| As our sister magazine points out (sub required), bank regulation can create more problems than it solves, particularly where weak governance may invite corruption.
But that problem, contrary to what one might assume, isn't limited to countries emerging from former dictatorships or underdevelopment. In fact, the U.S. system is also susceptible to it, because the Federal Reserve is unaccountable to the public. In contrast to the central banks of other industrialized democracies, the Fed's stock is owned by private banking companies, with Citigroup and J.P Morgan Chase together controlling almost half, by my calculations, and legally untradeable.
While this arrangement has periodically generated controversy ever since the central bank was established in 1915, little has been apparent of late, even as the new regulatory regime known as Basel II calls for regulators to have stronger supervisory powers to enable government regulators to scrutinize and discipline banks. (See Comment 1 below.)
More recently, we voiced a lonely complaint that the Fed's conflict of interest stood in the way of financial reform in the wake of Enron. Still, ours wasn't the only voice raised in such criticism. As Thomas Schlesinger of the Financial Markets Center put in a June 2004 speech, Citigroup's then-chairman Sandy Weil reportedly recommended that one of his minions, Stanley Fischer, become president of the New York Fed at a time when Citigroup "symbolized the financial industry's flouting of numerous standards enforced by the New York Fed and other agencies."(See Comment 2 below.) |
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