“This is huge news,” someone on Bloomberg Television declared, as the network interrupted a live broadcast from a crowded container port to announce new restrictions on trading activity by Fed officials and staff.
For the better part of two months, Jerome Powell labored under the shadow of a mini-scandal precipitated by “revelations” that Robert Kaplan, Eric Rosengren and Richard Clarida all traded securities last year during the Fed’s unprecedented push to backstop the economy and financial markets amid the worst economic downturn in a century.
Kaplan and Rosengren “retired,” with the latter citing health concerns and the former blaming the “distraction” caused by his own trades. As for Clarida, the Fed described his activity as a “pre-planned rebalancing.”
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At pains to inoculate the Fed from additional criticism (not to mention repair any damage done to his renomination bid), Powell launched an internal review.
On Thursday, he unveiled “tough new rules” on trading for policymakers and senior staff who are henceforth restricted in their capacity to purchase individual stocks, invest in individual bonds, invest in agency securities or dabble in derivatives.
Powell described the restrictions as “expansive” and took the opportunity to declare that the Fed is now “at the forefront among major federal agencies” when it comes to investment and trading rules.
Going forward, policymakers and senior staff are compelled to give 45 days’ notice before buying or selling securities. They’ll also need to have any purchases or sales approved and are required to hold investments for at least a year. Additionally, policymakers and senior staff won’t be allowed to make any trades whatsoever during what the Fed described as “periods of heightened financial market stress.”
Reactions to the new rules will vary. The peanut gallery (so, finance-focused social media and a few well-known tabloid portals) will spend an inordinate amount of time Thursday exchanging clichés, creating memes and reveling in one another’s hapless ba dum tiss efforts. Serious critics whose opinions actually count for something (e.g., Elizabeth Warren) will claim the rules are a step in the right direction but don’t go far enough and are too little, too late to restore the public’s faith in Powell. Powell’s supporters on Capitol Hill will applaud “swift” action. Someone will call it “bold.”
Meanwhile, the public (in whose interest everyone involved claims to be acting and on whose behalf everyone purports to be speaking) won’t care one little bit. And that’s assuming they even notice. The vast majority of Americans will never get the memo about this “huge news” (to quote the voice on Bloomberg Television), nor would they know what to make of it or why it’s important if they did.
Nothing in the new rules changes the numbers that count. 10% of Americans control nearly all of the stocks (figure below).
The undereducated own almost no corporate equities (figure below).
The bottom 50% is almost totally bereft (figure below).
Like all luxuries, stock ownership is disproportionately the purview of white people who make at least $100,000 per year (figure below).
Those visuals (and I could conjure a half-dozen more) speak to what actually matters in America when it comes to stock ownership, financial assets and the trading thereof.
Average Americans don’t care if Fed officials trade into (or out of) securities during periods of market stress. Everyday people don’t even know what the Fed does, let alone who Robert Kaplan is. If you explained the situation to them, most regular folks would shrug. “So you’re telling me there was a possible conflict of interest? Imagine that!”
In fact, the irony is that the very people (i.e., Main Street) who the finance community imagines are aggrieved at this situation would undoubtedly find it amusingly quaint that anyone would spend more than a few seconds marveling at a non-crime that can be roughly summarized as “rich people getting incidentally richer.” Quainter still to the American everyman is the idea that the discovery of another conflict of interest among society’s elite is newsworthy.
Everyday people care about their own lives first, the lives of those they care about second and everything else last, if at all.
Imagine you’re a single mother trying to raise two teenage boys in a violent Chicago housing project. If that’s you, whether or not a former Goldman executive-turned associate Harvard dean-turned technocrat bought and sold some stocks last year is so far removed from anything that’s even remotely relevant to your daily life that it may as well have happened on Mars.
The only link between those trades and regular Americans is the extent to which they (the trades) speak to a system that continues to reward the same privileged group of people in a never-ending cycle that perpetuates the wealth divide and ensures inequality of opportunity. Restricting Fed staff from trading isn’t going to change that, which means it’s totally irrelevant to the public.
Powell on Thursday congratulated himself. On behalf of the public. The bar for Fed officials is now sufficiently high “to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” he said.
(“There’s a pretty significant tent city that I drive through on the way home from work.”)
Jeez, do you think we could put some rules like this in place for members of Congress? (Just kidding!)
Not kidding, Congress, senior aides and staff, all government department heads and senior staff. Same rules for all.
No one will confuse Powell with a French aristocrat circa 1789, but, jeez, when it comes to all the people who could be Fed chair, we could do a lot worse.
