Monday, 25 July 2016

Fed Officials Push Back Against Calls to Overhaul Central Bank’s Structure

In World Economy News 25/07/2016

Federal Reserve bank presidents are pushing back against a rising chorus of voices saying the central bank’s century-old structure needs to be overhauled to reduce bankers’ influence over its operations and policies.
Presumptive Democratic presidential nominee Hillary Clinton and the party’s draft platform have echoed calls for change by left-leaning activists, a drive that could gain new attention this week during the party’s convention in Philadelphia.
At issue is the role played by private banks in the Fed’s 12 regional reserve banks, which supervise financial institutions, provide financial services and participate in the central bank’s monetary policy-making.
By law, private banks elect six of the nine members of each Fed bank’s board of directors, choosing three to represent the banks and three to represent the public. The other three are appointed by the Washington-based Fed Board of Governors to represent the public.
Critics say the setup creates an inherent conflict of interest, akin to the proverbial fox guarding the henhouse, and has resulted in too little diversity among the leadership of the Fed system.
“Common sense reforms — like getting bankers off the boards of regional Federal Reserve Banks — are long overdue,” Mrs. Clinton’s campaign said in May.
Fed leaders in recent public comments and interviews have defended the status quo as effective, though Chairwoman Janet Yellen said during congressional testimony in February “it is of course up to Congress to consider what the appropriate structure is of the Fed.”
Meanwhile, regional Fed bank officials have played down the potential for conflict of interest, noting that the directors aren’t involved in bank supervision, and the directors who represent private banks don’t participate in choosing the Fed bank presidents. The officials also see value in having close ties to the banking community.
Patrick Harker, president of the Philadelphia Fed, said most of the bankers in his district are from small firms, not the big financial institutions that can worry regulators.
“The banker from a small town in Pennsylvania provides incredibly important insight” about local conditions, and “I worry about losing that insight,” Mr. Harker said. He agreed bankers could provide input through advisory groups, but he said having them on his board, meeting every 15 days, provides a level of instant insight into the economy and financial system that would be hard to replace.
William Dudley, president of the New York Fed, told reporters in May, “The current arrangements are actually working quite well, both in terms of preserving the Federal Reserve’s independence with respect to the conduct of monetary policy and actually leading to pretty, you know, successful outcomes” in terms of hitting the Fed’s goals of maximum employment and low, steady inflation.
Another issue for some advocates of change is the regional Fed banks’ status as quasi-public, quasi-private institutions. The Fed board in Washington is a wholly government entity that ultimately oversees the regional Fed banks. But when private banks become members of the Federal Reserve system, they are required to buy stock, and in turn receive dividends from the Fed. So the private banks in a sense own the regional Fed banks, though they can’t transfer or sell the stock.
“It’s pretty indefensible for the Fed to be the only regulatory institution” in the U.S. “that’s owned by the industry it regulates,” said Ady Barkan, of the Center for Popular Democracy’s Fed Up Campaign.
Fed officials say the critics misunderstand the Fed’s ownership structure. Cleveland Fed President Loretta Mester said in an interview the quasi-private status of the regional Fed banks helps ensure the independence that is needed for good policy-making in an economically diverse nation. If the regional banks were made fully part of government, she worried, Washington’s power would grow, raising the risk of politics influencing the policy debate.
Ms. Mester said “yes, the banks have stock” in the Fed. “But that’s not owning the Fed in the sense of a corporation, right? It’s making sure that there’s representation from the district as part of the Fed structure,” she said.
Richmond Fed leader Jeffrey Lacker also worried making the regional Fed banks pure governmental entities might promote short-term thinking that would lead to bad policy outcomes.
Fed Up worked with former senior Fed staffer Andrew Levin, now a professor at Dartmouth College, on a proposal to make the Fed banks wholly government institutions, as are the central banks in all the major economies. His proposal also would eliminate the regional Fed board director slots reserved for bankers and have all the directors selected in a public process involving the Washington governors and local elected officials.
Mr. Levin said he’s somewhat mystified Fed officials appear to be rejecting almost all the major reform ideas now being debated. They “might not have much influence on the outcome if they wait too long to engage in the debate,” he warned.
Mr. Harker, the Philadelphia Fed president, worried “there are always unintended consequences anytime you make a change.”
But Mr. Barkan countered “it’s true the system could be made worse than it is now, but we think it could be made better.”

Source: Dow Jones