Tag: Fed

Securities and Exchange Commission building with seal and American flags reflected in window

Most Americans believe the Securities and Exchange Commission and the Federal Reserve should be politically independent.

That makes sense. A politically driven central bank or securities regulator can lose credibility and reinforce short-term political objectives—to the harm of long-term stability.


New research, however, finds partisanship among SEC commissioners rose recently to an all-time high. Driving the rise? More-partisan commissioners replaced less-partisan ones.

Partisanship at the SEC even appears in the language of new SEC rules and commissioners’ voting behavior, according to the paper “The Partisanship of Financial Regulators.”

“The Fed and SEC have institutional features that are designed to shield them from the effects of partisanship,” said Asaf Manela, Olin associate professor of finance and a coauthor of the paper.

In recent decades, US politics have grown significantly polarized and are testing those safeguards.

Language-based approach

The four scholars used a proven language-based approach to identify partisan phrases in Congress, such as “red tape” and “climate change,” and reviewed regulators’ usage of them. Basically, they examined whether Republican or Democratic regulators spoke like Republican or Democratic members of Congress.

They found Federal Reserve governors appeared to be “largely immune from the increased partisanship in American society.” The Fed was relatively nonpartisan throughout the research sample period of 1920-2019.

But partisanship among SEC commissioners rose to an all-time high.

The most partisan phrases suggest that Republican regulators favor less regulation than Democrats. For example, SEC Democrats emphasize investor and consumer protection, according to the paper, forthcoming in the Review of Financial Studies. SEC Republicans emphasize regulatory burdens and the unintended consequences of policy intervention.

Partisanship extends to governing

“Partisanship is not restricted to their speech but extends to their governing activity,” Manela said. “Rules are more likely to sound like the partisan language of the majority party in the regulatory body.”

In addition, partisanship at the SEC might affect commissioners’ regulatory philosophies, the study found.

“Many government entities were designed to be immune from partisan influence. The approach here can be used to evaluate whether the rise in partisanship in American society has spilled over into these entities.”

Asaf Manela

The study also documented “a dramatic increase in partisan voting behavior” at the SEC between 2006 and 2019. Dissenting activity increased substantially, and dissenting votes disproportionately occurred along party lines.

Manela said the approach of using congressional speech to examine the speech of non-congressional speech can be applied more broadly. Researchers can use the methodology to see if the US Supreme Court or state and local governments have also become more partisan.

“Many government entities were designed to be immune from partisan influence,” he noted. “The approach here can be used to evaluate whether the rise in partisanship in American society has spilled over into these entities.”

In addition to Manela, the researchers included Joseph Engelberg, University of California-San Diego; Matthew Henriksson, University of Mississippi; and Jared Williams, University of South Florida.

During the financial crisis from 2007-09, the U.S. Federal Reserve took drastic steps to ensure that banks had access to liquidity so they could continue lending. It extended the maturity of loans available through its Discount Window from overnight to 90 days, and established the Term Auction Facility, which offered similar funding through a series of special auctions.  Banks borrowed from these facilities to the tune of a staggering $221 billion per day during the crisis.

For the first time ever, Olin Professor Jennifer Dlugosz and her co-researchers, were able to examine data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.

Jennifer Dlugosz, assistant professor of finance at Olin Business School

Jennifer Dlugosz, assistant professor of finance at Olin Business School

“Perhaps contrary to popular beliefs, our research shows that the Fed’s actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities,” said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and former economist at the Board of Governors of the Federal Reserve System.

Dlugosz — along with co-authors Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University — analyzed data about the banks that took part in the Fed’s financial crisis programs. In the past, the information had not been released due to concerns about the stigma associated with accepting the assistance. However, the data became public in 2010 after media outlets Bloomberg News and Fox Business Network filed a Freedom of Information Act request.

“No one has been able to look at this question before, because the data weren’t available,” Dlugosz said. “This is the first time in history that detailed data on the individual loans has been made public.”

During the course of their research, Dlugosz and her co-authors found a total of 20 percent of small U.S. banks and 62percent of bigger U.S. banks — more than 2,000 in all — used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.

“We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis,” Dlugosz said. “We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.

“It wasn’t obvious at the time whether this was going to work. The Fed is a lender of last resort for banks. We already had some idea it was effective in preventing bank failures, but this paper also shows us it can also be useful in encouraging banks to lend.”

The research paper was recently accepted for publication by the Journal of Financial Intermediation.

By: Erika Ebsworth-Goold, WashU The Source

Jennifer Dulugosz, assistant professor of finance, tells St. Louis Public Radio that protests at Federal Reserve banks across the country this week were misguided if correcting unemployment disparity was the goal. “We know from macroeconomics that if the Fed tries to push the rate of unemployment below the natural rate, which people think is 5.5 percent, that it wouldn’t work and that it would just accelerate inflation,” she said.

Read Maria Altman’s report here.

Image: by Maria Altman. Derek Laney, Michael McPhearson, and Jeff Ordower (from left to right) were among protesters outside the Federal Reserve Bank of St. Louis on Thursday.