Are financial regulators too political or not political enough?

Regulators were never designed to be politicians, but the tide has turned.
Financial regulation is becoming an inconvenience 22: regulators are too politicized to be left unchecked, but not political enough to be properly checked by elected officials.

In general, financial regulators are expected to address issues that are considered important but not highly controversial, such as: B. preventing bank failures. Their design reflects this, with features designed to protect them from political pressure. But with the impasse in Congress, financial regulators are increasingly seen as an alternative to legislation. We hear calls for them to use their considerable powers on controversial issues like the environment, labor, and restricting access to legal but controversial products and services like guns, pornography, and payday loans. And sometimes those calls lead to real policies.

Now government agencies have to do controversial things. For this reason, our system includes checks and balances, which subject agencies to a degree of ongoing scrutiny by elected officials. For example, Congress's power over the stock market allows agencies to constrain agencies by limiting spending or cutting budgets. Similarly, agency heads serve at the request of the president, allowing new governments (or governments feeling the political heat) to replace them. Limitations on how long an "acting" chief can run an agency prevent a president from completely bypassing the Senate's confirmation power.

But financial regulators don't get the same treatment. 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 Congress or spending authority for budgets. Instead of an agency head acting at the discretion of the president, it is common to see multi-member boards, often with members who can only be removed "for cause" and with terms exceeding those of the president.

And while many of these boards qualify as nonpartisan, the reality is that agencies don't need a full board of directors to function. The FDIC statute states that the agency can operate with a single director. If an auditor is not confirmed in the OCC, a deputy auditor appointed by the Secretary of the Treasury may permanently direct the agency. The CFPB is the exception with a solo at-will director, but that's because the Supreme Court stepped in to say that the protections originally granted to the director were unconstitutional.

It's one reason senators have raised so many objections to President Joe Biden's Fed nominees: It's one of the few tools they have to wield power over regulators. If you don't want the Fed trying to dissuade banks from engaging in activities that could contribute to climate change, something that Sarah Bloom Raskin, the supervisor's nominee for vice president, recommended to regulators, then this is your last best chance to exercise control. .

This isolation from political checks and balances is intended to give financial regulators independence from the vagaries of politics. And that would be acceptable if the agencies were really purely technocratic bodies pursuing non-controversial goals. But when financial regulation becomes a broader regulatory instrument, 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 intended limits, and leave contentious policy issues to Congress. But that would probably require a level of trust not found in American politics. Given this sorry state of affairs, it may be necessary to treat these agencies as political beasts and reform their structure to reflect this.