The emotion is running high. In keeping the conversation to argue with rationality, relevent to current situation for problem-solving, backed with evidence, our hope is that we can bring more consensuses together, and to a minimum degree, we can reduce unnecessary confusion and conflicts. The issues we are having is interdisciplinary in nature, and globalization in scope, no one is possible to grasp all the details and technicality of the dispute, that is why we have to spend a lot of energy research to bring in many experts in different field for the purpose of applicable constructive debate and for the bigger picture grasping. Let’s continue:
Issue#4. The Persistent Trust Deficit – The loss of institutional credibility is part of a more generalized erosion of trust in politicians and the “system” as a whole.
Institutional credibility is crucial to generating and maintaining economic prosperity. Indeed, it is often the most important factor that differentiates stable mature economies from volatile and unpredictable ones. It is difficult to explain to the general public how governments and central banks stood by and allowed irresponsible financial risk taking to top into a crisis and subsequent prolonged mediocrity. It is even harder to explain why they then bailed out banks with trillions of dollars; these were the very entities that many regard as the perpetrators of the crisis. And it is virtually impossible to defend the fact that so few bankers have been punished for their irresponsible behaviors.
Delving further into Mohamed El-Erian’s point, if money is the cash capital then trust is the social capital. Without trust, social contract cannot maintain. And that is the degree of decay our society is facing. Today, it is not an exaggeration to say that in the popular imagination and in fact, the Federal Reserve sits atop the global financial system and, indeed, the global economy, in a way that no institution has ever one before. In the book The Power and Independence of Federal Reserve, author Peter Conti-Brown argued that to understand the unique place the Fed occupies at the intersection of financial markets and the US government requires a dive into the very meaning of this curious intellectual and institutional construction: Federal Reserve independence. The problem is that the Fed Reserve is one of the most organizationally complex entities in the Federal government, with some of the most varied missions to accomplish tucked inside. In the word of Walter Bagehot, the intellectual godfather of modern central banking, it is our duty to “examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.”
Federal Reserve evolved into its current form of arcane, complicated, bureaucratic jumble through three founding: the Federal Reserve Act of 1913, the banking act of 1935 and in an informal agreement in 1951 called the Fed-Treasury Accord. Investigating how the Fed influences the is influenced by ideologies, personalities, law and history, Conti-Brown demonstrated that the mission of Fed requires a reevaluation of the very way the nation’s central bank is structured.
The Banking Act of 1935 deposited the prestige in the public appointees this seven-person committee called Board of Governors– one of who to be designated as chair – the authority of the Federal Reserve System. The legal authority of the Federal Reserve system is not deposited in individuals, but two overlapping committees: the Board of Governors (for regulatory authority) and the federal Open Market Committee (for monetary authority). But in practice, Peter Conti-Brown explained, the authority of the Fed is concentrated in the hands of a single individual, as in the case of Chair Greenspan.
To get a better sense of the legal story of the chair’s primacy – or lack thereof – it’s useful to compare it to another prominent committee of experts that presides over a significant portion of the American democracy: the U.S. Supreme Court. In Supreme Court system, all nine justices vote to choose the cases the court will decide; they all hear oral arguments and question the litigants’ lawyers; they all vote on those cases’ dispositions; and then they all write and sign majority,, concurring, and dissenting opinions. Structurally, there is not much of a difference between the court and the board, and FOMC. The justices each have one vote, just as the governors or members of the FOMC do. If he chief justice wants his view of a case to prevail, the votes of four colleagues must be gained through reason, not will. The same is true for any other justice. As a result of this formal and practical equality, associate justices are rightly viewed as important figures in our democracy with significant power over the lives of people in it. Unlike that at the Supreme Court – of near unanimity on board and FOMC decisions, even with the most controversial of decisions, the board and FOMD usually speaks through the voice of the chair.
This make the Board of Directors a sort of “semi-trustees” for the nation, shouldn’t we make them real trustees, and with a good trust deed? The legal architecture exists for governors to influence Fed policy, but it does not so obvious exist in practice. Fed is an institution of institutions, the chair has come to dominate it in the public attention, but such dominance is required neither by law nor by practice.The law of the Fed governance and its practice are often at cross-purpose. This is inconsistent with the Federal Reserve Act.
To make things more complicated, the Federal Reserve is “double government” by economists and the lawyers. Take the example of 2008 Lehman Brothers’ bankruptcy. That decision was made by the Federal Reserve. Much has been said about this fateful decision, about the economic consequences, about the political pressures surrounding the decision, about the changes to the world economic order that it has meant. But for purposes of understanding the Fed’s internal governance, there is another important aspect to this decision: according to Fed Chair Ben Bernanke and others, the Lehman decision wasn’t based on economics or politics and wasn’t even a decision made by the Fed chair. Lehman Brothers’ bankruptcy, these insiders claim, a legal decision made by Fed lawyers. What this illustrated is that the Fed’s policy-making space is influenced not only by its senior leadership, such as the chair or the governors. Here are many other hands on the Fed’s tiller.
