By Simon Johnson
The Federal Reserve has great power in modern American society, including the ability to move the economy and, at least indirectly, to create or destroy fortunes. Its powers operate in two ways: through control over monetary policy, meaning interest rates and credit conditions more broadly, and through its influence over how the financial system is regulated generally and how specific large banks are treated.
The secrecy of our central bank has long been a source of controversy. In line with changes at central banks in other countries over recent decades, the Fed’s chairman, Ben Bernanke, has pushed for more transparency regarding how individual members of the Federal Open Market Committee view the economy – and thus how they are thinking about the future course of interest rates (and the Fed keeps us posted). This is a commendable change, helping people throughout the economy understand what the Fed is trying to do and why.
Under pressure from both left and right – for example, in the unlikely alliance of Senator Bernie Sanders of Vermont and Representative Ron Paul of Texas – the Fed has also, after the fact, disclosed more of its actions during the recent financial crisis.
But in terms of its process for determining financial-sector regulation, the Federal Reserve – at least at the level of the Board of Governors in Washington – is moving in the wrong direction.
Fed officials do testify frequently before Congress – 11 times last year on regulatory and supervisory matters, by the Fed’s count. But the Fed’s decision-making process is nowhere near as open and transparent as that of the Federal Deposit Insurance Corporation (about which I wrote recently).
The Wall Street Journal reported on Tuesday that during the 1980s that the Fed’s board held 20 to 30 public meetings a year, but these dwindled during the Greenspan years to less than five a year in the 2000s and “only two public meetings since July 2010.” At the same time, “the Fed has taken on a much larger regulatory role than at any time in history” – including “47 separate votes on financial regulations” since July 2010, The Journal said.
This high level of secrecy is a concern. It is particularly alarming when combined with the disproportionate access afforded to industry participants in the arguments about what constitutes sensible financial reform.
For example, just on the Volcker Rule – the provision in Dodd-Frank to limit proprietary trading and other high-risk activities by megabanks – Fed board members and staff members apparently met with JPMorgan Chase 16 times, Bank of America 10 times, Goldman Sachs 9 times, Barclays 9 times and Morgan Stanley 9 times (as depicted in a chart that accompanies The Wall Street Journal article).
How many meetings does a single company need on one specific issue? How many would you get?
Americans for Financial Reform, an organization that describes itself as “fighting for a banking and financial system based on accountability, fairness and security,” met with senior Federal Reserve officials only three times on the Volcker Rule. (Disclosure: I have appeared at public events organized by Americans for Financial Reform, but they have never paid me any money. I agree with many of its policy positions, but I have not been involved in any of their meetings with regulators.)
Americans for Financial Reform works hard for its cause, and it produced a strong letter on the Volcker Rule – as did others, including Better Markets and Anat Admati’s group based at Stanford University.
Based on what is in the public domain on the Fed’s Web site, my assessment is that people opposed to sensible financial reform – including but not limited to the Volcker Rule – have had much more access to top Federal Reserve officials than people who support such reforms. More generally, it looks to me as though that even by the most generous (to the Fed) account, meetings with opponents of reform outnumber meetings with supporters of reform about 10 to 1.
According to those records, for example, the Admati group has not yet managed to obtain a single meeting with top Fed officials on any issue, despite the fact that they are top experts whose input is welcomed at other leading central banks. To my definite knowledge, they have tried hard to engage with people throughout the Federal Reserve System; senior people at some regional Feds are receptive, but the board has not been – either at the governor or staff level.
When I asked the Fed Board of Governors about this lack of engagement with the most prominent research team advocating higher capital requirements, a representative sent this response, “We are meeting with a variety of groups and individuals with diverse perspectives and are carefully considering both what we hear in the meetings and what we read in the tens of thousands of comment letters we are receiving as we work with other regulators to implement the Dodd-Frank Act.”
Honestly, I do not understand the Fed’s attitude and policies – if they are really serious about pushing for financial reform. No doubt they are all busy people, but how is it possible they have time to meet with JP Morgan Chase 16 times (just on the Volcker Rule) and no time to meet Anat Admati – not even for a single substantive exchange of views?
The Federal Reserve should open up – creating an advisory council along the lines of what the FDIC already established for systemic resolution issues. Most importantly, this advisory council should include strong outsider experts – such as Professor Admati and her associates – and the council should meet in public, with its proceedings webcast (again, as the FDIC does). Anything less than this degree of openness and engagement will continue to help powerful special interests and end up further undermining the Fed’s legitimacy.
An edited version of this post appeared this morning on NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact The New York Times.