Financial regulation is becoming a catch-22: The regulators are too politicized to be left unsupervised, but they aren't political enough for elected officials to control them adequately.
Generally speaking, financial regulators are expected to handle issues that are considered important but not terribly controversial, such as preventing bank failures. Their design reflects this, with features meant to insulate them from political pressure. But in the face of congressional gridlock, financial regulators are increasingly seen as an alternative to legislation. We hear calls for them to use their considerable power on such controversial issues as the environment, labor, and restricting access to legal-but-controversial products and services like firearms, pornography, and payday loans. And sometimes those calls produce actual policies.
Now, government agencies are bound to do controversial things. That's why our system includes checks and balances that subject agencies to some level of ongoing control by elected officials. For example, Congress's power of the purse allows it to rein in agencies via limiting spending or cutting budgets. Likewise, agency heads serve at the request of the president, which allows new administrations (or administrations feeling the political heat) to replace them. Limits on how long an "acting" head can run an agency prevent a president from completely circumventing the Senate's confirmation authority.
But financial regulators are not treated the same way. Many of these regulators—including those at the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB)—do not rely on Congress for budgets or spending authorization. Instead of an agency head that serves at the president's pleasure, it's common to see multi-member boards, often with members who can only be removed "for cause," and with terms that exceed the president's.
And while many of these boards are branded as bipartisan, the reality is that agencies don't need a full board to function. The FDIC's bylaws say the agency can operate with just one board member. If a comptroller isn't confirmed at the OCC, a deputy comptroller appointed by the treasury secretary can run the agency in perpetuity. The CFPB is the exception, with an at-will solo director—but that's because the Supreme Court stepped in to say the protection originally granted to the director was unconstitutional.
This is one reason Republican senators have raised so many objections to President Joe Biden's Federal Reserve nominees: It's one of the few tools they have for exerting power over the regulators. If they don't want the Fed trying to push banks away from activities that might contribute to climate change—something Sarah Bloom Raskin, the nominee for vice chair of supervision, has said regulators should do—then this is their last best opportunity to exercise control.
These insulations from political checks and balances are supposed to give financial regulators independence from the whims of politics. And that might be acceptable if the agencies really were purely technocratic bodies pursuing non-controversial goals. But if financial regulation becomes a tool of broader regulation, the insulation can circumvent structural democratic safeguards.
In an ideal world, Democrats and Republicans could reach a broad and durable deal to depoliticize financial regulation, keep the power of the agencies within intended limits, and leave contentious political issues to Congress. But this would likely require a level of trust that doesn't exist in American politics. In light of this sad state of affairs, it may be necessary to treat these agencies as political beasts and reform their structure to reflect that.
That means removing for-cause protections for agency leadership, requiring congressional approval for all budgets, and either replacing bipartisan panels with sole directors or requiring the presence of at least one member from each major party for there to be a quorum. And if officials fear that this would give politicians too much more sway over the central bank, the Fed's regulatory authority could be shifted to another agency.
Such drastic steps would present political challenges of their own. But if financial regulators are going to be political actors, they should be treated accordingly.