POLITICS

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

A new reform plan tries to make the poorly understood central bank an election-year issue.
What is Hillary Clinton's vision for the Federal Reserve? A new reform proposal released on Monday tries to make the central
What is Hillary Clinton's vision for the Federal Reserve? A new reform proposal released on Monday tries to make the central bank a presidential election issue.
  • 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.

The Federal Reserve Board of Governors declined to comment on the new plan, but chairwoman Janet Yellen has opposed past effo
The Federal Reserve Board of Governors declined to comment on the new plan, but chairwoman Janet Yellen has opposed past efforts to audit the Fed.

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.

Sen. Bernie Sanders (I-Vt.) has released his own plan to make the Fed more accountable to the public. His campaign expressed
Sen. Bernie Sanders (I-Vt.) has released his own plan to make the Fed more accountable to the public. His campaign expressed support for the spirit of Fed Up's reform proposal.

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 below 4 percent.

Ady Barkan, Fed Up’s campaign director, said that the coalition had invited all five presidential candidates to join the press call, but only Sanders' campaign had agreed to participate.

Hillary Clinton’s campaign did not respond to a HuffPost request for comment on Fed Up’s proposal, nor did the remaining Republican presidential candidates Sen. Ted Cruz (R-Texas), Ohio Gov. John Kasich (R) and Donald Trump.

Getting Democratic politicians, in particular, to make the Fed a policy cause could prove a difficult task for a number of reasons.

In recent years, Fed reform has tended to be the province of conservative lawmakers eager to rein in the Fed’s unprecedented efforts to aid financial institutions and stimulate economic demand in the wake of the 2008 financial crisis. Democrats have cast themselves as defenders of the Fed in those circumstances, since the central bank’s actions were viewed as crucial to the recovery.

It doesn't help matters that the Fed is an issue that's simply not on the public’s radar.

And there is also the risk of being seen as breaching protocol by commenting on an independent, nonpartisan institution.

“I don’t think many voters understand enough to care about it,” Ari Rabin-Havt, a progressive radio host and onetime aide to Democratic Senate Minority Leader Harry Reid (D-Nev.), said in an interview earlier this month. “The people who do care about it somewhat, view it as a ‘temple.’”

If the economy starts to weaken again, we cannot trust Congress to act. Mike Konczal, Roosevelt Institute

But economists and policy experts argue that it would be a mistake for Democrats to ignore the Fed. “Central banks became and still are the only game in town” when governments want to boost economic demand and employment, according a column by New York University economist Nouriel Roubini. That's partly as a result of the ideological backlash across the developed world against using public spending as a fiscal stimulus, and the delayed effect of other reforms. 

And the Fed is especially important in the American context, because the government is likely to remain divided regardless of who wins the presidency, narrowing the possibilities of ameliorative fiscal measures.

“If the economy starts to weaken again, we cannot trust Congress to act,” Mike Konczal, a fellow at the Roosevelt Institute, said earlier this month. “We will need a Fed that is ahead of the curve.”

Short of embracing reforms to the Federal Reserve’s governance, Democrats could make a bigger issue out of the two empty Fed governor seats. President Barack Obama named nominees for the positions many months ago, but Senate Republicans have failed to give them hearings.

Tim Duy, an economist at the University of Oregon, said he is “wary” of the candidates even articulating what kind of people they would nominate to the Fed Board of Governors lest they jeopardize the central bank’s independence. But he said calling for filling the empty governor seats is fair game.

“I would like [the presidential candidates] to at least say that we should have a Fed at full power, because that’s what makes for effective monetary policy,” Duy said earlier this month. “That should be a priority for Democrats and Republicans.”

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