On Monday the vice chair of the Federal Reserve, Richard Clarida, tendered his resignation—just two weeks before his term was set to expire. As the second in command of perhaps the world’s most powerful financial institution, Clarida has been scrutinized for his investment behavior in February of 2020. The trades in question came just before Federal Reserve Chair Jerome Powell’s announcement that “the coronavirus poses evolving risks to economic activity.”
Clarida isn’t alone, however. Multiple presidents of Federal Reserve branches from Dallas to Boston resigned last year amidst similar scandals. Powell himself traded throughout 2020. Some people are pretty angry, but it’s important to mark a distinction here; you decide whether that distinction matters.
Clarida and Powell were both trading exclusively, as far as their disclosures indicate, in bonds and generally-focused index funds and ETFs. Conversely, Robert Kaplan, the president of the Dallas branch of the Fed, spent 2020 trading in individual stocks. This means Clarida and Powell were trading in broad bets on the market, rather than particular companies or sectors (like Kaplan did) about which they could have had privileged information.
Further, Clarida’s trades don’t seem based on any special knowledge of Fed policy which could affect the market broadly. Indeed, they came the day before an announcement from Powell, but the material component of that announcement was not about Fed policy, merely a comment on the publicly-available news about Covid.
Now, it seems to me that you can have a healthy democracy, even with people in those positions trading, as long as that trading is limited to broad-based bets like Clarida and Powell engaged in. That said, a lot of people may disagree. They think Fed higher-ups shouldn’t be allowed to trade at all, whether individual company stocks or broad-based index funds. For what it’s worth, most presidents of the 12 Fed branches across the country don’t trade at all. So clearly it isn’t that crazy of a policy or expectation. After all, these people wield enormous power to shape the market.
What position I can’t see as holding any water at all is one like Speaker of the House Nancy Pelosi’s. When asked about whether members of Congress and their spouses should be restricted from trading in individual stocks, Pelosi responded, somewhat mockingly, “We have a free market economy.”
The problem with this response might be obvious, but the reality is that people in Pelosi’s position could very well have inside knowledge of upcoming policies and market movements. To suggest flatly that members of Congress should be treated equally displays a willful ignorance of the fact that members of Congress are not positioned equally.
When it comes down to it, a few things are plainly true. First, we should be paying more attention to what leading figures in the world’s most powerful financial institution are up to. If you try to find a story on Robert Kaplan, for example, by googling “Kaplan resigns,” you’ll be met by a full page of stories about one of Andrew Cuomo’s lawyers. Second, we need better rules. Thankfully, Powell seems to be working on this. Lastly, it’s hard to discount allegations of plutocracy in America when Congress is beating the market and Jerome Powell is trading millions amidst the pandemic. The optics just aren’t good, and that matters.Subscribe to Spectacles