WASHINGTON – The Federal Reserve System was roundly criticized Wednesday during a hearing in which Republicans accused Democrats of staging a "hostile takeover" of the central bank, while community groups blasted the system as being blind to the needs of communities of color.
Rep. Bill Huizenga, R-Mich., who chairs the House Financial Services Committee's subcommittee on monetary policy, said that Democrats had tucked a provision into the Dodd-Frank Act in 2010 that would gradually increase the representation of their constituencies on the boards of directors of regional Federal Reserve Banks.
The change, which limits the powers of "Class A" directors – that is, those representing commercial banks – in selecting regional bank presidents, amounted to a "hostile takeover" of the central bank by a political party, Huizenga said.
"Should this coup succeed, District Bank directors would be selected not for their interest in increasing economic opportunity wherever it shows promise, but rather in channeling resources to where they maximize political favor," Huizenga said in a CNBC op-ed published the morning of the hearing.
But outside the committee room doors, a group of about a dozen community activists staged a short protest and press conference, criticizing the Fed's leadership for its lack of racial diversity and criticizing the Fed itself as being unconcerned with the plights of communities of color – whose unemployment rates and rates of poverty are statistically far higher than average.
"Anyone who believes in reforming the Federal Reserve, anyone who believes in raising the voices of communities of color" should support Fed reform, said Ruben Lucio, field manager for the Fed Up campaign. "We believe that when these voices are excluded from the conversation, that our interests are excluded."
The hearing, which featured testimony from Kansas City Fed Bank President Esther George and Richmond Fed Bank President Jeffrey Lacker, was held to examine the governance structure of the regional Fed banks and "how it related to the conduct of monetary policy and ultimately economic performance," according to the description of the hearing in a briefing memo .
The range of complaints lobbed at the Fed was wide. Huizenga argued that the Fed's accommodative monetary policy – in place since the 2008 financial crisis – has disproportionately affected savers and has hampered the "real" economy.
"Wall Street is doing just fine. I'm concerned about Main Street," Huizenga said. "This is something we have to tackle and I think that there really is something that the right and left share, which is a suspicious view of the Federal Reserve and to make sure it is properly checked."
Democrats, meanwhile, questioned why the Fed system was not more ethnically diverse and whether the largely white, male composition of the central bank's leadership was dulling its sensitivity to the plights of minority communities. Rep. Gwen Moore, D-Wis., said those communities "are not experiencing the recovery as other communities are."
Dr. William Spriggs, chief economist for the AFL-CIO labor union, said that the problem at the regional bank level is not a simple matter of regulatory capture per se – there are some labor unions and community groups among members of bank boards. But those representatives do not necessarily bring the urgency to those boardrooms that the communities they represent are feeling.
"These are people who look like bank directors, they are trained and talk like bank directors," Sprigs said. "It's not necessarily a capture in the usual sense of regulatory capture, but it clearly is a cultural capture."
Lacker acknowledged the complaint that communities of color are not as fully represented among the Fed's leadership as would be desired, and noted that the lack of diversity stretches back to the central bank's founding. But he said the Fed was designed to be decentralized, as evidenced by the 12 regional banks and their representation on the Federal Open Market Committee, and that was put in place in order to represent the geographic diversity of the country.
"The federated structure has benefited policymaking by ensuring that a diversity of perspectives on policy and economic conditions are brought to the table," Lacker said. "To be sure, our country's understanding of diversity has expanded since 1913. And it is in keeping with the spirit of our founding that the Federal Reserve has taken the importance of diversity seriously as we have sought to ensure broad representation of views in the formulation of monetary policy, including those associated with disadvantaged communities."
George added that it is critical that Fed banks take all sorts of factors into account when considering membership of their boards, including things like ethnic background, economic background and representation of critical industries. She said it is "essential to public trust in the institution" that boards reflect the communities they represent.
"We will not be successful without having ethnic diversity on our boards, without having the interests of labor on our boards, as well as multifaceted contributors to the economy – business, [agriculture] and commercial [interests]," George said.
Several members of both sides of the aisle complained that the location of the regional Fed banks – which was decided when the system was first established more than 100 years ago – disproportionately favors the eastern United States. Rep. Bill Foster, D-Ill., suggested a periodic reconsideration of the location of those banks might result in a more equitable geographic distribution of the banks. Rep. Mia Love, R-Utah, echoed that sentiment, saying she is "not convinced that the western states are represented as well as the eastern states."
George maintained that the interests of the entire country are represented in the Fed system and on the FOMC. While she conceded that the geographic boundaries were drawn based on a different economic reality than exists today, the question is less one of structure than of accountability.
"These issues were debated for a long time, and came to the conclusion that a decentralized structure was the best for the country, and I think that's still true today," George said. "I think its value comes from drawing from many parts of the country – not just Washington, not just New York."
Speaking during a press scrum after the hearing, Lacker said he was concerned about the political pressure the Fed is facing and whether it might ultimately undermine the institution's independence. The nation can only adopt one monetary policy at a time, he said, and the value of the Fed's structure is that it is free to pursue a policy that works best for most.
"I am concerned that we're maybe coming into the crosshairs," Lacker said. "People need to recognize that we just have this one tool. It's relatively blunt, and if we stimulate demand, there's no guarantee about where it's going to show up."