What The Federal Reserve Would Look Like If Progressives Had Their Way

By Daniel Marans

  • A new progressive proposal for reforming the Federal Reserve would turn the central bank into an entirely public institution.

  • Reform advocates argue that the Fed’s regional banks are too beholden to financial institutions.

  • The plan’s release is timed to spark discussion among presidential candidates, but only Bernie Sanders’ campaign responded positively to it.

The progressive Fed Up coalition released an ambitious Federal Reserve reform plan on Monday designed to increase discussion of Fed policy in the presidential campaign.

The reforms, which would require the passage of new legislation, would turn the Federal Reserve into a public entity akin to other federal agencies, with the goal of dramatically increasing the accountability of the world’s most powerful financial body.

Currently, the 12 regional Federal Reserve banks are owned by private commercial banks. As a result, financial executives dominate the regional Fed banks’ boards of directors, giving them an outsized role in key decisions like the selection of the banks’ influential presidents.

Four of the current presidents are alumni of Wall Street titan Goldman Sachs.

Fed Up and other progressives argue that the present governance structure undermines the Fed’s role as a regulator of the country’s financial institutions. These critics also argue that the influence of big banks tends to make Fed officials more sensitive to concerns about inflation, even as they hear little from ordinary workers affected by nominal changes in the unemployment rate.

It should be amazing for people in the public that banks actually own shares in the Fed.
Andrew Levin, Dartmouth College

Andrew Levin, a Dartmouth economist and former adviser to the Fed chair, who authored the proposal, said on a call with reporters that the changes would bring the Fed’s structure into line with major central banks in other countries. He mocked the plain conflict of interest inherent in giving the financial industry so much power over an institution charged with regulating it.

“It should be amazing for people in the public that banks actually own shares in the Fed. A lot of people would be shocked to hear that,” Levin said.

“It would be like if lawyers owned shares in the FBI,” he added.

In the new system Levin devised, the selection process of the regional banks’ directors would be supervised by the Washington-based Federal Reserve Board of Governors, with involvement from individual governors and members of Congress in the relevant Fed bank’s jurisdiction. The majority of each bank’s directors would need to come from small businesses and nonprofits. These more diverse boards, in turn, would have to make public their process for selecting a bank president.

Members of the Fed Board of Governors, unlike the regional Fed banks, are appointed by the president and confirmed by the Senate, which is one reason why Fed reform advocates consider them more accountable to the public.

Levin and Fed Up made clear that they view the new governance structure as a way of generating greater ethnic and racial diversity among Fed officials as well. Levin noted that in the Fed’s existence of more than a century, not one of the regional Fed presidents has been African American.

Levin called the statistic “clear evidence that something is broken.”

In making the Fed a public institution, the modified system envisioned by Levin would subject the regional Fed banks to the Freedom of Information Act and the oversight of the Fed Board of Governors’ inspector general.

The entire Fed, including the Fed Board of Governors, would also undergo an annual review by the Government Accountability Office, a government body tasked with evaluating the efficacy and accountability of federal agencies.

In addition, Levin’s plan changes the terms of both regional Fed bank presidents and Fed governors to seven years. Currently, regional Fed presidents serve for five years, and can be reappointed to a second term — which almost always occurs, thanks to a process that Levin and Fed Up say is typically no more than a formality. Fed Board governors now serve 14-year terms.

The Federal Reserve Board of Governors declined to comment on the reform plan. But Fed chair Janet Yellen has condemned legislation in the past that would audit the Fed’s finances, claiming it would “politicize” the institution’s decisionmaking. Yellen’s stance suggests she would likely oppose the even broader GAO review.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who was a top economist at the Fed for many years, said of the reform plan that he is “more concerned that there are already too many limits on the Fed’s power to help the economy.”

Gagnon nonetheless said he views most of the new proposals favorably. His biggest specific objection is to the plan’s seven-year term limits, which he worries would open the Fed up to more political pressure by allowing a single president to decide its makeup.

The rollout of the Fed Up-backed proposal is timed — and packaged — to encourage presidential candidates to speak out. The coalition sent out model questions for the candidates to accompany the release of the reform proposal.

“It is important that we have a president who sees the need for sensible, pragmatic, nonpartisan reforms that will put the Fed on a path to serve the public for the next hundred years,” Levin said.

Warren Gunnels, top policy adviser for Sen. Bernie Sanders (I-Vt.), joined the call to express support for the spirit of Fed Up’s proposed reforms.

Sanders “believes we need to structurally reform the Fed so that it is a democratic institution that is responsive to ordinary Americans not just CEOs on Wall Street,” Gunnels said.

Gunnels would not say if Sanders endorsed the proposal, however, claiming the senator needed more time to review it.

He instead pointed to the Federal Reserve platform Sanders laid out in a Dec. 23 New York Times op-ed. In the column, Sanders says he would bar financial industry executives from serving on the boards of regional Fed banks altogether, make Fed assistance to banks contingent on concrete measures of service to the public, such as lending to low-income workers, and preclude the Fed from raising its benchmark interest rate until unemployment is …read more

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