Federal Reserve Bank of Dallas President Richard Fisher, in an article on the Wall Street Journal, is arguing for power to be shifted away from the Federal Bank of New York. Community bankers also support this weakening of the New York Fed. In a letter to the U.S. Senate by president of the ICBA (Independent Community Bankers of America, an organization representing over 6,500 community banks), one of Fisher’s main points in his proposal is that financial institutions should be supervised by Federal Reserve Banks from districts other than the ones in which they are headquartered. This is all to promote transparency and avoid regulatory capture. I believe this is an important step in increasing the efficiency of the Federal Reserve system.
I hate to be one of the naysayers of the Federal Reserve because I believe in that they are a necessary entity for a better financial sector. This is why I think Fisher’s most important point is for the regulation of financial institutions to be conducted by Federal Reserve Banks other than their region. The current president of the New York Fed, William Dudley, was formerly Goldman Sachs’s chief economist. And of course, he oversees the regulation of Wall Street banks, including Goldman Sachs. This makes room for regulatory capture to occur. In fact, Carmen Segarra’s story paints a very suspicious image of the New York Fed.
In an article on Bloomberg View by Michael Lewis (whose books have been required reading for some economics classes here at University of Michigan), Carmen Segarra was the New York Fed regulator inside Goldman Sachs who had been fired because she called out suspicious activities conducted by Goldman Sachs. A segment from his article includes the following, expressed by Carmen Segarra, “In one meeting, a Goldman employee expressed the view that ‘once clients are wealthy enough certain consumer laws don’t apply to them.’ After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement — to which the regulator replied, ‘You didn’t hear that.'” Apparently, the culture in the New York Fed is such that most employees are deferential to the banks they supervised, and unpopular opinions are hushed (ProPublica, David Beim). And Goldman Sachs is not the only case, similar events are happening at JP Morgan as well.
The cause of this culture, I would guess, is because many employees of the New York Fed will eventually seek employment in some of these investment banks, and they do want to tarnish their chances by making enemies with these companies. That’s why, in order to avoid regulatory capture, Wall Street should not be supervised by the New York Fed.