Denis Hughes Named Head of New York Fed
By Staff News & Analysis - August 26, 2009

The Federal Reserve chose a labor leader to succeed a former Goldman Sachs executive as the chairman of the Federal Reserve Board of New York's private-sector board of directors. Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position. Mr. Friedman, a former Goldman Sachs Group Inc. chairman and adviser to President George W. Bush, had faced questions about his purchases of Goldman stock while serving on the New York Fed's board. – Wall Street Journal

Dominant Social Theme: A changing of the guard?

Free-Market Analysis: Back in May we declared that the American Federal Reserve was all but finished – or at the least that it would emerge from the financial crisis as a very changed institution. The proximate cause of our statement was the disastrous testimony of Inspector General Elizabeth Coleman. The testimony – which has to go down as one of the single most bumbling presentations every made on a major stage by a significant representative of one of the most powerful entities on earth – provided significant confirmation that the Fed was in disarray.

No, there was no explaining away Coleman – unless the top minds at the Fed had decided that they wanted the institution to appear confused and even bumbling. And that's not a good idea when you are printing and dispersing trillions of dollars. Since then, the Coleman appearance has logged nearly 2.5 million views all told on Youtube, and comments still appear regularly on various feedback spaces provided beneath the video (s) – there are several actually. To watch the clip, click here now.

But recently, as indicated by the article above and others as well, there are seemingly more signs confirming the trouble that the Fed is in. The approval rating for the Fed is apparently in the low 30s (percent) and going lower. Ben Bernanke has just been reappointed by President Barack Obama, but on the Internet and talk radio it was difficult to discern a kind word for the man. The economic news as provided by the mainstream media has been upbeat (it's not actually good at all in our opinion) so Bernanke's reappointment should have been seen in the context of a rising economy.

Yet there was a sourness that enveloped the reappointment, one that seemed to extend to most, excepting the inner circle of the Fed itself. And now the Obama administration has managed to place a member of the AFL/CIO as the chairman of the New York Federal Reserve – traditionally the most important of the Fed branches. The idea that a labor leader is sitting in a top Fed job is sure to be controversial, in part because of the reputation for corruption and violence that the union has.

But the placement of a labor big at the Federal Reserve has an even deeper impact. It strips away several more layers of central banking omnipotence. The Fed, manned by good gray banking suits derived from Wall Street's inner sanctum, has often seemed to be a place of such hushed, high importance that it was almost impossible to determine what actually went on there.

But now the Fed's own inspector general has proven to have feet of clay and one of the top spots in the Fed universe is occupied by a labor leader. People may not be able to figure out exactly what the Fed does or how it does it, but they understand what labor does and they understand labor bosses. And the perceptions aren't entirely complimentary.

Now strike three, reported at Bloomberg, as follows:

The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit. Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren't covered by the law because their disclosure would harm borrowers' competitive positions.

The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.

"The Federal Reserve has to be accountable for the decisions that it makes," said U.S. Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee, after Preska's ruling. "It's one thing to say that the Federal Reserve is an independent institution. It's another thing to say that it can keep us all in the dark."

The judge said the central bank "improperly withheld agency records" by "conducting an inadequate search" after Bloomberg News reporters filed a request under the information act. She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports, and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs.

It is very possible that the Fed may appeal this ruling, but given the Fed's lack of popularity and continued public indignation on a number of fronts when it comes to the nation's various bureaucracies and their behaviors, the chances of the Fed maintaining its current level of secrecy are probably not good. And then – still more! — there is this:

A bill sponsored by Democrats in Congress would make several U.S. inspectors general currently appointed by federal agency heads presidential appointees instead, including the inspector general keeping an eye on the Federal Reserve. The inspectors general, or IGs, are independent investigators charged with rooting out government waste and fraud in their respective federal agencies. Roughly half of the watchdogs are already appointed by the president upon Senate confirmation, while the other half are appointed by agency chiefs. An editorial published in the Washington Times over the weekend blasted the plan to convert five more IGs to presidential picks: "Such a move would undermine independent oversight of large parts of the federal bureaucracy," the editorial stated. "These changes would only serve to further politicize these positions." The editorial added, "Now is not a wise time to remove independent review of the government leviathan."

We think this move stems in part from the lamentable Ms. Elizabeth Coleman. Her performance has sparked a wave of indignation that will eventually end up with some sort of serious audit – preferably one that has little or nothing to do with her. There are already several bills pending in Congress that would push such an audit on the Fed.

But this move to put US inspectors general directly under the authority of the US president should be seen in this context as a device to impede outside investigations and reduce audit impacts. It is an obvious sign that those who support the Fed most strongly feel the institution is under attack. Yet the reappointment of Bernanke, who has not proved a charismatic or formidable fellow, will not aid in its defense. Paul Volcker was a tough guy and Alan Greenspan was the quintessential chairman, speaking gobbledygook in a measured tone, just the way a Federal Reserve chairman should. Bernanke, however, has a habit of getting irritated during various grillings. And once irritated, he becomes terse and a bit petulant. The Fed needs a charismatic salesman during this troubled time, but Bernanke, bearded and guarded, comes across more as a bureaucrat.

As can be seen from the above litany, we still think that one of the most powerful monetary institutions in the world is in serious trouble and has not been able to extricate itself from those troubles. It is not perceived as a trustworthy institution anymore, in large part because its struggles in coping with the current financial crisis has been played out over the Internet. Bernanke may receive praise within Obama's circle, but most who have read about the Fed's actions of the past year, or watched videos about the Fed and Bernanke, probably have little reverence for Bernanke's behavior.

On radio talk shows and in Internet chat rooms one hears the sentiment that the US$10 trillion or so that Bernanke has apparently disbursed does not qualify him as a miracle worker. In fact, the sentiment appears to be that most anyone could salvage the financial system by printing so much money. And further, there is considerable skepticism that Bernanke will be able to mop up all those funds. Sure, Japan managed to clean up a lot electronic money – but it did so at the expense of the economy, which didn't snap back for a decade. Can the US economy – or its political system – survive a double-dip recession or the obverse, hyperinflation?

After Thoughts

We're not prepared to say that the Federal Reserve or central banking are going to vanish from the scene. But we don't think the stars are aligned very positively for such institutions. Something is going to have to change in our opinion. Perhaps the world will revert to a gold standard of some sort. But before the latest financial crisis is over, the Federal Reserve, if not central banking in general, will be transformed. Just watch the Internet.