Why Won’t The Federal Reserve Board Talk To Financial Reform Advocates?

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.

43 thoughts on “Why Won’t The Federal Reserve Board Talk To Financial Reform Advocates?

  1. What more would you expect from like minded people who believe that gold is not money. Its only not money to them because they have none. Now ask them if cocaine is money, and they want you to keep your powder dry, a dual purpose mandate.

  2. there are times when i’m astounded by seemingly bright and insightful people who can’t seem to see the forest for the trees. an organization owned [literally] by large financial institutions, with executives from those very same institutions in decision-making roles … and said organization appears to be acting exclusively in the best interests of those same institutions. astounding. one might even say, inconceivable.

  3. As Jim Barth, Ross Levine, and I argue in the Guardians of Finance: Making Regulators Work for Us (http://www.amazon.com/dp/0262017393) the problem is that regulators are biased — like sports referees, they might go to work each day determined to do their best, but are swayed by the loudest fans, which in this case are the banks. That is why we need a form of instant replay to keep them honest. Without greater transparency and informed monitoring by the type of entity we propose in our book, their behavior will not change. So while some attention to specific regulations is great, what matters at least as much is ensuring that regulators act in society’s best interest. Unfortunately, the public is similar to the fans in the ‘nosebleed’ seats, and in this case they don’t know what is going on, so it is not surprising that their voices are not heard.

  4. “Honestly, I do not understand the Fed’s attitude and policies – if they are really serious about pushing for financial reform.”

    I think the Fed realizes the big banks are insolvent and believes imposing additional regulatory requirements will cause a financial implosion, and they’re probably right. Of course that problem could be addressed if we simply broke the Bigs up and capped their assets, but our Washington wise-men have decided that isn’t an option.

    So we’re stuck with the status quo.

  5. Neither the Fed nor other regulators want to put themselves into the position of having to answer the following… most probably because that would disclose how profoundly mistaken they have been… for a couple of decades.

    Perceived risks, like those present in credit ratings, function without any regulatory interference as a traffic light. If the perceived risk for default of a borrower is high, the light red, banks lend less, at higher interest rates and on tougher terms. If the perceived risk for default of a borrower is low, the light green, banks lend more, at lower interest rates and on more lenient terms.

    So, why on earth did regulators feel they also had to pay the bankers to follow the green light, by means of extraordinarily low capital requirements which resulted into extraordinarily high returns on bank equity, and which consequently also provoked the banks to avoid what officially was considered as risky, like the small business and entrepreneurs?

    As a result we have dangerous excessive bank exposures to what is officially perceived as not-risky and equally dangerous underexposures to what officially is perceives as risky?

    Did really the regulators not know that bank major systemic bank crisis have always resulted from excessive exposures to what was ex-ante considered as absolutely not-risky?

    The pillar of capital requirements for banks based on perceived risk is a completely faulty pillar… but it survives intact and not discussed in Basel III.

  6. “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?”

    You’ve got to be kidding. They met with JPM 16 times while stonewalling Admati because the Fed is a banking cartel that exists solely to serve the interests of its member banks, of which is JPMorgan, as a charter member of the cartel, is one of the most important.

  7. Tagging on to Mark’s comment, I don’t know why, Prof. Johnson, we would expect the Federal Reserve to act in the public interest, when it is, in fact, a private institution. If we still had phone books, I would say, look in the blue government pages of the phone book; you won’t find the Fed there.

    But as we’ve seen, we can’t even expect our government to behave like a government, it is so thoroughly captured by corporate interests. To begin the remedy, see http://www.movetoamend.org.

  8. I honestly can’t fathom why anyone would expect any good to come from our current masters after what we’ve witnessed in the last few years. The situation is absolutely vile and for months now I’ve been bracing for collapse. I suspect our masters are about as scared as I should another 2008 occur- but really, hiding in the dark, covering your own ass with both fingers crossed doesn’t solve much.
    I don’t know what it will take but at some point the fear and apathy has to give way to genuine outrage and a willingness to engage; if not we are completely screwed!
    Transparency and equal time are sorely needed… keep fighting the good fight Simon; I always enjoy your reads!

