Tuesday, April 26, 2011

The Future of the Federal Reserve

Frank Pasquale

The Roosevelt Institute will be hosting an event on the Future of the Federal Reserve tomorrow. They've got an extraordinary lineup of speakers, including Joe Stiglitz, Mike Konczal, Matt Yglesias, and law prof Tim Canova, who's done very interesting work on central bank independence and Fed history. The conference could not be more topical, given a number of recent developments:

1) Shahien Nasiripour has reported that "newly-released study from the Congressional Research Service bolsters claims that the nation's largest banks profited off the Federal Reserve's financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates." Nasiripour has repeatedly broken important news about unaccountable Fed and Treasury behavior. Though this article does not indicate the term of the banks' loans back to the government, it does raise troubling questions about the role of Fed policy in propping up balance sheets.

2) Tomorrrow is also the first press conference for a Federal Reserve Chairman. As Yves Smith notes, "It’s remarkable that an official widely described as 'the second most powerful person in America' has managed to sidestep basic measures of accountability to the public and transparency like this for so long." I hope someone asks her proposed question for Bernanke:

Given the extraordinary level of support extended to major banks during the crisis and now, via measures like super low interest rates and continued regulatory forbearance, why does the Fed continue to maintain the fiction that they are private companies? Why doesn’t the Fed treat them as humble utilities and regulate them accordingly?

3) A recent study by Renée B. Adams has documented that the Fed's "banking representatives are more likely to be chosen from large banks," and "the average stock price reaction to the appointment of a firm’s officer to a Reserve Bank board is positive only for banks." It is part of a line of work that examines the extent of regulatory capture at the Fed, as Adams explains:

The Federal Reserve played an important role in responding to the current financial crisis (see e.g. Allen and Carletti 2010). It may play an even more important role in future crises, because the Dodd-Frank Act of 2010 expands the supervisory powers of the Fed. However, some argue[] that the Fed’s response to the crisis was tainted by conflicts of interest. Kelly and Hilsenrath (2009) and Hilsenrath and Fitzpatrick (2010) singled out the Federal Reserve Bank of New York and its relationship with Goldman Sachs in particular. Because of the criticism the Fed received, Section 1109 of the Dodd-Frank Act specifies that the Government Accountability Office must conduct a review of the Fed’s governance.

I hope those at the GAO conducting that review will listen to the excellent panelists at the Roosevelt Institute conference. (The event will be recorded so that those unable to attend the conference can view the panels at their leisure.)

X-Posted: Concurring Opinions.

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