"It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner..." - Federal Reserve Chair Janet Yellen
Federal Reserve Chair, Janet Yellen, made a rather accurate public statement the other day, about the long-existing climate within the financial industry of reckless behavior, leading to an environment of moral hazard that can systemically impact our entire economy for the worse. When have we heard this before? But, why is Chair Yellen expecting the financial industry to regulate themselves by adhering to an ethical code that would allow for such altruistic self-regulation? Was that not the problem that got us into this mess in the first place, expecting private entities to do the ethical thing, instead of properly ensuring they comply with safety and soundness?
Yellen also remarked, "...there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness," is that also not obvious, and hasn't that been the reality for numerous consecutive decades? Isn't it also the Federal Reserve's job to regulate those firms so they don't undermine their safety and soundness, especially to the point of it impacting the entire economy?
Speaking of regulation, Yellen also commented, "The risk of regulatory capture is something the Federal Reserve takes very seriously and works very hard to prevent," then I wonder why they have been so absent in their regulation of Wall Street, and captured for so long by outside interests?
Many observers of this cozy relationship between the Federal Reserve and Wall Street, including some internal Reserve bank examiners
, have surmised that the Federal Reserve is already captured to a degree by the financial industry. The New York Federal Reserve was stripped of its oversight duty of Wall Street, regulation is one of the main reasons the Federal Reserve banks even exist.
What are the chances that Yellen has just been completely naive to this reality (that banks and regulators have close relationships that create massive conflicts of interests)? She has spent significant time serving in the Federal Reserve (1997-1999 & 2004-2010), and this is a revelation? I'm sure she has noticed fellow co-workers within the Federal Reserve leaving their posts for jobs within the very industry they were just "regulating".
Besides stating the obvious, what is Chair Yellen going to do about it? What mechanisms are going to be put in place that prevent the revolving-door phenomenon between the public and private sectors, which have help capture our regulatory intuitions.
There are definitely answers to those questions, but Chair Yellen hasn't shared them yet, or perhaps she is busy creating them at this moment. The history of the Federal Reserve stating the financial industry could regulate itself during the Greenspan era, and still expected to do the "right" thing in the Yellen era; even though the financial industry acts without regard to business ethics every single day, reflected in the hundreds of millions worth of fines they had to pay to the Department of Justice, just last year alone
, troubles me deeply.
But, what if Yellen isn't na?ve, and knows damn well what is occurring within regulatory institutions and Wall Street, and that she is truly looking to create change. I wonder how many fellow allies she'll be able to find in an already compromised Federal Reserve, or within a mostly paid for Congress.
Chair Yellen's greatest ally will be transparency, which concerns me, especially since she has resisted the transparency being called for by members of Congress on both sides of the aisle, with another Congressional led audit of the Federal Reserve (which goes well beyond the scope of the annual audits performed already on the Federal Reserve by other government agencies).
If the Federal Reserve, led by Yellen, was not so unwilling to set the standard for transparency, perhaps their comments on forcing the private industry to be transparent and ethical will remain only as comments, without any actions taken to back them up.