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Banking sector, Blogs, Macroeconomic policies

US President asked to consider extraterritorial impacts in appointing new leader of Fed

President Barack Obama is soon expected to announce his nominee to take over the role of Chair of the Federal Reserve Board system (Fed). The Fed’s current chairman, Mr Ben Bernanke, started in his position in 2006, and next year his second term will expire.

What views the person that will head the Fed –basically the US Central Bank — has on matters of financial regulation and monetary policy is bound to have a lasting impact on human rights, not just in the US but far beyond its borders.

If in doubt about this, just remember the now famous words of former Fed Chairman Mr Alan Greenspan, in the wake of the global financial crisis of 2008: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

Such a statement was revealing not only in what it said, but also in what it did not say. Indeed, one could interpret that in designing regulation and monetary policies, he was looking only after the needs of shareholders, not the financial system and the public at large. In other words, the focus was not just was completely domestic, but selective in the domestic constituencies it had in sight.

Yet, the views on the virtues of market self-regulation that Mr. Greenspan, chairman of the Fed from 1987 through 2006, was finding flawed in such statement, had by then inexorably shaped almost two decades of extreme withdrawal of government from its mission of oversight of the financial sector.

Unfortunately, there are no channels by which the many millions of poor and jobless people affected by flawed Fed policies can have their views heard in the process of appointing a new head for the Fed.

But, aware of the extraterritorial impacts that the choice will have, a group of US-based faith-based organizations have taken it upon themselves to bring up demands that these factors be part of the decision-making process.

Last week, in a letter addressed to US President Barack Obama, they exhorted him to include in his discernment process the fact that deregulatory policies have had negative effects on those living in poverty everywhere, including in countries with GDPs smaller than some Wall Street banks. So, the letter argues “the Fed chief needs to have a strong and proven track record as a staunch supporter of the role of regulation in limiting excessive risk-taking by financial institutions.”

It includes a call for interrogating the views of the nominee on the need for laws separating investment and commercial banking as “the repeal of such laws has severely damaged the financial system.” Reducing the concentration and interconnectedness of the banking sector that led to the bailout large financial companies is a still unaccomplished task that US groups have been trying to promote in the legislative and regulatory process. Under the financial reform legislation passed in 2010 the powers of the Fed for enforcing limits to concentration and interconnectedness, for instance by downsizing banks or non-banks considered “too big to fail,” have become larger. But the determination of whether and how to use such powers remains discretionary. Other relevant aspects also left to the Fed in such legislation, such as the domestic implementation of the internationally-agreed new capital requirements for the banking sector, underscore the importance of the individual background the chief of the Fed will bring to the job.

The letter also asks that the next Fed chair be known for maintaining “an appropriate distance from regulated companies with full transparency and disclosure.” This requirement would go a long way to prevent biased regulation in the interests of particular sectors, for instance financial interests.

The letter also says the new leader of the Fed should have the global vision to protect the poorest communities from food supply shocks. “Numerous studies have shown the impact that the massive expansion of investment in under-regulated commodities derivatives through commodity index funds and exchange-traded funds by non-traditional investors has had upon the price of food and energy commodities, especially since 2005.” Working with other agencies in the US, such as the Commodity Futures Trading Commission, the Fed weighs in on critical regulations necessary to safeguard the prices of food staples from purely speculative financial interests.

Just one of the manifestations of that power has been in evidence recently as the Fed began to scrutinize the permission it gave, several years ago, to financial firms for trading in physical commodities. That determination added a new twist to the impact of financial firms in commodity prices. It enabled banks to engage in what is essentially a conflict of interests as they trade in financial instruments that have as their underlying variable prices of commodities whose physical demand and supply the same companies can manipulate.

A petition containing the same demands as the letter is available and open for individual signatures here.

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February 2017
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