Financial regulation is becoming a catch-22: regulators are too politicized to be left unchecked, but not political enough to be properly checked by elected officials.
Generally speaking, financial regulators are expected to deal with issues that are considered important but not highly controversial, such as the prevention of bank failures. Their design reflects this, with features intended to insulate them from political pressure. But with Congress deadlocked, financial regulators are increasingly seen as an alternative to legislation. We hear calls to use his considerable power in such controverciales problems As the environment, work, and restricted access to legal but controversial products and services, such as firearms, pornography, and payday loans. And sometimes those calls produce real politics.
Now, government agencies are forced 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, Congress’ economic power allows it to control agencies by limiting spending or cutting budgets. Likewise, agency heads serve at the request of the president, allowing new administrations (or administrations feeling the political heat) to replace them. Limits on how long an “acting” chief can run an agency prevent a president from completely circumventing the Senate’s confirmation authority.
But financial regulators don’t get the same treatment. Many of these regulators, including those at 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 depend on Congress to the budgets. or authorization of expenses. Instead of an agency head serving at the discretion of the president, it is common to see multi-member boards, often with members who can only be removed.”for causeand with deadlines that exceed those of the president.
And while many of these boards qualify as bipartisan, the reality is that agencies don’t need a full board to function. FDIC statutes say the agency can operate with only one board member. If a comptroller is not confirmed at the OCC, a deputy comptroller appointed by the Secretary of the Treasury can run the agency in perpetuity. The CFPB is the exception, with a solo director at will, but that’s because the Supreme Court intervened say that the protection originally granted to the director was unconstitutional.
This is one of the reasons that Republican senators have raised so many objections to President Joe Biden’s Fed candidates: 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, something that Sarah Bloom Raskin, the vice-presidential candidate for supervision, has saying should regulators do, then this is your last best chance to exercise control.
These insulations from political checks and balances are supposed 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 may 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 intended limits, and leave contentious political issues to Congress. But this would probably require a level of trust that does not exist in American politics. In light of this sad state of affairs, it may be necessary to treat these agencies as political beasts and reform their structure to reflect that.
That means eliminating for-cause protections for agency leadership, requiring congressional approval for all budgets, and replacing bipartisan panels with single directors or requiring the presence of at least one member from each major party for a quorum. And if officials fear this would give politicians much more leverage over the central bank, the Fed’s regulatory authority could shift to another agency.
Such drastic steps would present their own political challenges. But if financial regulators are to be political actors, they must be treated accordingly.