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Financial Reform Newsletter: The New York Fed Has a President; Now What?

The New York Fed Has a New President; Now What?

After a lengthy, secretive and controversial process, the Federal Reserve Bank of New York has a new President: John Williams, currently the president of the Federal Reserve Bank of San Francisco.

The criticism of the selection has mostly focused on the Fed’s undeniable lack of diversity.  To address that, the search committee repeatedly stated that diversity was a key factor among many being considered during the search process.  Unfortunately, that has too often been viewed as just gender or ethnic diversity.  If that was the sole measure of success, then the search process (albeit not the result) was a success: the reported finalists were a woman, an African American male and a white male.

However, the process was as flawed as the result.  Not because Mr. Williams is a white male or because he doesn’t have many of the most important qualifications; he does, as former Fed Chair Janet Yellen has made clear.  It’s because diversity must be broadly defined as a multifactor component of any search.  Yes, gender and ethnic diversity are critically important, but diversity of background, thought, experience and history must be included as well.  That diversity should include a demonstrated record of intellectual courage, standing up and speaking out against conventional wisdom and the prevailing views or supporting those who did.

Groupthink – and the associated intolerance of and hostility to alternative or dissenting views --  is the Achilles’ heel of the Fed, which prizes consensus.  Two recent high-profile examples prove this:  the dot com bubble in the early 2000s and the 2008 financial crisis.  Both came as big surprises to the Fed.

That is why diversity of thought and a genuine openness to dissent and disagreement, if not apostasy itself, must be a key criterion for anyone considered for a senior Fed position.  Such candidates must also have the courage and conviction to stand up and speak out regardless of the consensus and pressure to go along.

It’s not too late for both New York Fed President Williams and the Fed more broadly to concretely address these issues.  First, as soon as possible, President Williams should give a speech on his values and vision for the New York Fed, including detailing how he intends to increase diversity broadly defined throughout the institution from top to bottom.  Second, in addition to the standing committees of the New York Fed, Mr. Williams should form a “red team” advisory committee, which would be comprised of people and organizations who have alternative views if not outright disagreement with actions the Fed has taken or might take.

The Fed’s opportunity is to create a model search process as it now seeks to find a new President for the San Francisco Fed.  First, it must conduct and publicly disclose an independent “after-action” report on the selection process just used for the New York Fed and determine what worked, what did not and why.  Second, the next search must include real transparency that enables public accountability.

Importantly, new Federal Reserve Chairman Jerome Powell agrees, as he stated after a recent speech:

“I am a big believer that you get better outcomes when you have diverse views around the table. You want to get people in who are diverse, give them a real shot, give them the support and training they need, and you want to hold onto them.”

There are more than 300 million Americans and the next selection process must look broader and deeper into that candidate pool if Fed rhetoric is going to become a reality.

 

Crucial Thoughts on Financial Protection from a Distinguished Public Servant: Thomas Hoenig

Tom Hoenig has had a long and distinguished career as a public servant, including the last five years as Vice Chairman of the Federal Deposit Insurance Corporation (FDIC).  Prior to that, he had a 38-year career at the Kansas City Fed, including twenty years as President. 

He has been a steadfast, thoughtful, dedicated public servant and fearless in standing up for the public interest against the biggest banks in the country.  No matter who you are or your position, doing that has significant risks and takes courage, which Mr. Hoenig has shown repeatedly in calling for more, higher-quality, loss-absorbing capital cushions for banks.  Wall Street financiers hate that because it lowers their leverage and their bonuses, but it is vital for Main Street because that is all that stands between a stressed and/or failing too-big-to-fail bank and taxpayer bailouts. 

In what was likely his last major policy speech before his tenure at the FDIC comes to a close on April 16th, Mr. Hoenig delivered a strong defense of the financial protections passed in the Dodd-Frank Act as well as a rebuke to the recent efforts to weaken those rules.  Alone among today’s so-called regulators, he also offered a cautionary note and a reminder that lawmakers and regulators should be mindful of the damage inflicted by the 2008 financial crisis:

“Memories are short and with an improving economy, these laws and regulations — which early in the recovery are viewed as essential — are eventually recast as burdensome constraints that need to be eased or ended.”

He also took aim at the current effort in Congress to roll back these protections, saying that any relaxing of rules could “undermine the long-term resilience of not only the banking system, but the broader economy as well.”  More specifically, he addressed the provision in the bill that would alter the supplementary leverage ratio for custody banks, saying:

“I caution strongly against eroding the post-crisis capital standards that have contributed to the strength of U.S. banks and the long-awaited recovery of the U.S. economy.  For example, reducing the capital requirements of the most systemically important banks by excluding central bank reserves from the supplemental leverage ratio ... is a serious policy mistake.

“Custody banks are integral to the financial system, highly interconnected to the capital markets, and relied upon as safe havens in times of stress.  These trusted custodians must remain pillars of strength and should be retaining capital, not reducing it.”

Mr. Hoenig also addressed the importance of the Volcker Rule, saying that rather than carve out exceptions, the Volcker Rule should continue to apply to all banks that benefit from deposit insurance. 

Thus, Mr. Hoenig is ending his tenure the way he began:  making a substantive case for essential, comment sense rules that protect Main Street homes, jobs and businesses rather than Wall Street’s revenues, profits and bonuses.  Every American is in his debt and we applaud his service.

 

Fed Chair Powell Correctly Sees No Evidence Showing Financial Regulations Hurt Banks

As we have been saying for a long time, Federal Reserve Chair Jay Powell stated after a speech to the Economic Club of Chicago that he does not see any proof that post-2008 crisis regulation have hurt the biggest banks:

“As you look around the world, U.S. banks are competing very, very successfully.  They’re very profitable. They’re earning good returns on capital. Their stock prices are doing well.  So, I’m looking for the case, for some kind of evidence that — and I’m open to this — some kind of evidence that regulation is holding them back, and I’m not really seeing that case as made at this point.”

He's right.  There is no evidence supporting bank arguments that financial rules are holding back their revenues, profits, bonuses or lending.  Better Markets has demonstrated those facts repeatedly in meetings with policy makers and regulators, in letters to regulators, in our newsletter, in op-eds, in our blog, and at conferences, to list a few examples. 

The bottom line is that the Dodd Frank law and the related regulations have reduced the risk of a financial crash, have refocused our largest banks on lending to the real economy, and have protected consumers and investors.  All this has been done without holding back the financial sector from anything other than socially useless, high-risk activities and predatory conduct.

 

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