Remarkably enough, I have come across a reform-minded Professor of Economics who believes that consumers should have a voice in the formation of U.S. bunking policy by the twelve Federal Reserve district banks around the country. The name of this rare scholar is Thomas Havrilesky of Duke University.
He has just published a report which argues that the Federal Reserve Reform Act of 1977 is being violated by these banks because no members of the Board of Directors of these Banks have any consumer representatives. The law specifies that the directors should “represent the public with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, the services, labor and consumers.” The banking industry is heavily represented and is the dominant influence on these Boards.
Now why should any citizen be concerned about this great consumer shutout? Well, for starters, the Federal Reserve Board (FRB), with its regional Banks, is the single most important economic policy body in the nation. Its monetary policy decisions deeply affect the availability of credit, the interest rates you pay, and the level of inflation production and employment. Also the FRB shares in the enforcement of several consumer protection laws regarding credit discrimination and community reinvestment flows. And as the saying goes, “if you don’t have a say, you’re likely to pay” the banks lots more than you should.
Havrilesky cited a number of studies on “the Federal Reserve as a bureaucracy and its mutually beneficial relationship with large banks.” Congressman Henry Reuss, while chairman of the House Banking & Currency Committee, declared that “only two segments of American society -banking and big business — have any substantial representation on the
boards.” It was precisely this situation which led Congress to pass the 1977 law which is being ignored as far as the appointment of people representing consumer interest is concerned.
The Duke Professor considers this “disregard of the law” a hypocritical contrast to the frequent lauding by Federal Reserve officials of the “grass roots” knowledge and concerns of the directors. Although the overwhelming majority of directors are from the business sector, small businesses continue to be “underrepresented.” Top executives of the largest corporations continue to dominate these regional Federal Reserve banks.
From the long time nemeses of the big banks, the late Cong. Write Patman, who started his populist oversight in the late Twenties, to Professor Havrilesky now, the effort to democratize the Federal Reserve system through changes that allow for diverse opinions inside its decision-making structures continues, though without much publicity.
In a letter to me recently, Havrilesky wrote of the taxpayers’ stake in broader representation: “Today the reserves of the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC) are exhausted. There are thousands of de facto technically insolvent banks and Savings and Loans which are being implicitly capitalized by ordinary taxpayers. The aggregate implicit value of federal government deposit and lender-of-last-resort guarantees is far larger than is generally recognized and is administratively out of control….The true bearers of risks are the ordinary taxpayers.”
“We, therefore, already have effected de facto nationalization of a huge portion of our nation’s banking system. Why doesn’t Congress ask the FDIC FSLIC: to present it with the tab? Why is Citicorp allowed to be the bag lady in the depository dumpster — selecting choice remnants to finance its national banking network at taxpayer expense? Where is the consumer representation on these matters — Congress? or, the Federal Reserve Bank directorates? or is it nonexistent?”
With banks failing in numbers riot seen since the Depression and with other small and large banks in technical default, many depositors from Maryland, Ohio and other states are realizing that ultimately the taxpayer is required to bail out much of their sequestered savings accounts in failed, mismanaged banks. The taxpayers should be represented on the inside if they are going to have to pick up the tab on the outside.
(For a free copy of Havrilesky’s report, write to him at the Department of Economics, Duke University, Durham, North Carolina, 22706)