Judge to Fed: You Work for the People

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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Accuse the Federal Reserve of being subservient to Wall Street and you will probably be called a conspiracy theorist -- unless you're a federal judge ruling in the public interest. The latest example comes fromyesterday's decisionby U.S. District Judge Richard Leon, who ordered the Fed to rewrite its rule for debit-card transaction fees.

A little background: Every time a customer uses a debit card, the bank that issued the card charges a fee to the retailer that is supposed to cover the cost of running the payments system. Retailers thought these fees were too high and complained that they were the victims of an oligopoly. The Dodd-Frank Act was supposed to fix this problem, by empowering the Fed to calculate a "fair" price for these fees and then enforcing a cap on the charges.

The Fed's rule went into effect in October 2011. Retailers sued the central bank on the grounds that the Fed was too accommodating to the banks and failed to adhere to either the spirit or the letter of the Dodd-Frank Act. The retailers argued that the Fed "invented a category of costs not mentioned in the statue," thereby allowing the central bank to allow significantly higher debit-card swipe fees than Congress intended.

Leon agreed. According to him, the rule the Fed came up with "not only fails to carry out Congress's intention; it effectively countermands it!"

This is hardly the first time the central bank has had to be sued to get it to follow the rules. It fought tooth and nail in the early 1990s to prevent anyone from reading the meeting transcripts of the Federal Open Market Committee, which is in charge of monetary policy. It only gave in once it became clear there were no legal protections against releasing the transcripts.

Jesse Eisinger's latest column for DealBook suggests that the Fed's staff regulators, particularly Scott Alvarez, the general counsel, are to blame for this attitude. It's certainly believable that an institution created to bail out banks during crises would have a natural bias to take their side in regulatory disputes. Little wonder that, according to Gallup, only the Internal Revenue Service has a lower approval rating than the Fed among U.S. government organizations.

Ordinary Americans have scant reason to believe that the central bank acts on their behalf as long as it continues to break the rules for the sake of the banks. Whoever ends up taking over as Fed chairman next year could improve this reputation by making it clear that the central bank is no longer a lackey of Wall Street.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.