Whom do the Regional Fed boards serve?

It is interesting to see the rising debates over role of central banks in the society. The discussion is of course widely different from those going in India where asking such a question is akin to a crime.

Of all the discussions, it is those on Federal Reserve and its Regional arms that are by far the most. Federal Reserve established in 1913 amidst a lot of suspicions has come a full circle. It moved from a suspicious body to one of the most powerful bodies in the world and is now back on the suspicious block.

There are all kinds of issues being posed on Federal Reserve from policy impact to independence. Though, the one on its relevance in US economy is perhaps the most important. People have attacked Federal Reserve as an institution from all possible corners. Some say Fed only serves Wall street interests, others say it does not do enough for main street. Within Fed structure, the role of regional Feds is being questioned as their boards are elected by member banks.

This piece by Helen Fessenden and Gary Richardson gets to the Regional Fed debate from a wide historical lens:

The governance structure of the Federal Reserve System, including the leadership of the twelve Federal Reserve Banks, is increasingly drawing fire from a wide array of critics. Liberal groups have focused on Reserve Banks’ boards of directors, which they believe are stacked too heavily in favor of private banking interests, too opaque, and insufficiently representative of women and minorities. The progressive coalition Fed Up, for example, calls for a ban on directors who have direct ties to banking and finance. It also has pushed for public nominations and public hearings for Reserve Bank presidents, who are currently selected by a subset of their Bank’s nine-member board of directors (subject to approval by the Fed’s Board of Governors). Coming on the heels of pressure from liberal members of Congress, the Democratic Party included language in its 2016 platform to prohibit executives of financial institutions from serving on Reserve Bank boards.

The leadership and board structure of the Reserve Banks also have conservative critics. Mark Calabria of the Cato Institute, for example, recently wrote that the Fed, in general, has a “diversity problem” of too many economists from elite East Coast schools staffing the most senior levels, on the Board as well as at the Reserve Banks. “You are guaranteed to have an institution that suffers deeply from groupthink, as well as being insulated from the everyday experiences of most Americans,” he wrote, suggesting reforms that included a ten-year residency requirement for candidates seeking to become Reserve Bank presidents.1

By taking aim at the Fed, including its governance model, these disparate groups are finding common ground. Many of these critics fail to note, however, that the debate over the leadership structure of Reserve Banks is not new. The composition of Reserve Bank boards has been discussed and disputed throughout the last century. These arguments were especially intense in the run-up to the passage of the Federal Reserve Act in 1913, in the Great Depression, and during the civil rights movement and painful stagflation in the 1970s. The question has resurfaced most recently in the wake of the 2008 financial crisis and the Great Recession, amid broader public scrutiny of the Fed. In fact, the debate over Fed governance, including Reserve Bank boards, is closely bound to the central tensions and grand compromises of American politics — encompassing the fights over local versus national government, progressive versus populist policies, and Wall Street versus Main Street economic interests. These arguments also reflect the tension between the desire for the benefits of a national bank and fears of financial monopolies and money trusts. The fact that these debates mirror such long-standing fissures in the American polity makes it all the more important to understand what the Reserve Bank boards actually do — and how these functions have evolved over time.

Hmm. Nice read. But the issue remains unsettled. It also tells you how something in economics which are once sacrosanct eventually find their doomsday as well.

Also see the emphasis on residency requirements for 10 years to become Reserve Bank Presidents as suggested by someone. This again is so different from the usual debates in India. There is a strong emphasis on bringing global expertise to give economic advice.

Ironically, global expertise does not mean any other country but US and at max UK. It is so ironical that in US some people are now seeking atleast some residency requirement before someone heads a regional Fed, but no such conditions apply here. There is a belief that more time you spend in India trying to figure an issue, the less capable one is going to be. The expertise rises significantly more someone is away from the region for maximum amount of time…

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