CPD IN THE NEWS

When the Federal Reserve was established, Congress called for its policy makers to have “fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”

But Fed officials have recently been drawn from just two backgrounds—academics, either at universities or Fed research departments, and alumni of the financial services firmGoldman Sachs & Co.

The announcement Tuesday that Neel Kashkari would become president of the Federal Reserve Bank of Minneapolis marked the third Goldman Sachs alumnus in a row to be picked to become a Fed bank president. The other two—Dallas’s Robert Steven Kaplan andPhiladelphia’s Patrick Harker —took office earlier this year.

Mr. Kashkari is a former investment banker at Goldman Sachs and a former Treasury official who ran the government’s Troubled Asset Relief Program (TARP) during the financial crisis. He takes the helm of the Minneapolis Fed Jan. 1, 2016.

Of the 17 Fed officials in office next year—five members of the Board of Governors and 12 regional bank presidents—all but three will have professional backgrounds as academics or with Goldman Sachs. The exceptions will be Atlanta Fed President Dennis Lockhartand Fed governor Jerome Powell, who worked at other banking institutions, and Kansas City Fed President Esther George, who was primarily a bank supervisor.

“The obvious downside of this is there’s more of a groupthink within the Fed,” said George Selgin, the director of the Center for Monetary and Financial Alternatives at the Cato Institute, a libertarian-leaning think tank, referring to the shift toward a narrow range of backgrounds at the central bank. “That can be very dangerous if the groupthink is based on ways of thinking about the economy that are not necessarily sound.”

Mr. Kaplan, a former Harvard Business School professor, had worked as a vice chairman of Goldman Sachs Group Inc., leading investment banking activities. Mr. Harker, the former president of the University of Delaware, served as a trustee of Goldman Sachs Trust and its Variable Insurance Trust.

New York Fed President William Dudley also spent most of his career at Goldman, ultimately serving as its chief economist.

Since the central bank’s founding a century ago, the background of Fed officials has undergone a dramatic shift.

In the early days after the Fed began in 1913, the people selected to run the nation’s central bank were primarily small bankers, reflecting that in the early days, the Fed’s key function was providing banking services to a highly fragmented banking industry. The notion of using Fed policies to steer the broader economy had not yet taken hold.

Through the Fed’s first 40 years, the backgrounds of officials grew increasingly diverse. In the late 1940s, for example, Fed officials included Chester Davis, a former agriculture commissioner and grain marketer; Laurence Whittemore, of the Boston and Maine Railroad and H. Gavin Leedy, a private practice attorney.

The central bank’s leadership also contained many functionaries who rose through the ranks as Fed administrators, such as Robert Gilbert, who in his 20s become one of the first 14 employees of the Dallas Fed. He worked as a loan and discount clerk and in the war loan department, before becoming manger of the Dallas Fed’s El Paso branch and eventually the Dallas Fed President.

Such quaint backgrounds were common among officials in the central bank’s early days but were beginning to dwindle by the 1960s. Today Fed officials who rose through the ranks are almost entirely Ph.D. economists who headed the regional banks’ research departments; the lone exception is Ms. George, who worked as a bank supervisor and Kansas City Fed administrator. Ms. George holds an M.B.A.

Gradually backgrounds in industry, law, and other aspects of government or administration fell out of favor.

“Keep in mind, for much of the Fed’s first half, the focus was really on financial stability,” said Sarah Binder, a George Washington University professor who is also a senior fellow at the Brookings Institution, a Washington think tank. “There wasn’t a well-worked out body of knowledge about monetary policy.”

As it became apparent that Fed policy held vast sway over the economic fortunes of the country, presidents and regional Fed boards increasingly turned to Ph.D. economists to guide the central bank and to be effective participants during the debates of the policy-making Federal Open Market Committee.

Ms. Binder thinks the narrow range of backgrounds among Fed officials may lead to a central bank that is thin on expertise when it comes to “the responsibilities that are laid on top of the board, in particular, that extend beyond monetary policy.”

The central bank is tasked, for example, with regulating much of the financial system, not only the giant Wall Street banks, but also community banks, insurers and other financial institutions. The Fed retains some responsibilities for consumer protection and community development, is responsible for the nation’s payment systems and continues to operate the discount window and other low-profile back-office banking functions.