There are plenty of important policy reforms that are of little interest to much of the general public. The single mom in a Chicago housing project probably doesn’t care whether current or former Goldman execs are the ones making money in the stock market. But she probably does hope that those in government are worrying more about the long term interests of the economy as a whole instead of their own short term financial gain. The problem is pervasive in government. We want our generals deciding what weapons the troops need, not thinking about where they will work upon retirement. Recent disclosures that over a hundred federal judges should have recused themselves from cases certainly surprised me. The concern is less about who and how much money is being made, and more about whose interests are being served. Powell’s reforms won’t save the world. But I think we are better off with them than without them. Personally, I would find it very frustrating to be constrained in my own investment activity by the rules he just imposed. (Although, sadly, I do wonder if I might have better returns if I didn’t buy individual stocks, and only bought when I knew I had to hold for one year.)
Whether any particular audience is or is not watching, it is the right thing to do and I’m pleased that Powell did it – and quite swiftly too.
I do think we can’t demand that Fed governors and staffers be sans real assets or securities portfolio. If a person is entrusted with the stability of the banking system and financial markets, and has the depth of real-world experience necessary to do the job, it would be quite odd for that person to be a stranger to either.
We also, in my view, also can’t demand that those persons convert their wealth to an asset class untouched by the Fed’s decisions, because there is no such thing.
I think the main thing we should expect is that they not trade based on material non-public information, or before public information has had a chance to become discounted in asset prices.
In principle, it might also be nice to require their portfolios to be highly diversified, rather than unduly concentrated in a specific asset class most influenced by whatever they are working on at the Fed. But that might be too difficult to administer.
In spite of the many (many, many, many) failings of American society, it is relatively free of corruption. We don’t expect to have to bribe someone to get a building permit. We may hate big banks, but we don’t expect them to skim from our checking accounts. Actions like Powell’s are necessary to keep our system (relatively) clean.
“We may hate big banks, but we don’t expect them to skim from our checking accounts”
Wells Fargo on line 1 for you 🙂
I don’t know what government you are referring to, but the US government and its state and local governments are absolutely corrupt. I lived in Iowa for 35 years. During that time Chuck Grassley was my congressperson and then my senator. While he has been in Congress he has been he recipient of millions in government aid for his farm. A truly good citizen would eschew such aide knowing that he wields significant power over the passage of legislation dispensing all this money. But he’s right there in line getting his “fair share.” Almost everyone in the Congress is a multi-millionaire, including Bernie Sanders. Given what they earn how did they accumulate so many millions? And Trump? Seriously?
The single mom doesn’t care about Powell trading stocks that he’s also using Fed policy to purchase but she does care about the rising cost of groceries. While she may or may not be able to connect the relationship between the Fed chairs buying stocks while simultaneously keeping QE going during “transitory” inflation. She certainly would be pissed off to learn that the Fed chair put his short term financial gain over her longer term ability to afford goods and services necessary for her family’s survival. While we don’t KNOW yet whether or not the Fed could have had an inkling that this transitory language was BS, it’s now painfully obvious that they waited way too long to taper QE and now have us on a crash course for another Stagflation type event.
What is becoming painfully clear to me about United States government is that it has been designed to be a place where corruption is not only possible but welcomed. Judges trading securities on cases they are adjudicating? Senators buying and selling stocks based on policy they set or information they get ahead of the public? The Fed chairs buying securities that they know their policies are buoying? All of this is just the tip of the iceberg on how easily corruptible anyone can be. If you work for a financial firm and have access to trading platforms or insider information, there are very strict guidelines about what you can trade and when. The irony to me is that a person who can look at a Bloomberg terminal has far less of an advantage than a a Congressmen who gets advanced information on a government shutdown and can liquidate his assets before everyone else. It’s completely backwards. This current time definitely has parallels with the Gilded age for me, throw in the weaponization of misinformation and that’s a pretty nasty cocktail we’ve got going on.
Give powell a break. He is not the son of god. He is human and is trying hard. Given his background in law and investment banking he is not going to be a social progressive. But he is a (reasonably) competent public servant. Same comment about Biden, although Joe is a bit more sympathetic/empathetic to an average person. A sign of political maturity for the electorate is to realize you are hoping the people running the show are good. But also to realize nobody is perfect. And even the really good ones make mistakes and make reasonable decisions which may not work out.
Amen. Well said.
the FED staff will be compensated by increased salaries and guaranteed benefits for being barred to trade securities, not necessarily a bad trade off…