Politicizing the Fed
Congress seeks more control over the 12 regional banks.
JUNE 14, 2010.
http://online.wsj.com/article/SB1000142 ... NewsSecond
For 97 years the 12 regional banks of the Federal Reserve system have operated relatively free of political interference from Washington. The looming financial reform bill threatens that independence, not least through an effort to impose new presidential appointees at the regional banks.
The biggest underreported threat comes from Subtitle I, Section 1801 of the House financial reform bill titled "Inclusion of Minorities and Women; Diversity in Agency Workforce." Sponsored by California Democrat Maxine Waters, the provision requires each federal financial agency, the Fed Board of Governors and the 12 regional Fed banks to "establish an Office of Minority and Women Inclusion."
So what else is new, you say? Don't the feds already dictate racial and gender hiring? Yes, they do, through the Equal Employment Opportunity Commission and assorted other federal laws. As a matter of racial and gender diversity, the Waters provision is at best redundant.
But Ms. Waters and the House are hunting bigger game—to wit, the political allocation of credit. They want to put a network of operatives at the highest level of government who are responsible for making sure that regulators put the hiring of, and lending to, minorities at the top of their priority list. The House provision makes that very clear by making each diversity officer a Presidential appointee who must be confirmed by the Senate. The post, says the bill, will be "comparable to that of other senior level staff."
The law says this diversity czar will "ensure equal employment opportunity and the racial, ethnic and gender diversity" of the work force and senior management of these institutions. More ominously, this creature of Congress and the White House will also be charged with "increas[ing] the participation of minority-owned and women-owned businesses in the programs and contracts" of each agency and conducting "an assessment" of stated inclusion goals.
Mull over that one for a minute. Having recently lived through a financial mania and panic caused in part by political pressure for "affordable housing," Congress will now order regulators to allocate credit by race and gender. Isn't the point of this financial reform supposed to be to make regulators better judges of systemic risks, which means focusing on financial safety and soundness? If the Waters provision passes, federal regulators will have to put racial and gender lending at the top of their watch list when they do their checks on the banks and hedge funds they are regulating.
This is especially pernicious at the Fed regional banks, which have long operated independently of political intrusion. Federal Reserve bank presidents aren't appointed by the President precisely to avoid Treasury and White House control. They are appointed by their regional bank boards.
However, in another threat to Fed independence, the Senate bill departs from that tradition by making the president of the New York Fed a Presidential appointee. Blame for this Congressional intrusion goes to Treasury Secretary Tim Geithner and former Goldman Sachs executive Stephen Friedman for orchestrating the selection of former Goldman economist William Dudley as Mr. Geithner's replacement at the New York Fed.
Mr. Friedman chaired the search committee to replace Mr. Geithner even as he increased his ownership of Goldman shares. Though this violated Fed rules, Fed Vice Chairman Donald Kohn and the Board of Governors gave Mr. Friedman a conflict-of-interest waiver. Congress has now seized on this to justify putting the New York Fed chief on a Washington political leash.
The Waters provision will also give Congress and the White House a new and powerful lever to influence the operation of the 12 regional Fed banks. Accusations of racial or gender indifference, much less outright bias, are politically deadly. With the threat of such an accusation in their holster, the Waters czars will have enormous clout to influence Fed governance and regulatory decisions, perhaps including monetary policy.
Fed regional presidents are often the main proponents of tight monetary policy. The presence of a diversity czar is one way Congress and the White House can intimidate these regional presidents to go along with the policies they favor. No Fed bank president will want to take the risk of being hauled before Congress to answer a report that the banks under his jurisdiction aren't racially or gender sensitive enough in their lending.
This political sway is already clear from how meekly the Fed as an institution is bowing to the Waters provision. The Senate bill doesn't have the same provision, so it could be removed in the House-Senate conference that begins this week. But we're told that Fed officials in Washington have told the regional banks to keep quiet because it can't be stopped and Ms. Waters and the House might punish them if they try. In other words, the political intimidation is already obvious even before the provision becomes law.
The public debate over Fed independence has focused on Congressional demands for an audit, but that's benign compared to the threat of political appointees sitting on the senior staff of the regional banks and Board of Governors. While masquerading as reform, the Waters and New York Fed provisions are the most brazen attempt to hijack central bank policy since its founding nearly a century ago.
The law will make it harder for regulators to do what ought to be their main job, which is making sure that they don't again let a credit mania run out of control. It's one more way in which this much vaunted reform will make the financial system even more politicized, and thus more vulnerable to another panic.