Liberal activist groups, led by the Center for Popular Democracy, have pushed for diversity in the appointment of new Fed officials, pressing for representatives of workers and consumers or labor and community leaders. They have had no luck, and with the filling of the Minneapolis Fed presidency and inaction in Congress over two current nominees to the Fed board, there are no looming vacancies for the central bank’s composition to begin a shift.

Source: The Wall Street Journal

In part one of this two-part posting, I looked at the gender bias at the Federal Reserve, showing how men vastly outnumber women in key posts at Federal Reserve Banks throughout the United States despite the Fed's Congressional mandate.  In part two of this posting, I want to take an additional look at the Fed's bias; its failure to represent the economic diversity of America.

For those of you that either didn't read part one or who are unaware of the Federal Reserve's organizational setup, here is a graphic from a report by the Center for Popular Democracy showing the link between the Federal Reserve and its Federal Open Market Committee (FOMC) and its district banks known as Federal Reserve Banks:

Here is a map showing the regions covered by each of the 12 district banks (Federal Reserve Banks) and the 24 branches within each district:

Note that Alaska and Hawaii are covered by the San Francisco district.

If we start at the top of the organizational chart, the seven members of the Federal Reserve Board of Governors are appointed by the President and confirmed by the Senate for a 14-year term of office.  The President (and Senate) also confirm two members of the Board to be Chair (currently Janet Yellen) and Vice Chair for four year terms.  The FOMC consists of 12 members; the seven aforementioned Board members, the president of the Federal Reserve Bank of New York and four other regional Federal Reserve Bank presidents on a rotating, one-year term basis. The Federal Reserve Banks form an important link between the Federal Reserve and their local economy and help to dictate the Federal Reserve's monetary policies.  Each of the twelve district banks has their own president and boards of directors (nine directors in total for each bank); in addition, each of the 24 district branches has its own directors (seven directors in total for each branch).  The Board of Directors for each Reserve Bank are appointed in two ways; the majority are appointed by the Reserve Bank and the remainder are appointed by the Federal Reserve's Board of Governors.  The directors for each district bank then appoint their own president and vice president.  It all sounds rather nepotistic, doesn't it? 

By law, under the Federal Reserve Reform Act of 1977, the Boards of Directors of the Federal Reserve are to be

"...elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers.". 

That is, each of the leaders/directors of the world's most influential central bank and its district banking system are to represent a wide variety of each of the economic sectors that make up the American economy.

The report by the Center for Popular Democracy compares the economic sector representation during the period from 2006 to 2010 when the Government Accountability Office examined the composition of the Federal Reserve Bank Boards and the present.  Here is a graphic showing the past and present composition:

In both 2006 to 2010 and 2016, directors from the banking sector filled over one-third of the board seats, growing by 3 percentage points over the timeframe of the study.  In combination, in 2016, representatives from the commercial and industrial sector and the banking sector filled 68 percent of seats, up from 63 percent in 2006 to 2010.   The service sector's representation fell from 26 percent of seats to 18 percent and agriculture and food processing saw their representation fall from 6 percent of seats to 3 percent.  Interestingly, even though they are relatively poorly represented compared to the other sectors, the number of directors affiliated with consumer and community organizations rose from 3 percent to 8 percent.

For your illumination, here are a few of the Directors for each of the Federal Reserve Banks that you can get a sense of who is dictating America's monetary policies:

If you are interested in who is on the boards of the other Federal Reserve Banks, please see the original report.

Interestingly, during the "financial crisis" of 2008, there was some question about directors' independence and actions taken by the Federal Reserve banks since there was at least the perception of conflicts of interest when director-affliated institutions took part in the Federal Reserve System's emergency programs.  With a preponderance of representation from the banking and commercial sectors, it certainly doesn't take a genius to figure out which sectors of the economy will likely be favoured by Federal Reserve policies should there be another "financial crisis", does it? 

