The Fed - Independence, Yes; But Accountability And Limits?
Via Peter Tchir of TF Market Advisors,
At this point it is clear that there is no single person in America, and possibly the planet who can influence markets as much as the Chairman of the Federal Reserve Board. The president may have more overall power (possibly) but in terms of moving markets for weeks at a time, that power primarily belongs to Mr. Bernanke. An unelected official with almost total control over the “board” he chairs.
Some have argued whether the Fed should even exist. I won’t go that far (it is beyond my scope), and I even understand why the Fed needs some independence. But I don’t understand why he isn’t accountable or why there aren’t limits.
The “Voting” Constraint
In theory the Fed has a board that votes. In fact there are actually 2 boards. The first is the Fed Board of Governors, which consists of 7 members (5 at the moment), appointed by the President and confirmed by the Senate for 14 year terms. The Board of Governors sets the discount rate and the reserve requirements. The second is the Federal Open Market Committee (FOMC), which consists of 12 members (10 at the moment), who are the 7 members of the Fed Board of Governors, the President of the Federal Reserve Bank of New York, and 4 other Presidents of the regional Federal Reserve Banks (on 1 year rotating basis). The Presidents of the other regional Federal Reserve Banks participate in the discussions but do not have a vote. Congress, effectively, no meaningful influence on the Fed since no appropriations come from Congress – Fed pays its bills from its own operations. FOMC sets the open market operations policy including the target Fed Funds rate.
In theory, the Chairman has the same one vote as the other members of the boards, but never in the history of the Fed has the chairman been on the losing side of the vote. In fact, multiple dissents are rare. The chairman may have the same vote but it is clear he is the leader. Whether the other board members are meant to be independent, there is a clear chain of command, and they are effectively subordinate to him regardless of what was intended. If the President of the United States wanted to call a board member directly, we have no doubt that it would be okay. If a board member called the President directly, I expect there would be repercussions. Only the chairman holds the post announcement press conference. He has the 60 minutes interviews. Whatever the intention was, it is impossible to argue that in practice the Fed Chairman is the boss of the others, and the idea of “team” is more reminiscent of the baseball bat scene in the “Untouchables” than a meeting of peers.
“Need To Know”
Why is there such a “need to know” level of secrecy surrounding many of their policies. The Government Accountability Office (GAO) does audit the Fed but its oversight of the Fed system is limited to areas outside of monetary policy. In fact, the “GAO can’t review most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee. It also can’t look into the Fed’s transactions with foreign governments, foreign central banks and other international financing organizations.” Fed Audit
Is it really a state secret what price the Fed paid on treasuries during their open market operations? Would it have been collapse of the Western hemisphere if which banks got loans was disclosed? We have real state secrets. Military secrets. Secrets that are designed to protect us from real people. The CIA and the Pentagon are able to operate with oversight committees. Shouldn’t the Fed have to ask special permission to keep documents or activities sealed? We have a need to know. Sure, there are some things that shouldn’t be available to everyone. It isn’t a black or white issue and we can argue over which side we err on, but there are procedures. How can it possibly be up to the Fed to determine what level of disclosure is necessary? How long should things be withheld. We have far bigger state secrets (I’m sure) than that ABC bank was going to fail if they didn’t get money and XYZ bank took advantage of the programs to make a few extra billion. Everything should be disclosed, it is our “fiat” money after all.
The fact that the Fed is technically owned by the banks is also a bit weird. Why is that necessary? Is there any reason for it? Does it really have no influence?
Fed As A Regulator
When was the last Fed Regulatory press conference held? The NY Fed has articles in the NY times about their open market purchase group and the level of “ahem” sophistication. How many regulators are there? If we could calculate a ratio of derivative notional outstanding per regulators assigned, how hideous would that number be? Don’t they have any responsibility for regulating? Where is the accountability? The banking system effectively collapsed under the existing regime’s watch, and the chairman and virtually every single board member is still there, or retired of their own volition. How is that possible? How can the NY Fed with all the banks still be there? The California Fed head with all the mortgage fiascos?
Which Fed member didn’t take the time to figure out why all the “risk” in his system was being pumped into AIG?
What is the Chicago member doing? Almost 4 years after Bear Stearns and we have to go to a DTCC website to get any information on CDS notionals? Where is clearing, let alone exchanges?
Why Not Have Limits?
Traders have limits. It is a key part of the job. You are expected to trade and make money but you need to know what your limits are. These include what products you can commit to, notional limits, DV01 limits, etc. They are meant to be large enough to handle the day to day business you run. You can usually get limit increases from your direct supervisor who has his own limits to allocate. If an occasional exceptional opportunity comes up that tends to be a fairly easy process. If you continually bump into your limits, you can ask for a bigger increase. Once in awhile something rare happens and the limits have to be approved at a higher level. That trader considers himself independent but is subject to limits.
Why can’t the Fed have certain limits, and beyond those, they have to go to Congress? Say $1 trillion of balance sheet. Is that normally enough? Sure. Under most circumstances that would be enough. The Fed would be independent though technically “limited”. If they need more, and times like this may call for more, it should be approved by the people or the representatives of the people. That isn’t too much too ask. The Fed is not slave to congress in “normal” times, but neither do they have unlimited powers.
Authority and Responsibility go hand in hand. One without the other invariably leads to disaster. That’s is why the US government is based on the principle of checks and balances. The President/Administrative branch cannot unilaterally make policy decisions except as has been authorized by the Constitution and Congress. To pass a Healthcare bill or change the tax structure, the President has to go to Congress and persuade/negotiate/compromise. And the Congress holds the purse strings. Nor can the Congress do things unilaterally, the President must agree or the Congress must have the unity to override the veto. The Judicial Branch is independent of the President and Congress, but if the Congress/President can pass a law overriding the decision of the Supreme Court. The key is information and ability to make corrections. Checks and balances all the way.
Why is the Fed not subject to the same principles? Congress has no purse strings over the Fed; the President has no voice past the appointment (and given the 14 year terms that can be served once, that’s not much a lever). The Fed doesn’t have to reveal what it has done, thus making it impossible to make corrections. The President can be impeached for "treason, bribery, or other high crimes and misdemeanors." So can other civil officers of the United States, including the Fed Chairman. The Vice President can assume the office of the President, if the President is unable to discharge the powers and duties of the Presidency. The Fed Chairman apparently could ride in a helicopter dropping $100,000 bills on the people “to further monetary policy” and it might be impossible to stop him or find out how much he is dropping and on whom.