At the Board of Governors in Washington, D.C., there is a select group of economists that profoundly influences the Fed’s entire policy-making apparatus. They are the heads of the Fed’s chief divisions: Monetary Affairs, Research and Statistics, and International Finance. These senior economists aren’t mere adjuncts to the Fed, with together senior staffers, these agency is probably the closest thing in the United States government to a British ministry, where the permanent civil servants, who are highly skilled and deeply entrenched dominant. It wasn’t a question of economic expertise that prevented Board of Governors from taking a more robust role in these divisions. More often, the Fed’s failure to publicly engage critics occur not because staff economists or Fed leadership are acting petty or bitter. The problem is to understand the balance between producing knowledge and justifying policy action. And although that balance has profound consequences for public policy, it is not a balance that the public gets to strike.
There is a distinct problem to the rise of economics and economists within the Federal Reserve. Even if a diverse group of economists are consulted, if there is not greater methodological diversity in the approach to thinking about inflation, financial stability employment, and the rest of the concerns that occupy the Fed, there is the broader risk of homogeneity of views that can lead to unproductive groupthink. Sociologist Neil Fligstein and his coauthors argued that, this kind of approach may have played a role in the 2008 financial crisis as the “FOMC failed to see the depth of the problem because of its overreliance on macroeconomics as a framework for making sense of the economy.”
No other select committee has any comparable power; and considering how carefully we have fettered and limited the powers of all other subordinate authorities, our allowing so much discretionary power on matters peculiarly dangerous and peculiarly delicate to rest in the sole charge of one secret committee is exceedingly strange. No doubt it may be beneficial; many seeming anomalies are so, but at first sight it does not look right.
After the 2008 financial crisis, the Fed’s lawyers were responsible not jut for interpreting law, but also making policy. And they do so behind a veil of secrecy that makes it difficult, even impossible to evaluate their work. A case in point, of the over one thousand enforcement actions taken by the Fed over the last ten years, only eleven proceeded to an administrative hearing, and only seven of those eleven proceeded to the Board of Governors. The Fed staff resolved the rest.
Considering Feds authority in conducting monetary policy and in its functions as a lender of last resort, there is no mechanism provided by statute or judicial decision to review Fed actions in court. What are these authorities? Are the legal interpretations defensible? Did the Board of Governors endorse them? Have the governors read them? The public doesn’t know. And here, author Conti-Brown, feel almost certainly the Fed’s lawyers – on the Fed’s institutional geography is at its most powerful. A “double government,” indeed.
There is an outsized role that lawyers play not only in enforcement and statutory interpretation, but in the formulation of regulatory policy generally. The Dodd-Frank Act of 2010 for example, is a huge piece of legislation, but also a dramatic delegation to the administrative agencies of defining the scope and applicability of the law. Because the Fed is the first among equals as a financial regulator, much of that authority falls to the Fed. And because the Fed’s lawyers are the staff primarily in charge of overseeing that implementation, the ideologies and values of the Fed’s chief lawyer is highly relevant to understanding how the Fed will define the space within which it makes it s polices.
The Fed’s policy makers have, over the last hundred years, become much more than defenders against inflation. They are also, by statute and practice, recession fighters, bankers, financial regulators, bank supervisors, and protectors of financial stability. These many missions are not the bailiwick of technocrats and mathematicians alone. the Fed’s policy maker are people. The have values and ideologies, like the rest of us. And the policies they formulate and implement require the exercise of value judgements under uncertainty.
With so many policy, constitutional and governance problems exist in the Reserve Banks and not enough of value to justify the current structure given those serious costs, shouldn’t the public be informed and establish some kind of influence into the Fed’s inner governance who play such a significant role in shaping Fed policy? The idea, that the work of the Federal Reserve is pure technocracy, the domain of mathematical economists solving proofs, is grossly inaccurate. Given how much power the Federal Reserve Act and the Dodd-frank Act give to the Board of Governors, and the lawyers who advise them in shaping federal policy, it is also important to know who these lawyers are and what they believe about the statutes, regulations, and policies they are assigned to interpret. Here, the Ulysses/punch-bowl theory of Fed independence, with its emphasis on technocracy and insulation from politics, is worse than useless. The question is whether the current failure to subject these staff leaders to presidential appointment is appropriate given the authority they exercise.