By A Political Junkie

Source

A recent study published by the Alliance to Reclaim Our Schools and the Center for Popular Democracy, entitled “The Tip of the Iceberg,” found $203 million lost to fraud, corruption and mismanagement in charter schools, with a projected $1.4 billion in losses in 2015 alone. The Federal Bureau of Investigation is concerned as well: It has investigated schools in Pennsylvania, Louisiana, Connecticut, Arizona, Ohio, Massachusetts, Indiana and Illinois.

Brown University’s Annenberg Institute for School Reform released a report detailing the standards that should be required to raise the charter sector to the level of equity and transparency that public schools must meet. Such reforms are popular: A 2015 poll showed that 89 percent of respondents favored making charter board meetings publicly accessible, 88 percent supported routine audits of their finances and 86 percent desired transparent budgets.

Whether or not one thinks that charter schools are a good thing, we should be able to agree that greater accountability strengthens our school system. However, many charter advocates have stood in the way of reform.

In California, four long-overdue bills that would bring a higher level of accountability to the state’s 1,100 charter schools were introduced last March. A 2015 report from the Center for Popular Democracy documented how charter schools in California have lost $81 million in public funds to fraud and abuse. Over the last 10 years California’s Fiscal Crisis & Management Assistance Team revealed multi-million dollar scams in Los Angeles, Oakland and Santa Ana, to name a few cities, as well as rampant abuse in what was the state’s largest charter operator.

Instead of supporting common-sense reform, the state’s charter industry, represented by the California Charter School Association, has fiercely opposed the bills. “We believe current laws address these concerns and these proposals are unnecessary,” the lobbying group wrote in a press release.

California, the state with the largest number of charter schools, should lead the way for reform. But progress is slow going: There is little indication that any of the bills will make progress in Sacramento this year. 

In Connecticut, it took a scandal to spur this kind of reform. A 2014 study from the National Association of Charter School Authorizers ranked Connecticut as the seventh-lowest state with regard to charter accountability. In response, the state passed a law in July that makes all charter school records a matter of public record subject to the Freedom of Information Act. It also requires charter schools to have anti-nepotism and conflict of interest policies, and it empowers the state’s Department of Education to post each school’s certified audit statement on its website.

The reform was spurred by a massive scandal around a prominent charter school figure named Michael Sharpe. For years Sharpe led a chain of schools called the Jumoke Academy and advocated for unfettered charter expansion. Yet, in early 2015, in the midst of an FBI investigation and after more than six months of relentless investigative reporting by the Hartford Courant, Connecticut’s Department of Education found Sharpe’s network riddled with “rampant nepotism.” Its report also revealed that Sharpe had ordered “expensive and ornate modifications” to an apartment owned by his company, which he then rented for his own use.

In the aftermath of these revelations, Connecticut’s reform law was approved in May by a 35 to 1 vote in the state Senate and 142 to 3 in the state Assembly. While this is a positive development, other states should not have to wait for a scandal of this magnitude before demanding greater accountability.

Charter reform can be a bipartisan cause. In Ohio, Republican State Senator Peggy Lehner began pushing for laws to require greater disclosure of how public funds are spent after, she says, seeing “story after story” about charter school scandals. A recent investigation by the Akron Beacon Journal found that of the 300 charter schools reporters contacted, only a fourth provided basic information like board members’ names. Meanwhile, 87 percent of charters got Ds or Fs on the most recent state report cards.

Major charter advocates spoke to the need for reform. “Charter schools are public schools, and there should not be a veil of secrecy,” said Chad Aldis, vice president for the Thomas B. Fordham Institute, which sponsors 11 charter schools in the state. “We need to have transparency.”

In June, a bill that passed the state Senate that would require Ohio to annually audit all charter school operators to monitor the use of public funds. Charter schools would also have to obey open records laws and other transparency standards that are already the norm in public schools.

Such changes should be no-brainers. And yet the bill has stalled in the General Assembly. With much of the debate going on behind closed doors, the public has thus far not been able to get a clear sense for the cause of the delay.

Sunshine advocates fear that the inaction of the Ohio House bodes ill for the bill’s future. “It appears that the poor-performing charter school sector has again won the day,” argues Stephen Dyer, former legislator and Education Policy Fellow at the progressive think tank Innovation Ohio.

