How To Solve The Fed’s ‘Embarrassing’ Ethics Problem

When Jerome Powell takes questions from the press after this week’s critical Fed meeting, monetary policy won’t be the only thing on reporters’ agenda.

As Bloomberg put it, Powell “will also face questions about recent embarrassing 2020 stock-trading revelations involving two regional Fed presidents.”

I feel compelled to weigh in on this controversy, even as I realize my take isn’t likely to be popular among some readers considering we live in a world where even the nominally sane love conspiracy theories.

The story is simple enough: Some policymakers actively traded and/or owned assets whose prices were influenced by the Fed’s emergency pandemic programs.

I’ll just go ahead and chance irritating a few hundred (or a few thousand) readers: Who cares?

Each and every week (if not each and every day), you, me and everyone we know, engages in some manner of activity that constitutes a conflict of interest.

One of the most popular financial portals on the internet once featured a tongue-in-cheek advisory to readers that they (readers) should assume the site’s owners held positions in every asset discussed on the site, for example.

In the corporate sector, equity-linked compensation virtually guarantees that some high-level decisions about, for instance, how to deploy cash, are made based almost entirely on the likely ramifications for share prices. Those decisions often come at the expense of workers and investments in long-term growth.

More importantly, though, the contention (implicit, explicit or otherwise) that the Fed’s policy decisions in the wake of the pandemic were materially influenced by the personal portfolios of officials is simplistic and highly specious.

The reality is, these people are already rich. And, as the linked Bloomberg article pointed out, the structure of the system already meant that regional “Feds can operate with less disclosure and scrutiny.”

Do they want to get richer? Well, sure. Probably. And did at least one (or two or three) officials hear a little voice in the back of their head(s) that said, “You know, these policies are likely to benefit the asset-rich and you’re asset-rich”? Maybe. Sure.

But if we’re going to go this route, then let’s clawback every, single dime in capital gains in every, single portfolio held by every living US lawmaker on record voting for legislation which can be mathematically linked to market outcomes which benefited those positions.

Getting quickly back to the Fed governors, consider that all of them (Powell especially) could surely be making more money in the private sector than they make currently as Fed officials. In fact, it’s not a stretch (at all) to suggest that they could make more money simply by retiring and accepting paid speaking engagements. Given that, it’s the furthest thing from obvious that anyone at the Fed thought, “Oh, good, a pandemic! Now I can consciously abuse my position to get richer.”

Would the Fed’s pandemic response have been materially different if it were run by — I don’t know — a board comprised of factory foremen, civil rights activists, charity workers and ASPCA volunteers, all supervised by a couple of “regular” economists plucked from the classrooms of obscure universities? Who knows.

Admittedly, that’s a straw man. But not entirely. Consider the following assertion from Benjamin Dulchin, director of the Fed Up campaign at the Center for Popular Democracy, as quoted by Bloomberg:

The bigger problem is how asset-wealthy the majority of the Fed’s leaders are, and how that creates a natural assumption for them that what’s good for Wall Street is good for the country. The Fed can’t prohibit wealthy people from serving in Fed leadership, but the Fed absolutely can implement policies to make their leadership more diverse.

But can it? How easy is that to accomplish in practice? How straightforward would it be to install a Fed leadership that’s “diverse,” where “diverse” apparently means a pseudo-mandate that a certain number of seats are reserved for people who aren’t asset-wealthy?

Strictly speaking (and certainly from the perspective of the American middle class), someone who has, say, $1.1 million in a retirement fund is asset-wealthy. In fact, to the average American family, someone who has $500,000 in investments spread across a few simple index funds is asset-wealthy. Remember: Most Americans can’t afford to fund a $400 (that’s four hundred, with no “extra” zeros after it) emergency with spare cash.

Who’s precluded under such a mandate? Lots of qualified people, that’s for sure. And pretty much everyone who would normally be considered for such a position.

Consider how thorny the issue of diversity is in university admissions. The history of affirmative action essentially revolves around holding up the concept of “diversity” as a shield against accusations that explicit, quota-based systems designed to increase African American enrollment unfairly discriminate against other, “better qualified” applicants, where the scare quotes suggest standardized testing is questionable as an infallible predictor of success.

Without delving into the specifics, the short version is that quotas invariably elicit charges of reverse racism, so in order to get around that, schools lean on four-decade-old precedent which permits considering race in admissions decisions by reference to the benefits associated with building a diverse student body.

The problem with that well-intentioned workaround is that it’s inherently nebulous. The court recognizes the necessity of fostering equality of opportunity and advancing the cause of racial justice in order to atone for America’s “original sin,” but isn’t prepared to wholeheartedly countenance quota systems, which effectively cap white enrollment. The Supreme Court continues to grapple with the issue.

One could argue that institutions like the Fed should adhere to a similar system. For example, we could cap the number of asset-wealthy white men, not because there’s anything wrong with being rich and white, but because the Fed would benefit from diversity on its own “campus,” where that means reserving a certain number of seats at various tables for, say, African American males with less than $50,000 in financial assets. Or Hispanic females who don’t own rate-sensitive securities.

I’m all for it. How about everyone else? After all, the Fed itself now includes a tacit commitment to a diverse labor market in its dual mandate.

I assume the punchline here is obvious. But just in case: The Supreme Court Justice who established the diversity precedent which dominates the affirmative action debate to this day was Justice Powell.