With Republicans in Congress unwilling to pass President Obama’s jobs bill, many believe that the Federal Reserve is the only institution left that can lift the economy out of its seemingly perpetual slump.
That has led to the normally quite secretive Federal Reserve, the nation’s most important economic institution, coming under increased scrutiny. This in turn means that the question of who leads the Fed is growing more important.
A new report has revealed that an overwhelming majority of the Fed’s leadership is made up of executives from banks and private corporations, confirming previous American Independent reporting. The report, from the Government Accountability Office (GAO), looked at the membership of the boards of directors of the 12 regional Federal Reserve banks.
Using a voluntary survey of the currently serving directors, the GAO found that over three-quarters of the regional Federal Reserve directors are the president or CEO of the company they work for. Of the directors that have served from 2006 through 2010, only six represented labor and five represented consumers, while 56 represented commerce or industry interests, and 73 represented banking interests.
The report recommends extending director recruitment efforts beyond the senior executive level: “To the extent that director searches are limited to chief-level executives, the Reserve Banks not only limit the diversity of the pool of potential candidates but also risk limiting the perspectives shared about the economy in the formation of monetary policy.”
Federal Reserve Chair Ben Bernanke said in an official response to the report that the Fed has “has already broadened the pool of candidates for these positions to consider qualified candidates who are not chief executives.”
Sen. Bernie Sanders (I-Vt.), who requested the report as part of the Dodd-Frank financial regulatory reform law, called the financial sector’s influence over Fed leadership “unacceptable.”
“Not only do they run the banks,” said Sanders in a statement, “They run the institutions that regulate the banks.”
“Recruiting consumer and labor representatives is a challenge”
The Federal Reserve System is comprised of the central bank in Washington, D.C. and 12 regional Federal Reserve banks. These are charged with carrying out policy dictated by the Federal Reserve guiding committee, the Federal Open Market Committee (FOMC), which in turn is required by Congress to craft policy keeping unemployment low and prices stable. The presidents of the regional Feds, which are selected by the boards of directors, also rotate through five of the twelve voting seats on the FOMC.
Each board consists of nine members: six members are selected by the member banks of the Federal Reserve, and three are selected by the national Federal Reserve Board in Washington. “Class A” members of the regional Fed boards are selected by banks that participate in the Federal Reserve to represent their interests, and are usually commercial bank officials.
The Federal Reserve Act requires that the other 6 directors of each board, 3 “Class B” members appointed by the member banks and 3 Class C members appointed by the national Board, “represent the public” and be “elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.”
But Fed officials told the GAO that “they generally focus their search on senior executives… usually CEOs or presidents.” Officials also told the GAO that “having senior executives on the board of directors helps elevate the stature of the board” and that senior executives “may have a broader view of how their industry is being affected by the economy.”
Despite the fact that Class B and Class C directors aren’t allowed to have ties to the banking industry while serving on the board, the GAO report found that “at least 56 percent [of the surveyed directors] have had some financial industry experience.”
The GAO cited a 2010 memo from the Federal Reserve Board that said recruiting representatives of organized labor and consumers to serve on the regional Fed boards was a “high priority.” But two Fed officials told the GAO that “recruiting consumer and labor representatives is a challenge because many of them are politically active,” and the Board’s policy restricts a director’s political activity.
It’s unclear how the national Board defines “political activity”. TAI’s previous reporting has shown many of the directors have donated generously to political campaigns. And the political activities of at least one director, JPMorgan CEO Jamie Dimon, are regularly the target of speculation by the national media, given his close relationship with the Obama administration and his recent meetings with Republican candidate former Massachusetts Gov. Mitt Romney.
Using data from the Equal Opportunity Employment Commission, the GAO compared the demographics of the Fed board directors with the demographics of “executive and senior level officials and managers” of firms with more than 100 employees, and found that they were quite similar.
Women and racial minorities are extremely underrepresented on the boards: In 2010, 15 of the 108 directors were minorities, and 18 were women. Despite officials telling the GAO that “Class B and Class C directors are a source of demographic diversity on Reserve Bank boards,” only 32 of the 202 Class B and C directors since 2006 have been women, and 23 have been minorities.
The education level of the directors is also unrepresentative: An “overwhelmingly majority” of the directors have a bachelors’ degree, and at least 55 percent have some type of advanced degree.
The GAO found that the selection process relies heavily on personal networking, with many directors selected after a personal recommendation from a current or previously serving director. 86 out of the 91 surveyed directors in 2010 serve on some other board of a for-profit or non-profit company.
One official told the GAO that “they look for candidates in a variety of industry lists such as a Forbes’ magazine list of the most powerful women in business,” while other directors have pursued the job by reaching out to the Fed staff themselves.
“The appearance of conflict of interest”
Fed watchers have noted that regional Fed presidents, selected by the boards of directors, tend to have the most conservative voting records on the FOMC when considering whether to use extraordinary measures to reduce unemployment. Reuters recently rated FOMC members and Fed presidents on their aversion to further stimulating the economy, and found that the most hawkish or anti-stimulus members of the Committee were all regional Fed presidents.
The importance of diversity in the country’s most important economic institution can be seen in the unemployment statistics: While the unemployment rate for people with at least a bachelor’s degree was 4.2 percent in September, for those with only a high school diploma it was 9.7 percent. For whites, the unemployment rate is 8 percent, but for Hispanics it’s 11.3 percent and for African-Americans it’s 16 percent.
Rep. Barney Frank (D-Mass.), the Ranking Member of the U.S. House Financial Services Committee, has proposed eliminating the voting power of the regional presidents. Frank says that all of the voting members of the FOMC should be directly appointed by the president and confirmed by Congress, rather than selected by boards made up of business leaders.
The GAO appears to agree, at least in part, with Frank: “The statutory requirement for three classes of directors was intended to provide representation of both stockholding banks and the public… However, the existence of Class A and to a lesser extent Class B directors on the boards creates an appearance of a conflict of interest, particularly in matters involving supervision and regulation.”
This became especially apparent during the recent financial crisis, when the Fed created multiple emergency programs that provided direct financial support to the country’s largest banks.
The report found no instance of a director being directly involved with the supervision of a program that benefited his or her banking institution. Nevertheless, the GAO recommended that any waivers granted to directors in the event of a conflict of interest be made public.Tags: barney frank, bernie sanders, federal reserve, FOMC, GAO, inflation, Jamie Dimon, unemployment