The Federal Reserve under Chairman Ben S. Bernanke has made great strides toward explaining to the public what central-bank officials are thinking when they make decisions about interest rates. If only it would do the same when writing new financial regulations.
Increased transparency has been one of Bernanke’s primary goals during his six years at the helm of the Fed. When he testifies to Congress on Wednesday and Thursday about the outlook for monetary policy and the economy, he will reap some of the benefits. Thanks to new disclosures of Fed officials’ individual forecasts for interest rates, employment, inflation and growth, lawmakers and Fed-watchers have a better sense of what Bernanke might say and how to put it into context. As a result, he doesn’t have to worry as much about unnecessarily shocking the markets.
Unfortunately, that same spirit of openness hasn’t reached other parts of the Fed’s operations. The central bank is working largely behind closed doors as it crafts the myriad regulations mandated by the Dodd-Frank financial reform law.
Fed staff members have written, and governors have approved, proposals for dozens of rules -- such as capital requirements and the Volcker rule, which forbids banks from making speculative bets with their own money -- that could affect the livelihoods of millions of people. But the public’s glimpses of the process have come almost exclusively when Fed officials appeared for congressional testimony, or in formal Fed disclosures outlining issues that interested parties -- most of them banks and bank lobbyists -- raised in private meetings with Fed officials. As a result, uninformed criticism of the rules has been plentiful, and explanations from the authors scarce.
In the Dark
The pitfalls of making rules in the dark became apparent this month, when the Fed disclosed how individual governors had voted on the specific rules they had considered since Dodd-Frank was passed in mid-2010. One governor, Sarah Bloom Raskin, had dissented when the Fed approved its proposal for the Volcker rule -- on the grounds, according to a Fed spokeswoman, that the rule was too unwieldy and contained exemptions that were written too broadly. The information would have been useful for people commenting on the rule, but the disclosure came after the public comment period had ended.
The lack of transparency is a problem. Interested parties can’t provide relevant input at the early stages of the process. Banks and their lobbyists get an advantage because they are able to secure far more frequent private meetings with Fed officials than less well-heeled organizations that tend to support reforms. And opacity weakens final regulations, which won’t have the credibility and endurance that come from being hashed out in the public arena.
Other U.S. agencies, such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, have taken a different approach. In most cases, before they propose a rule, they hold open meetings at which commissioners, and sometimes other interested parties, pose questions to the staff members charged with the actual regulation writing. They post webcasts of the events prominently enough that a layperson can find them on the agency’s site.
The Fed would do well to follow their example. True, there’s a risk open meetings could become mere formalities; it’s up to Bernanke to make sure they are well-run and informative. They could be inconvenient for far-flung Fed governors, but videoconferences could solve that problem. Public meetings could also be embarrassing for staff members who get put on the spot, but that comes with the territory.
If there’s even a chance the added transparency will lead to better rules and a more resilient financial system, there’s no good excuse for avoiding it.
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