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Bernie Sanders: The big banks rule the Fed, here's how to fix it

October 26, 2011: 11:07 AM ET

The independent senator from Vermont is taking aim at the make-up of the Federal Reserve's board of directors, arguing it has too many bankers.

Bernie Sanders

Bernie Sanders

FORTUNE -- At a time when the rally against Wall Street and corporate greed gains momentum, a U.S. government report released last week raises a question few protesters probably think about: Are too many members of the U.S. Federal Reserve board of directors from the banking sector? After all, the Fed regulates many of the very same companies that its members run, and so this potentially poses a conflict of interest, according to the Government Accountability Office.

While the report didn't find that these firms directly benefited from the Fed, it confirmed worries that several financial firms and corporations could have gained from their executives' close ties to the Fed. For instance, JP Morgan Chase could have benefited from its chief executive Jamie Dimon's position on the board of the Federal Reserve Bank of New York. According to the GAO, the bank received bailout loans from the Fed while it served as one of the clearing banks that facilitate payments for the Fed's emergency lending program.

Now self-described Democratic socialist Sen. Bernard Sanders of Vermont, who spearheaded the report, has gathered a team of top economists to draft legislation to reform the Fed. Sanders (or "Bernie" as most call him) joins Massachusetts Congressman Barney Frank and others in their call to restructure the Fed as the agency comes under increased scrutiny in recent years. Sanders is one of only two independents in the U.S. Senate. The 70-year-old politico has long slammed the excesses of Wall Street and U.S. businesses. Only recently, as The Guardian points out, has he become less of a political outsider.

Fortune caught up with the senator this week over telephone from his home state of Vermont. He talks about the inequitable influences of Wall Street and how to give the rest of America more say over policies to restart the U.S. economy.

Does anything in the GAO report surprise you?

No. In many ways what the GAO was telling us is what many of us already knew but the significance is that for the first time the GAO is telling it. You have representatives from the largest financial institutions in the country sitting on Fed board of directors ostensibly regulating their own banks. For many of us by definition that's a conflict of interest.

The other point that the GAO made, which I think is significant, is it identified 18 former and current members of the Federal Reserve Board who are affiliated with banks and companies who received emergency loans from the Fed. That included General Electric (GE), JP Morgan Chase (JPM) and Lehman Brothers.

The GAO also found that the firms these board members represented did not receive special treatment. Should we breathe a sigh of relief?

No. I think any objective look at a situation where you have CEOs and representatives of the largest financial institutions in the country sitting on boards, which are ostensibly regulating these same institutions, I think, would tell the average American that there is something very, very wrong that needs to be changed.

I'm not here to say that in every instance there were improprieties, but just by definition you shouldn't have the regulators being the same people who are being regulated.

But some would say having actual bankers on hand to provide their expertise and perspectives on the market would be invaluable in helping the Fed achieve financial stability. What are your thoughts on that?

I think you certainly want the advice and experience of bankers. The function of regulation in terms of a federal agency like the Fed is to protect the interest of the people of America. And if the people who are sitting on the boards are the same people who run the largest financial institutions I think the overwhelming majority of the American people would see that as a conflict.

Some of the largest financial institutions are charging 25% to 30% interest rates on credit cards. Wouldn't you want to hear from consumer representatives sitting on there what that means to the average American? I think you might.

Also, one of the Fed's mandates is to maximize employment. In my view the Fed hasn't responded very strongly on this. Wouldn't you want a representative from organized labor to talk about what it means in this country when you have 16% unemployed or underemployed?

You've gathered a team of top economists to reform the Fed. What would an improved central bank look like?

We can learn from best practices from other central banks. Many other countries have much more stringent rules regarding conflicts of interests – such as who can sit on the board, etc … I think Australia and Canada have something that we can learn from.

Another very important issue is with unemployment so high, how can we strengthen the Fed's full-employment mandate and ensure that it conducts monetary policy to achieve maximum employment? In other words the Fed has a number of mandates and one of them is to control inflation. But one of them also is to pursue policies that lead to full employment. Is the Fed doing that in an adequate way? Well I would argue that by definition when you have 16% of people unemployed and underemployed it really is not.

During the financial crisis the Fed through a revolving loan fund lent out $16 trillion at very low interest rate to every major financial institution in America, central bank around the world and large corporations. They did that in order to prop up Wall Street and make sure there wasn't a financial collapse. Right now 16% of the American people are unemployed or underemployed. Do we see the same sense of urgency on the part of the Fed in addressing that crisis as we did in the Wall Street crisis three years ago?

Another issue: The Fed has the responsibility to ensure the safety and soundness of the nation's banking and financial system. That's one of its mandates. Right now, the six largest financial institutions in this country have assets that are equivalent to 65% of U.S. GDP (over $9 trillion). Three out of the four largest banks are now bigger than they were before we bailed them out because they were too big to fail. Do you think that the Fed has responded effectively to address the too big to fail crisis when three out of the four largest financial institutions are bigger than they were before the bailout? I think probably not.

How do you think implementation of Dodd-Frank Wall Street reform act is going?

I think Wall Street is doing everything that it can to make it as weak as possible. But again now we're talking about the role of the Fed, not Dodd-Frank. In my view I think the proper response on the part of the Fed would be to break up the large financial institutions. Right now their concentration of ownership in the financial industry is much too great. But again these are the kinds of questions that need to be answered.

There's a lot of anger against Wall Street. What are your thoughts on the Occupy Wall Street movement?

I think they're doing a good job in focusing attention on the greed of Wall Street and certainly pinpointing the reality that Wall Street is directly responsible for the terrible recession that we're in right now. And while millions of workers have lost their homes and their jobs and their life savings, many of the CEOs on Wall Street are doing better than they ever have before.

So I think focusing attention on that is correct. And the other issue that they're focusing attention on, which I think is very appropriate, is income and wealth inequality in America. We now have the 400 wealthiest people owning more wealth than the bottom 150 million Americans. This gap between the very rich and everybody else is the widest that it has been since 1928.

Do you plan to run for president and do you see yourself as the next Ralph Nader?

No I think I've answered that question many, many times.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

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