by Daniel Schneider
Less than a week ago, the Government Accountability Office (GAO) released a report highlighting major issues that the Federal Reserve will need to tackle in order to stem potential conflicts of interest and regain the public’s confidence.
The study of the Reserve’s internal governance and decision-making processes was commissioned as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The 127-page report details the workings of the Federal Reserve at both the National and Regional levels, explaining how each Reserve Bank’s Board of Directors is chosen and how these choices impact the organization as a whole.
In the report great emphasis is placed on public confidence. Much like the economy – an abstraction of billions of financial transactions – the Federal Reserve’s viability as an organization is largely linked to the people’s fundamental belief that it works. The Federal Reserve Administrative Manual (FRAM) explicitly states that directors on each Reserve Bank’s board should “avoid any action that might result in or create the appearance of affecting adversely the confidence of the public in the integrity of the Federal Reserve System”. Whether or not one believes that our government cares about the average citizen, it certainly understands that people’s faith is essential to the market’s functioning.
The GAO recommended that the Fed focus on three major points:
1) Enhance the diversity of the Reserve Bank boards.
2) Strengthen policies for managing conflicts of interest.
3) Increase transparency.
Each of twelve Regional Reserve Banks has a nine-person board of directors. The three Class A board members are representatives of the national banks, whose livelihood is most directly affected by the monetary policy set by the Fed. Class B board members are representatives of other industries, from Agriculture to Food Service to Manufacturing. These members are selected by Class A board members, meaning that the representatives of national banks also choose three additional board members. Class C board members are, in theory, meant to represent the public’s interests and are appointed by the Federal Reserve Board of Governors. There is also a board president, chosen through a vote by Class B and C members of the board.
Reviewing the structure of the board reveals a disturbing amount of power given to the member banks. Not only do they elect their three Class A members to the board, but they are allowed to hand-pick the board’s Class B members, as well.
This means that two-thirds of all Reserve Bank board positions are selected by national banks, banks which need to be large enough to even fall under the purview of the Federal Reserve. And since Class B board members have a say in choosing the board President, banks also select one-half of the people who will vote for or against potential candidates.
The GAO uncovered a grave lack of diversity on the Reserve boards, both in terms of gender equality and minority representation. Out of 108 director positions, only 13 were held by minorities in 2006, with a slight jump to 15 of 108 by 2010. “In 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women.”
The GAO report also reveals a lack of general transparency at the Federal Reserve, particularly in the areas of performance review and how members are chosen to serve on the Reserve Board. It is known, however, that “of the 108 directors serving in 2010, 82 were the president or CEO of their company.” This means that an average of 80 percent were CEOs, most coming from major corporations. The board of the Federal Reserve Bank of New York, for instance, hosts the CEOs of Loew’s, the movie theatre chain, and Macy’s, the department store. That’s in addition to the three CEOs which came straight from the banking industry, including former JP Morgan CEO Jamie Dimon.
So the Reserve board is mostly made up of not just white men, but wealthy white men. This raises questions about the Fed’s policy of having the three Class C members of each board representing the people’s interests.
Add the influence that national banks have on the Fed’s Board of Directors), and the picture becomes painfully clear: the Federal Reserve’s Reserve Bank boards are largely made up of white, male, corporate CEOs chosen by banking industry professionals.
To what extent do these boards control Fed policy? The board has the power to “make recommendations”, but it’s hard to tell from the report, which states that “Reserve Banks lack transparency in their governance practices”. This to what extent the board has a say in developing and executing monetary policy.
In truth, until more is uncovered, it will remain unclear exactly how the makeup of the boards affect monetary policy. Fortunately, the Dodd-Frank Wall Street Reform Act does not end with this study. There will be more reports in the coming years, and hopefully a great deal of light will be shed on this complicated relationship between our central bank and the commercial banks it is supposed to regulate.
Read the Government Accountability Office’s full report on the Fed’s governance, which is posted on Senator Bernie Sanders’ website: http://sanders.senate.gov/imo/media/doc/d1218%20%282%29.pdf