Central Banks Recruit from Wall Street, Wall Street Runs Central Banks

Central banks have been captured by Wall Street through revolving door politics: (Wikipedia) movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation

From the Bloomberg:

Wall Street is again leading to the corridors of central banks.

From Minneapolis to Paris, investors and financiers are increasingly being hired to help set monetary policy less than a decade since the banking crisis roiled the world economy and chilled their public-sector employment prospects.

Academic studies of historical voting records at central banks suggest the new trend may mean an increased bias towards tighter monetary policy.

Last week’s appointment of Neel Kashkari to run the Federal Reserve Bank of Minneapolis as of January means a third of the Fed’s 12 district banks will soon be run by officials with past ties to Goldman Sachs Group Inc.

Kashkari also worked for Pacific Investment Management Co. and managed the U.S. Treasury’s $700 billion rescue of banks during the financial crisis.

The New York Fed’s William Dudley was Goldman’s chief U.S. economist for almost a decade before joining the central bank in 2007, while recently appointed Dallas Fed President Robert Steven Kaplan spent 22 years at Goldman and rose to become its vice chairman of investment banking.

Although Patrick Harker joined the Philadelphia Fed from the University of Delaware he also served as an independent trustee of Goldman Sachs Trust.

It’s not just the Fed. Bank of England Governor Mark Carney and European Central Bank President Mario Draghi both famously worked for Goldman before entering central banking, yet they have recently been joined by others with financial backgrounds.

The new head of the Bank of France, Francois Villeroy de Galhau, spent 12 years at BNP Paribas SA, becoming its chief operating officer in 2011. Meanwhile, in September, Gertjan Vlieghe joined the BOE’s Monetary Policy Committee from hedge fund Brevan Howard having also previously worked for Deutsche Bank AG.

Even if one argues that these officials have noble intentions and have not been tacitly supporting the interests of Wall Street, their policies will most likely be based from perspectives that have been shaped by their previous work experiences. What you see depends on where you stand. In other words, instituted policies will likely manifest on the official's path dependency—FT Lexicon—idea that decisions we are faced with depend on past knowledge trajectory and decisions made, and are thus limited by the current competence base.

So the more recruits from Wall Street, the larger the tendency for policies to be biased in favor of Wall Street.

In the past I enumerated how the FED promotes its interest through underhanded—conflict of interest—ways

1. Self-publication or by influencing the materials that are published in mainstream Journals 

Cato’s Steve Hanke writes, ``One of the reasons the Federal Reserve gets so much good press is that it’s publishing most of it itself” (italics mine)... 

2. Outsource jobs and offer privileges 

Aside from having a say on the articles published on mainstream economic journals, Ryan Grim of the Huffington Post says that the US Federal Reserve has outsourced many of its work to the academia and has equally bestowed intangible benefits and privileges to them... 

3. Influencing public policies through the mainstream networks

One of the advantages of the Fed’s employment of a large external network is to be able to put pressure on public policies that favors its interests.

Huffington Post’s Mr. Grim addresses such conflict of interest issues by citing anew Robert Auerbach work, ``Auerbach concludes that the "problems associated with the Fed's employing or contracting with large numbers of economists "arise"when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications."(all bold emphasis mine)...

Why stop at just self-promotion, outsourcing or influencing mainstream networks?

Why not recruit directly from Wall Street and from academia? (ex-Fed chair Ben Bernanke was a Princeton University professor)

This makes the fourth factor:

To reinforce or strengthen these dynamics, leaders of the central banks have to be recruited from the mainstream financial institutions (Wall Street)/ academia.

At the end of the day, all these converge to point out why central bank policies have been biased towards Wall Street.