Viewpoint: Consumers' Chance to Have a Voice at the Fed

One thing the financial crisis has taught us all is the extraordinary power of the Federal Reserve Board. President Obama now has an historic opportunity to make sure that the small group of governors that runs the Fed represents consumers and not just the banking industry.

Indeed, it's not too much to say that if the Fed's seven-member board of governors had included one or two pro-consumer representatives a few years ago, the subprime mortgage meltdown and the Great Recession that followed might have been averted.

Back in 2004, the Greenlining Institute warned then-Fed Chairman Alan Greenspan that deception and unscrupulous practices were spreading in the subprime mortgage industry. It's now obvious that those abusive practices helped fuel a speculative bubble in housing, seducing buyers with shaky finances into loans they couldn't afford in order to buy homes whose prices were wildly inflated.

We're all paying the price, and will be for years to come. But back when it could have made a difference, the Fed didn't listen to advocates who warned of trouble brewing.

With Fed Vice Chairman Donald Kohn resigning in June, President Obama will have the chance to fill a total of three vacancies on the Fed's governing board. Those new governors must not represent more of the same.

The same in this case means a narrow class of elite academics and high-level bankers. That elite will be well represented by the four board members who are remaining. Two have roots in academia and two hail from the banking world: a former board member of the American Bankers Association and a former executive director of Morgan Stanley's mergers and acquisitions department. Not surprisingly, all are white and a large percentage of foreclosure victims are Asian-American, Latino and African-American.

The other slots need to represent the real economy: smart, knowledgeable people who have hands-on experience with how the Fed's policies play out in the real world. That might include someone from a nonprofit who has worked with low- and moderate-income communities; somebody who knows the realities on the ground and has seen what foreclosure does to communities; someone who has witnessed the destruction caused by exploitative practices like payday lending.

The Fed has no shortage of governors who see the world of banking and finance from the top down. Surely there is a place for two or three who know what it looks like from the bottom up.

The Fed's governance becomes all the more important if, as seems increasingly likely, pending financial reform legislation eliminates an independent Consumer Financial Protection Agency. Instead of a tough, independent watchdog for consumers, Christopher Dodd, D-Conn., chairman of Senate Banking's Housing and Urban Affairs Committee, recently floated a proposal under which the CFPA wouldn't be independent at all, but instead would be under the control of the Fed.

That may come to pass given the massive lobbying efforts against an independent CFPA by the banking industry and the U.S. Chamber of Commerce.

But whether or not we get an independent consumer financial watchdog, the Fed will continue to play a massive role in the economic policies that affect every American, rich, poor or in between. A Fed run exclusively by economic elites with no clue how their policies affect ordinary Americans is guaranteed to fail again.

For reprint and licensing requests for this article, click here.
Community banking
MORE FROM AMERICAN BANKER