After working as a financial columnist at the Dallas Morning News, DiMartino Booth spent nine years (2006 - 2015) as an advisor to Richard W. Fisher at the Federal Reserve Bank of Dallas. After leaving the bank, she authored the bestselling book FED UP: An Insider's Take on Why The Federal Reserve is Bad For America.
During the interview, Erik and Danielle look inside the Regional Federal Reserve Banks from the inside. They look further into the little understood shadow banking system in the United States and reflect on the 2008 Global Financial Crisis. They further discuss the culture at the Reserve Banks and more importantly what should be done with the Fed. They further discuss if interest rates ever be normalized and considerations on the underfunded pensions.
Here is an excerpt from the interview questioning the management of insider information from the fed:
Erik: Well and along those same lines something that really struck out to me. I didn't know until reading your book that your boss at the Dallas Fed was actually one of the only people on the FOMC who thought that there needed to be some equivalent to insider trading rules. And what blows my mind - if I understand this correctly - if Janet Yellen tomorrow called Lloyd Blankfein at Goldman Sachs and said, "Hey, listen, I got a secret for you - know we're going to go with Q.E. four starting at the next meeting, nobody knows about it. Go ahead and front run it, and then you can give me a better job when I don't get reappointed by President Trump, when my term is up."
Obviously if she did such a thing - and I don't think Janet would ever do that - but if hypothetically she did she'd be selling out the entire country so that Goldman could make billions. If that happened would anybody have violated any law that's actually on the books right now?
Danielle: A law that's on the books - well, something that you just described would certainly be--
Erik: Because I don't think it would, I think that's actually illegal.
Danielle: Well, what you described is actually illegal. However the ability for Federal Reserve policymakers to meet with those in the private sector has not been reined in, and I think we saw evidence of that with a recent Brookings Institution private audience with the vice chair Stanley Fischer and some of the people who sat on that board are members of some of the largest shadow banking entities on planet Earth.
The Fed I think would be convicted if what you described actually occurred, but I think the opportunities for there to be leaks. And if we've learned anything from Lacker and his assertion that he was simply the corroborator and not the source of the leak - if we've learned anything it is that the culture and the environment is such that leaders within the Federal Reserve don't feel that there's a conflict of interest involved in having private audiences with those who can benefit the most profit-wise.
So, that's a problem, that is a problem and it is a problem that has not been addressed. It shook me to my bones when Daniel Tarullo in his last few days at the Fed - in his capacity, bear in mind, as a lawyer - but it shook me to my bones that Tarullo said that the Lacker matter had been resolved properly and legally and that the matter itself was going to be put to rest. That was highly unsatisfactorily for me and I don't even think we should honor the Fed. I'm not even in that camp.
Erik: Why don't we talk then about what we should do? Because obviously, Ron Paul the libertarian from Texas, your state, has tried unsuccessfully to mount campaigns to end the Fed or to audit the Fed. I think you don't agree that those are the right solutions so what is the right solution? What needs to happen in order to rein this organization in and make it accountable to the best interests of the country?
Danielle: Well, there are a lot of things we can do. You discussed something that could be very elegantly satisfied by bringing Glass Steagall back. I know people hate to hear that, but you know if you're going to bring deposits in and the commercial safety-net of the U.S. government under you, don't take the taxpayers' money to Vegas and borrow and play with it and speculate with it, keep investment banking activities outside of anything that will ever touch the taxpayers' purse. Slice the dual mandate that was doubled in 1977 back in half, leave job creation in the hands of the private sector. In the times of recession, if we need to extend unemployment benefits maybe once, fine - then Congress can step in in times of emergency. But otherwise the Fed does not have the correct tools to address the labor market - it is what's caused "mission creep" within the institution. Remove that from the Federal Reserve and leave them simply with safeguarding the buying power of the U.S. dollar, period - and I mentioned earlier the fact that there are power seats in Washington D.C. And at the New York Fed I would argue that those need to be distilled and dispersed throughout the country and that the original lines drawn in 1913 of the 12 Federal Reserve districts be readdressed - that three of them that are in the Midwest vanished because they're no longer economically relevant, and that when you add one on the West Coast - because clearly Janet Yellen's San Francisco Federal Reserve, during the years that of the buildup to the housing bubble, there wasn't enough in the way of eyes, ears on the ground supervision regulation. You'll end up with ten Federal Reserve districts, give all permanent vote, and make sure then that you slash the number of PhDs and you bring in more people who are on the receiving end of that policy, who don't have an agenda, who aren't the host of the canes or some other economic school of thought and who can come in and help you make much more pragmatic policy decisions going forward. That's just my short list.
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Download the transcript for the full interview.
Danielle gives some fabulous insights on the inner workings at the Reserve banks and drives the question on how things need to change. This will continue to drive the debate as to what should be done with the Fed and more importantly what needs to happen next.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.