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The Fed: New leader, old complaints

The US Fed has a new, progressive leader - but worries about its opacity and ties to big banks are likely to persist.

Last updated: 02 Feb 2014 13:32
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Janet Yellen recently became the first woman to head the US Federal Reserve. [AP]

"She's the most powerful woman who's ever lived since Cleopatra. Because whatever she says, and how she says it, moves markets, moves mountains, moves business decisions."

John Zindar, an economics professor at New York University's Center for Global Affairs, was describing incoming United States Federal Reserve chairperson Janet Yellen. The position brings with it immense power, and global financial markets hang on every word the chairperson says.

The Federal Reserve, or "Fed", has been the central bank of the US for the past 100 years, and plays a critical role in regulating the banking industry and maintaining the stability of the financial system. It is comprised of a Board of Governors based in Washington, DC, and 12 regional banks throughout the US, each with its own president. The Federal Open Market Committee (FOMC), a committee within the Federal Reserve, establishes monetary policy for the US. 

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Ostensibly an independent governmental agency, the Fed has come under fire for what its detractors say are its cozy relationships with large banking institutions, its lack of transparency, and for not doing enough to avert, and recover from, the financial crisis.

Yellen, who has spent 36 years with the Fed in various roles, was selected by US President Barack Obama to replace Ben Bernanke, and was confirmed by the Senate on January 6. When she officially assumed the post on February 1, Yellen became the 15th person to lead the Fed since its inception, and the first woman. 

"The past six years have been challenging for our nation and difficult for many Americans," Yellen said in her confirmation hearing. "We endured the worst financial crisis and deepest recession since the Great Depression. The effects were severe, but they could have been far worse."

The Fed and the banks 

But others criticise the Fed for failing to spur a stronger recovery. "We do have economic growth, but it is an economic growth that is extremely shallow," said Ann Lee, author of What the US Can Learn from China and a board member at Astor Janssen Partners, a financial services firm in Chicago. "In my opinion, the Fed really did a horrible job in trying to turn around the economy." 

Lee said that while the Fed bailed out the large banks, it didn't ensure that small businesses and individuals had access to the financial support they needed, pointing to a disappointing jobs report released in January. "The Fed's way of restoring the economy is extremely biased toward the banking industry. Their quantitative easing is a way for bankers to make free money," she said, referring to the central bank's bond-buying programme designed to stimulate the economy.

Our central bank is about independent as it can get, compared to banks in every other part of the world.

- John Zindar, economics professor at NYU's Center for Global Affairs

Another common complaint is that the Fed's leadership is too closely entwined with those of big banks. The president of the Federal Reserve Bank of New York, William Dudley, was a former managing director at Goldman Sachs, and was the firm's chief economist. The head of the Philadelphia Fed has served as a consultant to JP Morgan Chase. Atlanta President Dennis Lockhart is an alumnus of both Citigroup and Heller Financial. Dallas President Richard Fisher ran a capital management firm. Stanley Fischer, who will serve as vice chair under Yellen, is a former vice chairman for Citibank, a former governor of the Bank of Israel, and, perhaps most notably, served as PhD adviser for outgoing Fed Chair Ben Bernanke at the Massachusetts Institute of Technology. 

This doesn't concern Zindar. "Sure, there's a little bit too much cosiness between the Fed and the big banking industry, because they're doing business together on a daily basis," he said. Under the law, appointments to the Federal Reserve are supposed to be a "fair representation of the financial, agricultural, industrial, and commercial interests" of the US.

That cosiness won't change with a new presidential or congressional administration. The Fed is designed to operate free from political pressure, independent from the whims of whichever party holds power in Washington. But some, like Steve Hanke - a professor of applied economics at Johns Hopkins University and director of the Troubled Currencies Project at the Cato Institute - says that independence is a myth. 

"By its very nature the Fed, as well as all central banks, have a political component," Hanke told Al Jazeera. "The idea of having central bank independence is bad. They should be open and transparent and explicitly connected to the checks and balances of the political system."

Zindar disagrees. "There may be some political influence, but our central bank is about independent as it can get, compared to banks in every other part of the world. The ECB [European Central Bank] has 28 countries trying to influence it. The Fed has industry."

The Fed is subject to regular audits conducted by the Government Affairs Office, and an outside firm managed by the Office of the Inspector General. It also issues the "Beige Book", a report published eight times a year that provides updates on economic conditions from each bank and its branch directors. The Fed Minutes offer insight into discussions at the FOMC meetings.

"It's not perfect, but it's the closest thing we have to a perfect banking system on the global stage," said Zindar. "The Fed was the only thing that kept the economy from dying because politics alone wouldn't help with fiscal policy." 

Fed staff were unavailable for comment due to the media blackout surrounding the recent meetings.

Transparency

Even so, Hanke faults the Fed for what he called its lack of clarity. "There is very little transparency to what goes on," he said. "You have to have five PhDs to even read the minutes from the open market committee when they come out." 

Lee said that lack of transparency is not an accident. "The Fed was pretty much set up to serve the bankers. The bankers wanted to have a monetary policy that was independent from government, so that was largely what it is," she said. "It's an incredibly powerful lobbying group for the banks dressed up as a policy-oriented group that's nonpartisan. But it serves to benefit the existing players." 

"They have created an oligopoly so the existing rules, laws, and regulations exist to serve these large players at the expense of the other players," said Lee. "The Fed is the keeper of its own gate."

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Source:
Al Jazeera
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