Financial regulation becomes a catch-22: Regulators are too politicized to be left unattended, but they are not politicized enough for elected officials to control them adequately.
Generally speaking, financial regulators are expected to deal with issues considered important but not very controversial, such as the prevention of bank failures. Their design reflects this, with features intended to insulate them from political pressure. But in the face of congressional deadlock, financial regulators are increasingly seen as an alternative to legislation. We hear calls for them use their considerable power on such controversial issues as the environment, labor and restricting access to legal but controversial products and services like guns, pornography and payday loans. And sometimes those calls produce real policies.
Now government agencies are required to do controversial things. That’s why our system includes checks and balances that subject agencies to some level of ongoing scrutiny by elected officials. For example, the purse power of Congress allows it to rein in agencies by limiting spending or cutting budgets. Similarly, agency heads serve at the request of the president, allowing new administrations (or administrations experiencing political heat) to replace them. Limits on how long an “acting” leader can lead an agency prevent a president from completely circumventing the confirmation authority of the Senate.
But financial regulators are not treated the same way. Many of these regulators, including those of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) do not report to the Congress for budgets. or authorization to spend. Instead of an agency head who serves at the pleasure of the president, it is common to see multi-member boards, often with members who cannot be removed”Because“, and with terms that exceed those of the president.
And while many of these boards are labeled as bipartisan, the reality is that agencies don’t need a full board to operate. FDIC statutes state that the agency can operate with only one board member. If a Comptroller is not confirmed in the OCC, an Assistant Comptroller appointed by the Secretary of the Treasury may run the agency in perpetuity. The CFPB is the exception, with an all-you-can-eat solo director, but that’s because the Supreme Court intervened to say that the protection initially granted to the director was unconstitutional.
That’s one of the reasons Republican senators have raised so many objections to President Joe Biden’s Federal Reserve nominees: It’s one of the few tools they have to wield power over regulators. If they don’t want the Fed trying to steer banks away from activities that could contribute to climate change, which Sarah Bloom Raskin, the vice-presidential nominee for oversight, has noted regulators should do – then this is their last best opportunity to exert control.
These isolations from political checks and balances are meant to give financial regulators independence from the vagaries of politics. And that might be acceptable if the agencies were really purely technocratic bodies pursuing uncontroversial goals. But if financial regulation becomes a broader regulatory tool, isolation can circumvent structural democratic safeguards.
In an ideal world, Democrats and Republicans could reach a broad and lasting agreement to depoliticize financial regulation, keep agency power within limits, and leave contentious policy issues to Congress. But that would likely require a level of trust that doesn’t exist in American politics. In light of this sad state of affairs, it may be necessary to treat these agencies like political beasts and reform their structure to reflect this.
That means removing reasoned protections for agency leadership, requiring congressional approval for all budgets, and either replacing bipartisan panels with single directors or requiring at least one member from each major party to be present to that there is a quorum. And if officials fear it will give politicians too much influence over the central bank, the Fed’s regulatory authority could be moved to another agency.
Such drastic measures would present their own political challenges. But if financial regulators are to be political actors, they must be treated accordingly.