  9. All the evidence we have points to insolvency for some of the largest banks, as you point out. The failure to mark assets to market after the housing bubble collapsed was the first clue. The no-interest loans, the buyback of the Treasuries that had been purchased with those loans, even the most recent decision to allow banks to devalue mortgages on first liens while keeping the second liens intact and serviceable – this is the Fed giving mouth-to-mouth to a victim who’s breath can barely able to make a candle flicker.
    I think the point that needs to be made is that a tougher regulatory environment can and should go hand-in-hand with the liquidity refueling. That’s where the failure is, and where the genesis of the Fed -as a tool of the banks – shines on through. It’s all they’ve ever known, it’s where most of them came from and where they’ll return to someday if they behave.

  10. I dunno….would it be good policy to meet with all and sundry undereducated hecklers? Not the best use of the Fed’s time.

    It is indeed heartning to see Admati in complete agreement with resonable bankers: Basel 3 is flawed, inadequate, and anti-american.

  11. Admati notes that Basel 3 is “insufficient and flawed” in her response to Volker.

    Now, will she and her colleagues be lobbying against Basel 3? Or will she leave the hard work to Banks – who she will then blame for lobbying against Basel3?

    Right now, her approach is to pile on more flawed regulation to counter upcoming flawed regulation.

  12. Admati (and Johnson), despite the patina of objectivity created by an intellectual pedigree, are functioning as political and policy advocates, and populist rabble-rousers, as opposed to providing any realistic, nuanced, real-world advice that the central bank could actually use.

    Case in point: Admati’s response to virtually any question is to repeat as gospel an academic theory well established and uncontroversial as of the 1960s, and a theory that is only true given many strong assumptions, you are not advancing the discussion. For example, when asked about the challenges posed by the tax code, and your response is effectively, “act like the tax treatment of debt and equity really is equal” even though it is not, or “why don’t you go and reform the tax code”, you don’t give anyone a reason to listen further.

    Lastly, Johnson makes no mention of how many private phone calls, written or electronic communications, conversations at academic or other conferences, and meetings that happen all the time between academics as a whole and Fed staff. Clearly Johnson is communicating all the time with the Fed to ask them why they are not meeting Admati. Johnson’s complaint that no one is meeting w/Admati simply means that — no one wants to meet with Admati — and fails to prove anything about whether or not the Fed is seeking expert/independent advice or has a good or bad process.

  13. Fundamentals:
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    Produced by Peter Joseph

  14. If 1/10 of 1% own more than everyone else….it’s obvious why mega banks got more meetings with the FED.

    Come on it’s a place that makes money. Sheep and gold and whatever else that was traded as a resource back in the day is simple made now. Really, how cool is that for the 1/10 of the 1%. Come on, HOW COOL IS THAT!!!! I mean wow, and we’re told modern finance is good, because it’s provided the quality of life we have so, “shut up poor person”! Really, it’s given power to the 1/10 of the 1% so their like “this is da shit”( that’s bankster talk)!!!!!! “Shut up sheeple take my debt, you need it” and “oh by the way I’ll own you” and not just because will owe money but because “I’m TBTF and you’re going finance my loss.” And that’s real control.

    So, debt is an asset but it’s also control. We have seen that profits will be greater if you stagger wages and grow debt, but there is a silver lining, it also give you control. If we grew wages and reduced debt, control would be more evenly distributed throughout the population, while taking control away from the debt producers and that’s not why they play this game.

    Pure unfettered greed. 1/10 of 1% of 310,000,000=310,000 . That is the size of a city. So one city owns more than every major metro area and everything in between and we let that city of 310,000 control the economy and the government……..

  15. “Basel 3 is flawed, inadequate, and anti-american.”

    There Desi goes again, cranking out the hysterical one-liners! You really do have a talent for comedy. Mayber next you can post about how capital requirements make free-market Jesus cry.

  16. @Desi Girl @Ben Wolf “Basel 3 is flawed, inadequate, and anti-american.”