Rather than standing in the way of greater accountability, lawmakers should view the current bill as a first step. Not only should the measures be passed, they should be strengthened. Communications and overhead costs would not have to be disclosed under the state Senate’s bill, casualties of the charter industry’s lobbying.

Moreover, Ohio’s bizarre system of charter approval would remain largely unchanged under the bill. Instead of having a few authorizing agencies to approve charter schools, Ohio allows dozens of groups, including non-profits, to sponsor and approve charter schools. These authorizers receive payments from the schools and rarely close them as a result.

The public deserves better — in Ohio and beyond. If charter schools are to become a permanent and respected part of public education in America, their champions will need to clean up their sector and let the sunshine in.

Source: Al Jazeera America

The progressive Fed Up coalition released an ambitious Federal Reserve reform plan on Monday designed to increase discussion of Fed policy in the presidential campaign.

The reforms, which would require the passage of new legislation, would turn the Federal Reserve into a public entity akin to other federal agencies, with the goal of dramatically increasing the accountability of the world’s most powerful financial body.

Currently, the 12 regional Federal Reserve banks are owned by private commercial banks. As a result, financial executives dominate the regional Fed banks’ boards of directors, giving them an outsized role in key decisions like the selection of the banks’ influential presidents. 

Four of the current presidents are alumni of Wall Street titan Goldman Sachs.

Fed Up and other progressives argue that the present governance structure undermines the Fed’s role as a regulator of the country’s financial institutions. These critics also argue that the influence of big banks tends to make Fed officials more sensitive to concerns about inflation, even as they hear little from ordinary workers affected by nominal changes in the unemployment rate.

Andrew Levin, a Dartmouth economist and former adviser to the Fed chair, who authored the proposal, said on a call with reporters that the changes would bring the Fed’s structure into line with major central banks in other countries. He mocked the plain conflict of interest inherent in giving the financial industry so much power over an institution charged with regulating it.

“It should be amazing for people in the public that banks actually own shares in the Fed. A lot of people would be shocked to hear that,” Levin said.

“It would be like if lawyers owned shares in the FBI,” he added.

In the new system Levin devised, the selection process of the regional banks’ directors would be supervised by the Washington-based Federal Reserve Board of Governors, with involvement from individual governors and members of Congress in the relevant Fed bank’s jurisdiction. The majority of each bank’s directors would need to come from small businesses and nonprofits. These more diverse boards, in turn, would have to make public their process for selecting a bank president.

Members of the Fed Board of Governors, unlike the regional Fed banks, are appointed by the president and confirmed by the Senate, which is one reason why Fed reform advocates consider them more accountable to the public.

Levin and Fed Up made clear that they view the new governance structure as a way of generating greater ethnic and racial diversity among Fed officials as well. Levin noted that in the Fed’s existence of more than a century, not one of the regional Fed presidents has been African American.

Levin called the statistic “clear evidence that something is broken.”

In making the Fed a public institution, the modified system envisioned by Levin would subject the regional Fed banks to the Freedom of Information Act and the oversight of the Fed Board of Governors’ inspector general.

The entire Fed, including the Fed Board of Governors, would also undergo an annual review by the Government Accountability Office, a government body tasked with evaluating the efficacy and accountability of federal agencies.

The Federal Reserve Board of Governors declined to comment on the new plan, but chairwoman Janet Yellen has opposed past efforts to audit the Fed.

In addition, Levin’s plan changes the terms of both regional Fed bank presidents and Fed governors to seven years. Currently, regional Fed presidents serve for five years, and can be reappointed to a second term — which almost always occurs, thanks to a process that Levin and Fed Up say is typically no more than a formality. Fed Board governors now serve 14-year terms.

The Federal Reserve Board of Governors declined to comment on the reform plan. But Fed chair Janet Yellen has condemned legislation in the past that would audit the Fed’s finances, claiming it would “politicize” the institution’s decisionmaking. Yellen’s stance suggests she would likely oppose the even broader GAO review.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who was a top economist at the Fed for many years, said of the reform plan that he is “more concerned that there are already too many limits on the Fed’s power to help the economy.”

