The Board of Governors of the Federal Reserve was created to represent the economic sectors and portions of our population most directly affected by the central bank's actions. Instead it's comprised almost entirely of economists and lawyers who are associated with Northeastern institutions and the Washington, D.C., political class.
With the current vacancies on the Board, President Obama has a chance to change that. He has an opportunity to shift the Fed's direction in a way that would be both economically transformative and politically popular. He has an opportunity to make the central bank an institution which reflects and serves the people who created it.
It's also what the law requires.
A Nonrepresentative Board
As the Federal Reserve's website notes:
"By law, the (Board of Governors) appointments must yield a 'fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country,' and no two Governors may come from the same Federal Reserve District."
How's that working out so far? Of the five current members, three are economists and two are lawyers. The attorneys served as officials in the Clinton and Bush Treasury Departments, respectively, while the economists are monetary experts. Four of the five appear to come from the Northeast, according to their personal biographies, while one was raised abroad.
This is not intended to slight either the Northeast or the professions of economics and law. But the fact remains that this is not a representational group of Governors. Its members do not reflect the diverse interests called for by law.
Three nominations await Senate action. Economist Stanley Fischer is already serving on the board but is awaiting confirmation to become Vice Chair. One of the other economists on the board, Jerome Powell, was re-nominated by President Obama at the end of his term but is also awaiting Senate confirmation. So is a new Obama appointee to the Board, Lael Brainerd, a former Treasury Department official and current professor of Applied Economics.
Another board member is leaving in May, which means that altogether President Obama has two more appointments to make. That's where he can make history.
Board Chair Janet Yellen has indicated she'd like to see a community banker nominated for one of those two slots. This is a common-sense move which bodes well for her recent appointment. It's also an idea which could help meet the geographic requirements of the Federal Reserve Act, since the community banker could be chosen from anyone of the Fed's twelve regions.
The White House has hinted it will comply with Yellen's proposal. Meanwhile, David Dayen reported in The New Republic that "multiple sources" told him Obama was considering former Treasury Department official Michael Barr for the remaining position. As Dayen observed, that was "unwelcome news to financial reformers, who see Barr as a leading architect of previous administration policies that were too lenient on the banking sector."
We can independently confirm that this view is common in the financial-reform community.
This particular candidates confirmation would have needed to pass a high, er, bar. Barr's record is unpopular with some key Senate Democrats, including Senators Elizabeth Warren and Jeff Merkley, and any appointee with close ties to the Obama administration will inevitably be unpopular with Republicans.
Dayen reports that Barr took himself out of the running the day after he reported this story, and suggests that financial reform advocates wield increasing power in Washington. No further information is available about the seriousness of the White House's interest in Barr, or whether this was merely a trial balloon on someone's part.
Here's where Barr fits on that "fair representation" scale: Lawyer. Educated at Yale, a Northeastern Ivy League school. Former Treasury Department official.
He would not have been a transformative choice.
The appointment of a community banker would serve to assuage the concerns of the nearly 7,000 smaller banks (with assets of less than $10 billion) who reportedly feel underrepresented and underserved by the current Fed.
But the President has yet to name a nominee for the community banker's seat, and he has one additional appointment to make. Who should he choose? Ideally, his nominees should reflect the spirit as well as the letter of the law, so let's consider that spirit for a moment.
When Congress created the Federal Reserve, it directed the president to emphasize "agricultural, industrial, and commercial interests" because those were the sectors of the economy which were most affected by banking policy. Roughly thirty percent of the American people lived on family farms in the first decade of the Fed's existence, and the financial panic of 1907 was still a vivid memory for the nation's farmers.
That made the inclusion of agricultural interests perfectly reasonable. Organized labor had not reached the levels of influence it was to achieve later in the twentieth century. Consumer loans were not nearly as prevalent as they are today, in an age when student debt alone exceeds $1 trillion. But today workers and banking consumers are the underrepresented population whose concerns should be reflected at the Federal Reserve.
The president's remaining Fed appointments -- presumably of one community banker and one other governor -- can therefore serve the following "fair representation" goals:
- They can serve to acknowledge that the president has a statutory requirement to consider geographic diversity when making appointments to the Board of Governors.
- They can reflect the fact that the Fed Board should not be restricted to economists, lawyers and bankers.
- They can reflect the new diversity of America's economic population, with an emphasis on consumers, communities, and concepts of diversity that are broader than merely geographic: by socioeconomic status, for example.
Where to Look
But where can the president find potential candidates who might meet these requirements?
Advocates for banking consumers and homeowners could fill the role once played by representatives of family farmers. Labor representatives also have a critical role to play, since the Fed has the dual mandate of managing inflation and keeping unemployment low -- and it's been neglecting the latter part of its duties.
As for commercial and industrial interests, large corporations already have substantial Fed representation at the regional level. The boards of the Fed's 12 regional branches are dominated by large corporate interests, together with large banking concerns. (Out of 250 regional board members I reviewed in 2012, only three represented working Americans.) Suffice it to say that commercial interests don't lack for representation in the Federal Reserve.
It would be wise, therefore, to focus instead on the small and mid-sized businesses that are the engines of job creation in this country. Board representation for these economic interests, for whom lending has been slow to resume since 2008, would be a smart move. The president could begin his search by looking for strategic thinkers who represent American manufacturing and/or small businesses.
The People's Fed
Will he appoint anybody from one of these groups? Based on past experience, it's not likely. And reports that Obama has considered appointing a former banking industry lobbyist are not exactly encouraging.
But the public should be calling for these transformative appointments anyway. It should be demanding a Federal Reserve which more closely reflects the people who created it. It should be demanding a Fed which takes its employment responsibilities seriously and holds banks accountable for serving consumers honestly and effectively. These demands should be reflected in calls to change the composition of regional bank boards, as well as the Board of Governors, so that the bank becomes a more democratically-governed institution.
The call for a "people's Fed" should become part of a broader movement for meaningful economic reform, a movement which is needed to end the threat of growing inequality and restore the American dream. Besides, a representative Fed board isn't just good policy; it's the law.