The way that regional Federal Reserve boards are chosen leads to an inherent conflict of interest, says the Government Accountability Office in a new audit of the Fed. In a brilliant management move, each Fed board picks its members from local businesspeople and bankers. The problem, though, is that the bankers who are on the board help decide what the regulations on the banks that they work for should be.
According to the Washington Post, this means that “executives from Goldman Sachs, J.P. Morgan Chase, General Electric and other firms sat on the boards of regional Federal Reserve banks while their firms benefited from the central bank’s policies during the financial crisis.” In a particularly embarrassing example, the person who handled the bailout of Goldman Sachs had stock in none other than Goldman Sachs. No wonder everyone is so upset at Wall Street.
These systemic conflicts of interest could help explain why the government bailouts were so cushy for big banks, but did little to improve the lives of workers who may have lost their jobs, homes and wealth due to the recession. As we know, bankers sometimes forget that the world doesn’t actually revolve around them, and that what’s best for them may not be what’s best for everyone else. It just looks like there weren’t enough structures in place to make sure they didn’t lose sight of their own private balance sheets.
The GAO report has a lot of recommendations for how to improve the regional Fed boards. They include more clearly delineating what kinds of people can hold what positions and increasing diversity by appointing more women and minorities. Though these are certainly a start, the Fed is not going to regain its credibility or fix the economy until it starts looking out for all Americans, not just those in the top 1%.
Photo from epicharmus via flickr.