Gagnon nonetheless said he views most of the new proposals favorably. His biggest specific objection is to the plan’s seven-year term limits, which he worries would open the Fed up to more political pressure by allowing a single president to decide its makeup.

The rollout of the Fed Up-backed proposal is timed — and packaged — to encourage presidential candidates to speak out. The coalition sent out model questions for the candidates to accompany the release of the reform proposal.

“It is important that we have a president who sees the need for sensible, pragmatic, nonpartisan reforms that will put the Fed on a path to serve the public for the next hundred years,” Levin said.

Sen. Bernie Sanders (I-Vt.) has released his own plan to make the Fed more accountable to the public. His campaign expressed support for the spirit of Fed Up’s reform proposal.

Warren Gunnels, top policy adviser for Sen. Bernie Sanders (I-Vt.), joined the call to express support for the spirit of Fed Up’s proposed reforms.

Sanders “believes we need to structurally reform the Fed so that it is a democratic institution that is responsive to ordinary Americans not just CEOs on Wall Street,” Gunnels said.

Gunnels would not say if Sanders endorsed the proposal, however, claiming the senator needed more time to review it.

He instead pointed to the Federal Reserve platform Sanders laid out in a Dec. 23 New York Times op-ed. In the column, Sanders says he would bar financial industry executives from serving on the boards of regional Fed banks altogether, make Fed assistance to banks contingent on concrete measures of service to the public, such as lending to low-income workers, and preclude the Fed from raising its benchmark interest rate until unemployment is below 4 percent.

Ady Barkan, Fed Up’s campaign director, said that the coalition had invited all five presidential candidates to join the press call, but only Sanders’ campaign had agreed to participate.

Hillary Clinton’s campaign did not respond to a HuffPost request for comment on Fed Up’s proposal, nor did the remaining Republican presidential candidates Sen. Ted Cruz (R-Texas), Ohio Gov. John Kasich (R) and Donald Trump.

Getting Democratic politicians, in particular, to make the Fed a policy cause could prove a difficult task for a number of reasons.

In recent years, Fed reform has tended to be the province of conservative lawmakers eager to rein in the Fed’s unprecedented efforts to aid financial institutions and stimulate economic demand in the wake of the 2008 financial crisis. Democrats have cast themselves as defenders of the Fed in those circumstances, since the central bank’s actions were viewed as crucial to the recovery.

It doesn’t help matters that the Fed is an issue that’s simply not on the public’s radar.

And there is also the risk of being seen as breaching protocol by commenting on an independent, nonpartisan institution.

“I don’t think many voters understand enough to care about it,” Ari Rabin-Havt, a progressive radio host and onetime aide to Democratic Senate Minority Leader Harry Reid (D-Nev.), said in an interview earlier this month. “The people who do care about it somewhat, view it as a ‘temple.’”

But economists and policy experts argue that it would be a mistake for Democrats to ignore the Fed. “Central banks became and still are the only game in town” when governments want to boost economic demand and employment, according a column by New York University economist Nouriel Roubini. That’s partly as a result of the ideological backlash across the developed world against using public spending as a fiscal stimulus, and the delayed effect of other reforms.

And the Fed is especially important in the American context, because the government is likely to remain divided regardless of who wins the presidency, narrowing the possibilities of ameliorative fiscal measures.

“If the economy starts to weaken again, we cannot trust Congress to act,” Mike Konczal, a fellow at the Roosevelt Institute, said earlier this month. “We will need a Fed that is ahead of the curve.”

Short of embracing reforms to the Federal Reserve’s governance, Democrats could make a bigger issue out of the two empty Fed governor seats. President Barack Obama named nominees for the positions many months ago, but Senate Republicans have failed to give them hearings.

Tim Duy, an economist at the University of Oregon, said he is “wary” of the candidates even articulating what kind of people they would nominate to the Fed Board of Governors lest they jeopardize the central bank’s independence. But he said calling for filling the empty governor seats is fair game.

“I would like [the presidential candidates] to at least say that we should have a Fed at full power, because that’s what makes for effective monetary policy,” Duy said earlier this month. “That should be a priority for Democrats and Republicans.”

By Daniel Marans

Source