The early retirement of a key Fed official offers a rare chance to address Wall Street conflicts
- New York Fed President William Dudley is retiring half a year early, in mid-2018.
- As a former Goldman Sachs partner, Dudley contributed to the image of the New York Fed as too close to the banks it is supposed to regulate.
- Dudley's departure offers the New York Fed's board of directors a chance to change those perceptions.
William Dudley, president of the Federal Reserve Bank of New York, is retiring early, creating another vacancy at a central bank already in a flux of personnel changes. Here's a suggestion to the the New York Fed's board of directors, which will select Dudley's successor: Try to avoid picking another banker.
Dudley, a former Goldman Sachs partner, has shown himself to be far too close in principle and practice to his former banking colleagues, supporting the view that the Fed is there to serve bankers rather than the public.
The Fed's regional bank structure, which makes the presidents of those banks unaccountable to the political process, can sometimes reinforce that perception. The New York Fed is particularly important in the regional Fed structure because its president is automatically vice chair of the policy-setting Federal Open Market Committee and is the only regional president whose vote on the committee is permanent rather than rotating.
Dudley's departure is "an opportunity to get someone who will do better, who won't just talk about 'culture' but actually try to address the issues and the consequences" of Wall Street's bad behavior, Anat Admati, a finance professor at Sanford's Graduate School of Business, told Business Insider.
Dudley's term was set to end in January 2019, but he now says he will leave the post by mid-2018.
By Goldman Sachs, for Goldman Sachs
Dudley's background and actions as New York Fed president can be viewed as overly friendly to Wall Street.
Under Dudley's watch, a former Goldman Sachs banker narrowly avoided jail for obtaining confidential information from a friend at the New York Fed. There has also been a lot of talk about improving bank incentives and behavior, but little in the way of concrete action, particularly when it comes to executive pay.
The very history of Dudley's appointment is muddled with conflicts. Dudley was hand-chosen to replace Timothy Geithner, who was becoming Treasury Secretary, by the former head of the NY Fed's board of directors, Stephen Friedman. Friedman was, simultaneously, the president of Goldman Sachs.
Dudley started at the New York Fed in 2007, just as the credit crisis that would later morph into the worst financial crisis in generations - and threaten even the powerful Goldman Sachs itself - was just getting under way.
In 2009, Friedman abruptly stepped down from the New York Fed after it emerged that he was actively trading Goldman Sachs stock while he had inside knowledge of bailout negotiations taking place at the height of the financial crisis.
"With this in mind, it is crucial that the process for choosing Dudley's successor does not resemble the insider game of choosing among financial industry executives like it has in the past," Shawn Sebastian, co-director of the Fed Up Campaign at the Center for Popular Democracy, a coalition of liberal groups pitching the Fed to keep interest rates low to help poor communities recover, told Business Insider.
Balancing a new Fed chair from Wall Street
To his credit, Dudley has warned politicians in Washington not to be too aggressive in rolling back post-crisis regulations. But his general tone and attitude has been far too cozy with bankers. He even felt comfortable enough about Wall Street to recommend another Goldman banker, Donald Trump's National Economic Council chief Gary Cohn, to head the Fed.
That bid fell apart, but Trump chose instead to replace the intensely-qualified Janet Yellen as Fed chair with Jerome Powell, a current Fed governor with ample financial sector experience but not nearly as much knowledge of economics and interest rate policy than his predecessor. Powell was trained as a lawyer and spent much of his career in private equity.
That the new Fed chair hails from finance makes it all the more imperative that the New York Fed chief does not. Balance is good, right? There are plenty of smart economists, public policy experts, or community leaders who would gladly and deftly do the job.
The next New York Fed president should be "chosen through an open process with consideration of diverse candidates who've demonstrated independence from Wall Street. Independence from Wall Street is a crucial prerequisite to credibly be a leading regulator of Wall Street," Sebastian said.Sebastian points out that four current regional Fed presidents are ex-Goldman bankers, "and Trump's first two picks for the board of governors come from the same private equity firm."
"The New York Fed board (see box on right) needs to distance itself from the corrupt logic of the Trump administration and appoint a President who has a record of advocating for workers and consumers," he added.