    Of course Basel III is flawed.

    It still builds on capital requirements based on perceived risks, precisely what led the banks to a monstrous overexposure to what was perceived as not risky, like triple-A securities and infallible sovereigns and an equally dangerous underexposure to what is officially perceived as risky, like lending to the small businesses or entrepreneurs.

    And though I do not agree its anti-American but more anti-western world, Basel III is definitely un-American… because anything that discriminates so much against what is risky in the land of the brave is un-American, and anything that forces banks to have more capital when lending to Americans than when lending to the Government sounds also utterly un-American to me… it sounds even outright communistic.

  17. Oh Ben, Ben, why don’t you read what your messiah Simon is preaching:

    Here is how you do it:

    1) Click on the link in paragraph 10 or 11 above: http://www.gsb.stanford.edu/news/packages/PDF/VolckerRuleAdmatiPfleiderer021312.pdf
    2) Open pdf file
    3) Read….(if you are capable)
    4) Page 2, third paragraph, 2nd line
    5) Comprehend and try to understand (again…if you are capable)

    I know, I know, logical thinking is way beyond your pay grade but Admati calls Basel 3 “insufficient and flawed” and suggests that since it is badly desined, one way to counter that bad design is to enforce more idiotic regulations like Volker (in its current form).

    Most likely you do not understand finance…but Simon has relied heavily on Admati’s ranting to make his points.

    And Admati taking full advantage of the Volker rule comments to publicize her nonsensical theories about bank capital.

    Is this all “Americas Best” can deliver? Funny? is it not?

  18. @Desi Girl. Indeed the horrendous flaws of Basel I, II and III are sometimes equalized by the flaws in the criticism of Basel I, II and III. Anyone discussing the capital requirements for banks without commenting on the fact that they are arbitrarily and stupidly discriminatory, evidences he or she knows as little about it as those who concocted the poison.

  19. The FRB still has *legitimacy*?

    The only way an institution (FRB) that issues debt instead of money – fiat money, no less – and that is un-tethered to any other evolved institution of civilization on Earth and, yet, is composed of mere humans having secret meetings, reading secret *holy* books and going off on secret missions can be considered *legit* is if it is presented as fiction by a very creative sci-fi writer.

  20. @bruce e. woych … so much as i enjoy following simon’s work, i think that video was actually more useful than the original post. thanx

    Posted by Richard at 9:58 AM
    Labels: Policy Failure, Swedish model
    Monday, February 20, 2012
    Iceland shows that forcing banks to take losses works to end financial crisis
    … the Japan model and the Swedish model for handling a financial crisis.
    Under the Japan model, governments do everything they can to protect the meaningless bank book capital values. This includes allowing the banks to recognize losses as banks generate earnings to absorb the losses, shielding the banks from market discipline by providing an implied guarantee when regulators proclaim that stress tests show the banks are solvent, and adopting zero interest rate policies.

    The Japan model puts the interest of the banks ahead of the interests of society.

    Under the Swedish model, governments require the banks to recognize the losses on the excesses in the financial system today. Banks then rebuild their book capital through future retained earnings and equity issuance.

    The Swedish model puts the interests of society ahead of the interests of the banks.

    Today, I would like to focus on two interesting data points. First, Japan has been following the Japan model for 2+ decades since its credit bubble burst with no end in sight. Second, Iceland has been following the Swedish model for 3 years since its credit bubble burst, the financial crisis is effectively over and it has returned to investment grade.”

  22. I love this bloc, Simon and James. I love the folks who comment on the posts. We, along with a vast minority in this nation (and, I assume elsewhere in some cases) are a very few who actually make an attempt to comprehend the level of charade performed by so many of this world’s elitists intended (and very successful, tragically) to distract the majority of those who would, if they knew the truth, revolt massively at the level of fraud being propounded as governmental policy across the globe by the wealthiest global citizens to rob from and destroy all others of the world citizenry. We get it. We talk about it. We try to swim upstream against an immense current of political influence. This extends from the ECB to the FED, to dynasts like Assad and Putin. It is blatant. It is massively destructive to all civilized society. It is completely out of control. This article about the Bernanke FED is wonderful in that it points out the level of influence wielded by the largest banks. When Obama reappointed Bernanke in the wake of the Summers and Geithner appointments, it quite simply proved that both major parties are captives of the wealthiest interests. Without some kind of revolution, we are lost. That has become clear. The ever sensible Vollker Rule will be softened to the point of absurdity. The banks will get their way. Oh, there will be a few “bones” thrown our way, but even those won’t be enforced.

