The revolving door between the big banks and the Federal Reserve isn't just unseemly — it's a time bomb. Here's how to fix it.
- By Pedro Nicolaci da CostaPedro Nicolaci da Costa is editorial fellow at the Peterson Institute for International Economics. He spent over a decade covering the Federal Reserve, first at Reuters then The Wall Street Journal.
The revolving door that allows regulators to slide quickly into the same sector they oversee and vice versa is a common pattern across industries. It seems to spin with particular vigor, however, when it comes to Wall Street and financial overseers in Washington. The revolving door has not merely led to the impression of conflict, eroding public trust in an already troubled and meltdown-prone financial system and the institutions in charge of regulating it; it has also coincided with ethical scandals and even alleged crimes that have affected the credibility of many of the world’s leading central banks, including the Federal Reserve.
It’s also a door that keeps on spinning. But it doesn’t have to: Simple reforms could prevent its most pernicious incarnations.
Lack of public trust in the Fed’s aggressive monetary easing may already have curtailed additional action to support the economy and arguably lessened the benefits of low rates and asset purchases for the economic outlook. That’s because consumers and investors were left thinking the central bank would pull back stimulus as soon as it possibly could. Indeed, many observers have erroneously come to equate the Fed’s monetary policies, which are aimed at the economy as a whole, with bank bailouts, which are direct cash injections to specific institutions.
The latest tour de porte came on Dec. 7, when the bond fund giant Pimco announced not one but three salient appointments of former leading government figures — former Federal Reserve Chairman Ben Bernanke, ex-European Central Bank President Jean-Claude Trichet, and Gordon Brown, former U.K. prime minister and, earlier in his career, its finance minister for a decade. Before that, on Nov. 10, the Federal Reserve Bank of Minneapolis appointed Neel Kashkari, a former Goldman Sachs banker, to be its new president. It was the third consecutive top Federal Reserve appointment to come from Goldman Sachs.
Kashkari’s story is, in many ways, typical. He has already taken a couple of spins through the revolving door. He first came into the public eye in late 2008, at the age of 35. Then-Goldman Sachs CEO Hank Paulson had been tapped by George W. Bush to become treasury secretary as the financial crisis deepened, and Paulson brought Kashkari, then a young confidant at Goldman, to work with him. Kashkari was appointed to manage the $700 billion taxpayer bailout of the nation’s largest banks. Given that role, he certainly possesses some experience in economic policy management. But the ease with which he has flowed back and forth between public and private jobs is disheartening.
After working in several senior Treasury roles between 2006 and 2009, including assistant secretary for financial stability, Kashkari returned to finance, working for the previously mentioned Pimco, which is based in Newport Beach, California. After that, Kashkari made an unsuccessful run for governor of California as a Republican in 2014. His return to the Federal Reserve completes a well-worn cycle.
When he was appointed, Kashkari became the fourth out of 17 sitting top Federal Reserve officials to have worked at Goldman Sachs. It’s little wonder the bank has jokingly become known as Government Sachs. Kashkari is also the sixth former Wall Street banker with a top Fed job right now: Both Vice Chairman Stanley Fischer and Atlanta Fed President Dennis Lockhart used to work at Citigroup, one of the banks that fared worst during the 2008 financial meltdown.
Goldman’s influence isn’t limited to U.S. policymaking, however. Both Mario Draghi, president of the European Central Bank, and Bank of England Governor Mark Carney are Goldman alumni. It also isn’t out of the ordinary or even a coincidence: Goldman Sachs, Citigroup, and Morgan Stanley have all paid out multimillion-dollar awards to executives who have left to work for the government.
Fed Governor Jerome Powell also worked in finance, if not banking. He spent his career in private equity, an industry that uses debt financing to buy, restructure, and then sell firms. Powell worked at Carlyle Group, where he amassed the largest personal fortune of any current Fed official, amounting to tens of millions of dollars.
