With the Fed’s latest hiring of Neel Kashkari as President of the Minneapolis Federal Reserve Bank, Goldman Sach’s former executives will now hold 4 of the 5 Fed President’s seats on the very powerful Federal Open Markets Committee, which is responsible for the formulation of U.S. monetary policy.
Before discussing concerns about these appointments, it would be interesting to revisit some history.
The subprime debacle of 2008 took down a lot of companies and individuals, most especially the American taxpayer. However several savvy investors made a killing from that financial disaster.
One of those was the powerful investment bank, Goldman Sachs. According to the Wall Street Journal, late in 2006, traders in its Structured Products department convinced bank executives that the “sub-prime market was heading for trouble.” Being smart traders, the bank sold off much of its “stockpile” of mortgage-backed securities. In addition, the bank’s traders bet — what is called “selling short” — that the market would go down.
It paid off and Goldman generated “nearly $4 billion of profits during the fiscal year ending in November of 2006, erasing their mortgage-related losses. Not bad gambling, except that Goldman’s customers lost out. And, Goldman Sachs continued selling mortgage-backed securities while still betting these same securities would lose their value.
Goldman‘s “success at wringing profits out of the sub-prime fiasco,” the Wall Street Journal said, “raises questions about how the firm balances its responsibilities to its shareholders and to its clients.” Ben Stein, in his usual pull-no-punches manner wrote that the firm continued “injecting dangerous financial products into the world’s commercial bloodstream” even after it became convinced they were “horrible.” “It is bad enough,” he wrote in the New York Times, “to have been selling this stuff.” “It is far worse,” he added, “when the sellers were, in effect, simultaneously shorting the stuff they were selling.”
Goldman did ultimately pay to the SEC fines of $550 million related to the above activity and has additionally paid additional billions in settlements related to mortgage sales and securitizations activities.
And, by the way, $12.9 billion of the taxpayer funded bailout of AIG went to Goldman Sachs to cover derivatives losses which would have occurred if AIG had been allowed to fail. This made Goldman the largest beneficiary of the AIG bailout, which was engineered by Secretary Paulson, another Goldman alum, and Tim Geithner, president of the New York Fed.
Again, lest we forget, up to and during the crisis, Goldman’s former leadership included the then current Secretary of the Treasury, the governor of New Jersey, and the Treasury Secretary under President Clinton. Pretty powerful people, smart people. Nothing illegal here, but, is it ethical? Moral?
Still this is old news. After all, this happened in 2006 thru 2008. Who cares? We’d best, as essentially we are establishing dangerous precedents.
So let’s fast forward to today. Given Goldman’s dubious history, I’m curious as to why the Federal Reserve keeps hiring former Goldman Sach’s executives.
The above referenced post goes on to say, “To curtail Wall Street’s reckless and manipulative activities that most Americans blamed for causing the Great Depression, the Banking Act of 1935 revised control of the U.S. Federal Reserve by adding a rotating five of the twelve Federal Reserve Bank Regional Presidents as voting members to the seven-member Fed Board of Governors, which has sole voting authority to set interest rates as members of the Federal Open Markets Committee (FOMC).”
But in recent years, Goldman Sachs, Inc. has led Wall Street’s campaign to dominate political donations in an effort critics refer to as trying to create “The Best Government Money Can Buy.” Since reporting records became available in 2002, Goldman Sachs and its employees have made $51.6 million in political contributions.
So with the Kashkari appointment, four of the Fed’s 12 regional branches are run by former Goldman executives. In August, the Dallas Fed named former Goldman Sachs Vice Chairman Robert Kaplan as its president. The head of the Philadelphia Fed, Patrick Harker, was the trustee of the Goldman Sachs Trust, and the head of the New York Fed, William Dudley, was Goldman’s chief economist. That 4 of the 5 Fed President’s seats on the very powerful Federal Open Markets Committee, which controls U.S. interest rates, are held by Goldman Sachs former executives, seems a bit odd to me
When the Federal Reserve was established, Congress called for its policy makers “to have fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country.” This is no longer the case. It seems that we are hiring Fed officials from two backgrounds: 1) academics from universities and Fed research departments and, 2) alumni of Goldman Sachs.
“Of the 17 Fed officials in office next year, five members of the Board of Governors and 12 regional bank presidents, all but three will have professional backgrounds as academics or with Goldman Sachs,” reports the Wall Street Journal. George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, referring to the shift toward a narrow range of backgrounds at the Fed says, “The obvious downside of this is there’s more of a groupthink within the Fed.”…“That can be very dangerous if the groupthink is based on ways of thinking about the economy that are not necessarily sound.”
It’s the Fed’s role to regulate much of our financial system, from the Wall Street banks, community banks, insurers and other financial institutions. The Fed also has some responsibility for consumer protection, community development, our payment systems and other banking functions. The narrowness of the professional backgrounds now on board at the Fed may potentially limit expertise and decision making.
I have a real concern over the Fed’s ability to make decisions with the independence and objectivity it needs to regulate our economy and interest rates, with four of the five Fed president’s seats on the Federal Open Markets Committee being former Goldman executives. The Federal Reserve must be absolutely independent and objective in pulling the levers on the economy. But, how can it be given the very unbalanced situation of power?
But more than that. Goldman Sachs was at the center of the debacle. How can we in good conscience hire their former executives to run the most powerful structure in the country when, during the financial debacle, they were involved in less than full disclosure and dubious transactions themselves?
“Regardless of whether a Democrat or a Republican is inaugurated as U.S. President on January 20, 2017, he or she will need to cooperate with what will undoubtedly be referred to as the “Federal Reserve of Goldman Sachs.”
At the end of the day, conscious capitalism can only thrive in a society where citizens and corporations make ethical choices. Goldman Sachs did not.
[tweetthis url=”http://bit.ly/1HWXXGv”]Conscious capitalism can only thrive in a society where people make #ethical choices. ~ @RichardMBowen #thefed[/tweetthis]