by Mike Kimel
The other day Ben Bernanke gave a speech in which he asked and answered five questions about the Fed:
1. What are the Fed’s objectives, and how is it trying to meet them?
2. What’s the relationship between the Fed’s monetary policy and the
fiscal decisions of the Administration and the Congress?
3. What is the risk that the Fed’s accommodative monetary policy will
lead to inflation?
4. How does the Fed’s monetary policy affect savers and investors?
5. How is the Federal Reserve held accountable in our democratic
I’d have asked only one question, similar to his first, albeit with a bit of prefacing. This is what I’d love to ask Bernanke.
The Fed has a very close relationship with the financial sector. Simple examples of this include:
a. Of the three advisory committees that advise the Board of Governors of the Federal Reserve directly, even in theory only one, the Consumer Advisory Council, has a non-zero number of members who don’t directly work for the financial sector. Regional Federal Reserve Banks are also, ahem, advised by similar committees made up entirely or almost entirely by financial institutions and/or their representatives.
b. By design, every one of the Fed’s methods for raising and lowering the money supply require direct interactions between the Fed and financial institutions. None of these methods even allow for any direct interactions between the Fed and members of the public. (Note that raising and lowering the money supply does not in any way constitute “regulating the banks.”)
c. Federally chartered banks and some state chartered banks are designated “members” of the Federal Reserve system – no similar appellation or roles apply to the public at large.
d. Federal Reserve banks serve as repository institutions for member banks, but none of the services performed by the Fed for banks are
available to the public at large.
e. And of course, there is something of a revolving door between the Fed and the financial sector.
Given all of this, what would the Fed’s objectives be, and how would it be trying to meet those objectives, if the interests of the public were given equal weight to the interests of the financial sector?