  23. It’s unfortunate so many commenting here have conceptions of economics which are totally infected by political rhetoric. It is utterly absurd to argue that capital requirements for banks are unfair, particularly when those same banks leverage government money to earn their profits.

  24. @Ben Wolf: It is utterly absurd and actually criminal that private banks create money which is borrowed at interest by the governement (taxpayers).

    @Bruce Woych: thank you, thank you, for the link to the Trust Your Instincts post on Iceland, and the REAL NEWS NETWORK video of Bill Black.

    @Bayard: Like you, I am profoundly grateful that there are a few places in the blogosphere, like this one, that provide an opportunity for regular folks to “cuss and discuss” about the issues that materially affect our lives and those of our fellow citizens. And I also highly recommend http://www.nakedcapitalism.com.

    Thank you all.

  25. @Carla @Ben Wolf: “It is utterly absurd and actually criminal that private banks create money which is borrowed at interest by the government (taxpayers).”

    Indeed, the fact banks can lend to the government without any capital because this borrower has been declared infallible by regulators, but are required to have around 8 percent in capital when lending to the citizens, because they have been deemed top be risky borrowers by the same regulator, seems like something out of the playbook of a colorful dictator of a colorful banana-republic. It makes a mockery out of the whole economic signaling machine, and a mockery out of the balance of powers upon which democracies are built.

  26. @Carla,

    Banks do not create money. Only the consolidated government can create new net financial assets.


    Capital is collateral, which the bank already has in the form of the bond it just bought. It’s a straight asset swap, bonds for reserves. What holds for extending credit to the real economy does not hold for transactions endogenous to the banking system. If you personally buy a U.S, bond the government doesn’t require you to have capital either.

  27. @Ben Wolf. You might be interpreting something different with the term capital. In the context of bank regulations capital is equity.

    The fact is that if a bank lends to a citizen, it needs to earn a net margin sufficient to satisfy the expected returns of the required 8 percent in capital-equity, but, if it lends that money to the government, since there is no similar equity requirement, it needs not to concern itself with such mundane matters.

    @Ben Wolf “Banks do not create money”

    From a Wikipedia: “In economics, money creation is the process by which the money supply of a country or a monetary region is changed. There are two principal stages of money creation. First, a central bank introduces new money into the economy by purchasing financial assets or lending money to financial institutions. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits) in the economy so that it is a multiple of the amount originally created by the central bank.”

  28. @Kurowski

    The money multiplier is a myth. Banks do not create money in the way described by wikipedia or an economics textbook. The money “loaned” out (though banks don’t actually loan money), creates a loan (asset) and a liability (deposit). The two net to zero and mean no net financial assets are created.

  29. http://en.wikipedia.org/wiki/Regulatory_competition
    From Wikipedia, the free encyclopedia
    “Regulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their “competitors” to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation – particularly the United States of America, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally.

    The dominant opinion is that regulatory competition between jurisdictions creates a “race to the bottom” in standards, due to the decreased ability of any jurisdiction to enforce standards…”

    Otherwise known as corruption ?

  30. @Woych – liked Real News and Punk Economics….all that pompous a— yaddayadda of the Greenspam era is finally over…

    Star Trek Deep Space 9 – Season 3 – episodes “Past Tense Part 1 and 2” tells the story of 2024…

  31. Duh. Why should the Fed do anything different from what they’re in business to do in the first place? Rip off the American people. Surely no one is surprised.

  32. Yea, but the Fed is not supposed to ralph (barf) on the ones it was meant to serve, unless of course you are Conan Brian and eat like a cow.

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