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This Is Uncomfortable

Episode 19: Instrument of sabotage

Oct 17, 2019

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Make Me Smart with Kai and Molly

A fully public Fed?

Aug 26, 2016
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A view of the Federal Reserve Bank of St. Louis, one of the 12 regional Reserve Banks.
Matthew Black/Flickr

The Fed is an odd bird.  The headquarters in D.C. is a federal agency, the regional branches are not. You can even tell by the email addresses. Headquarters’ addresses usually end in .gov, regional Fed addresses end in .org. 

“The 12 regional banks are private institutions owned by the commercial banks ,” said Andrew Levin, professor of economics at Dartmouth.

“Own” is used somewhat technically here; the Fed objects to the use of the term. Commercial banks do own shares of the regional Fed banks, but they’re required to by statute, and they can’t buy and sell these shares like one would be able to do for a normal bank.

Definitions aside, the member banks do participate in the running of the regional banks.  They get to choose six out of the nine board members of each regional Fed bank. Commercial banks choose three out of the six regional board members that get to nominate regional bank presidents, who go on to have a say in monetary policy.  (The three board members not chosen by banks are chosen by the presidentially appointed Board of Governors in D.C.)

Levin does not like this; he and other economists want everything at the Fed to be federally run, what he calls “fully public,” and to be subject to the same transparency as most other federal agencies.  

Levin would like to see regularly scheduled U.S. Government Accountability Office reviews of the Fed’s operations and management, beyond the audits that currently take place.

“Given that the Fed is making crucial public decisions, the directors of each regional Federal Reserve Bank should be public officials where the public is choosing who these people are,” Levin said.  He pointed out that this is how the Central Banks of Japan, Canada and England all do it.

“The Federal Reserve is the only major central bank in the world that is owned by commercial banks,” he said.

The idea has gotten traction on the left. Presidential nominee Hillary Clinton has been sympathetic to the basic idea and the Democratic Party platform includes calls for the removal of bank representatives from regional Fed bank boards. 

“It sounds interesting; I think it’s all wrong,” said Robert Barbera, co-director of the Johns Hopkins Center for Financial Economics. Commercial banks, he said, don’t actually have a much direct influence. 

Dodd-Frank bars bank executives or direct representatives from participating in the nomination of regional Fed presidents, and regional Fed banks have no role in regulating commercial banks.  The (federally appointed) Board of Governors in D.C. isn’t required to abide by the nominations in selecting regional bank presidents.

“I just don’t buy the notion that there’s been a meaningful bias away from the best interests of the country because of the Fed’s construct,” Barbera said.

He said if you compare the Fed to fully public central banks, it’s actually had easier monetary policy, favoring borrowers over lenders. Otherwise put, he said, less on the side of banks.

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