associate researcher at the Yale Program on Financial Stability. “It’s something that has been problematic from the very beginning. “

Reserve banks initially had significant autonomy, until post-Great Depression legislation concentrated power over monetary policy with the Washington Council.

Reserve banks are governed by regional directors, but who holds real governance power is opaque. There is no public oversight of Fed bank chiefs, unlike members of the Washington board of directors who are appointed by the US president and confirmed by the Senate.

Search committees to select regional chairs are headed by each council, but they do not produce a public report. Day-to-day governance and the relationship between directors and presidents are difficult to discern.

Bloomberg News in 2016 requested the annual assessments of the 12 regional leaders via Freedom of Information Act requests. The banks refused, with one citing court rulings that “performance reviews are extremely personal and are not subject to public disclosure.”

The chairman of the Boston Fed board, through a spokesperson, declined to say whether there had been an internal review of Rosegren’s investment decisions. The chairman of the Dallas Fed board of directors and the general counsel both reviewed Rob Kaplan’s investing activities and found that they “conformed to the rules and policies of the Federal Reserve system.” bank spokesman James Hoard said.

Peter Conti-Brown, associate professor at the University of Pennsylvania, said local councils had “no responsibility”.

“The idea that they would have a serious role similar to that of the US Senate in determining who our central bankers are and how they behave, I think, is wrong,” Conti-Brown said. “It is not good democratic hygiene.”

Trade controversy is the Fed’s latest embarrassment.

Richmond Fed Chairman Jeffrey Lacker abruptly resigned in 2017 as he announced his role in a confidential information leak about the policy options being considered by the central bank in 2012.

The New York Fed was also criticized during the financial crisis after granting a waiver allowing a member of the Goldman Sachs board to remain on the board of the New York Fed after Goldman Sachs became a banking holding company in September 2008. The change of status placed it under the supervision of the New York Fed.

Past efforts by Congress to overhaul the Fed system have not gone far. Lawmakers, just as they did when the institution was created, like to have a regional balance of power to counteract the influence of Washington and Wall Street.

Six former Fed chairmen interviewed by Bloomberg News also defended the current structure.

They argued that this protects the independence of the Fed because regional presidents are not politically appointed, while local directors provide on-the-ground insight into the regional economy.

“The members of the board have been very valuable to me,” said former Philadelphia Fed Chairman Charles Plosser. Former Atlanta Fed Chairman Dennis Lockhart said his boss was his local board of directors: “I didn’t see my boss as the chairman of the board of governors.

Even so, Lockhart and other presidents have described a compromise inherent in the Fed’s system. Washington governors have ultimate authority over regional bank budgets, for example, they approve presidents and first vice presidents, and can dismiss any officer.

“Directors are important and valuable to the president and the independence of the reserve bank,” Plosser said. “But the ultimate authority resides in Washington.”

The Council’s influence over reserve banks is often subtle and is also hidden from the public eye.

Each year, the councils of regional banks and the Board of Governors work together to assess the president of a reserve bank.

These annual reviews focus on a range of issues ranging from bank operations to the president’s role in monetary policy. They lead to a renewal vote by the Board of Governors on the President’s five-year contracts.

Bloomberg Opinion columnist and former Minneapolis Fed Chairman Narayana Kocherlakota, writing in a 2017 essay, said the power of the Washington board of directors over reserve banks is “surprisingly opaque and should be considerably more transparent. “.

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