It’s not that bankers and other financiers are not qualified to be central bankers. An understanding of finance is important to setting interest rate policy, as is having a feel for markets, knowing what to say, and when to say it in order to minimize swings in the economy. The problem arises when the conflict of interest becomes so flagrant that public confidence in the institution — even government itself — is shaken. And after a historic financial crisis caused in great part by reckless banking, it’s not difficult to see why the average taxpayer might be a bit put off.
They have good reason to be mad, too. The revolving door isn’t just unseemly — it’s dangerous.
To be clear, officials are not flouting any laws or rules by moving rapidly into the private sector. In most cases, they are also not attempting to influence policy in a way that bolsters their previous or future employer when they enter government. But the mere impression of a conflict is enough to hamper the institution, particularly when it comes to its role of supervising and potentially sanctioning financial firms for any wrongdoing. Following the financial crisis, American voters have been especially receptive to Fed-bashing rhetoric from both sides of the aisle, with Republicans accusing the central bank of not being transparent enough while some Democrats worry it has been too soft on the banks it regulates.
Possible conflicts exist not just for Fed officials previously employed in finance, but also for those seeking to enter the industry after working in government. What used to be called public service has become a stepping stone to private profit. Richard Fisher made his millions as a hedge fund manager before becoming president of the Dallas Fed in 2005. Just days after stepping down this March, Fisher announced he was joining the board of PepsiCo. In June, he became an advisor to Barclays, one of several Wall Street giants that just a month earlier pleaded guilty to criminal manipulation and rigging of the foreign exchange market. Although Fisher wouldn’t have directly regulated Barclays during his time in Dallas, he would have had indirect oversight over the bank’s U.S. operations, which are significant.
The leap into private sector profits isn’t limited to those who started out in banking, either. Bernanke, a lifelong academic and intellectual, seemed an unlikely candidate for moving into finance after an eight-year tenure at the Fed’s helm. Yet Bernanke, in addition to being on Pimco’s board and already working there previously as advisor, also works for Citadel, a large hedge fund. Jeremy Stein, a Harvard academic who returned to Cambridge after just two years as a Fed governor in order to keep his professorial tenure, also ended up working for a hedge fund.
So how should perturbed citizens go about slowing this merry-go-round of legal but untoward behavior? Solving the problem could be a lot easier than some politicians in Washington would have voters believe.
Bankers often talk about building buffers or firewalls to contain financial risk. Why not build a substantial, robust firewall between Wall Street and the regulators who supervise it? Otherwise, does anyone really think we have a shot at a well-regulated, less volatile banking system?
Here’s a good start: Let’s impose a three-year waiting period between any financial sector position and any regulatory or supervisory role in government. That would substantially diminish the “prestige advantage,” to use the Fed’s own terminology, that public officials confer on private institutions because of their inside knowledge and personal connections. Similarly, a three-year cool-off would scrap the incentive banks currently have, including bonuses, to actively try to place their executives in top public office.
The potential for conflict is not merely theoretical. Several recent scandals involving leaks by top Fed officials to financial sector participants have raised concern and triggered — in addition to fines in the tens of millions — probes from Congress, the Justice Department, and the Federal Bureau of Investigation.
The U.S. central bank is not alone in finding itself at the center of legal controversy. In October, after a senior policymaker gave a private speech to a hedge fund that had a big impact on markets, the European Central Bank was forced to issue a new set of communications rules for top officials — emulating the Fed’s own code of conduct established following a leak uncovered in 2010.
In the United Kingdom, the Bank of England became enmeshed in the Libor interest-rate rigging scandal after Tom Hayes, the UBS trader who was recently sentenced to 14 years in prison, testified in court that a senior central bank official had been notified of the rate-rigging fraud in an email but failed to act on the information.
And in 2012, Swiss National Bank Chairman Philipp Hildebrand was forced to step down after it was discovered that his wife, a former hedge fund manager, made a large trade in the foreign exchange market just weeks before her husband announced a large intervention in the Swiss franc.
This type of behavior, or even the impression of malfeasance and collusion, is highly damaging for the global economy. It opens up central banks, one of its leading stewards, to political meddling and public anger that can make policy less effective. After all, the value of the U.S. dollar is ultimately founded on trust in the nation — and institution — that issues it.
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