Of statecraft and governance: The market is regulated to maintain the fiction of democracy.

Good governance requires that the taxpayer-consumer be led to believe that she participates in determining the rates or prices that help clear and settle the exchange of goods and services. She will more freely enter a market to buy and sell goods and services if this democratic tenet of choice takes on some realistic form.

Take a rate case hearing held by utility regulators. Ratepayers are invited to comment on the ratemaking process and opine on what rates should be. In most cases their comments are conclusory. They are not able to probe with detail because they lack the necessary framework of analysis necessary for asking the best questions and seeking the best data.

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The utility regulator and the utility are willing to suffer through a comment period that delays a decision 30 or 60 days in exchange for increases in rate prices and fee and tax collections. There is also the psychic benefit of keeping the barbarians from knocking down the gates by meeting the masses’ need for participatory democracy.

This is bare minimum and necessary statecraft.

This approach has to be tweaked in the money markets. The Board of Governors of the Federal Reserve System does not provide a comment period on the determination of its primary monetary policy tools: the discount window rate and the overnight reverse repo rate. Providing a thirty-day comment period on a rate change would bring money markets and the overall economy to a screeching halt. Fed Day is not the time for democracy.

Rather, the Board of Governors allows primary dealers and market makers to participate via comments provided during Fed surveys of primary dealers and money market participants. The consumer has an opportunity of sorts to participate in the Fed’s ratemaking decision via the Fed’s survey of consumer expectations regarding inflation.

This approach actually provides data prior to a decision versus after a decision has already been made. At least it looks that way. Under the aforementioned utility model, it is likely that a utility regulator has already made up her mind about rates and is willing to perform a song and dance for consumers that drive all the way to Tallahassee from a retirement home in St. Petersburg to decry a rate increase.

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A Fed governor or federal reserve bank president may have made up their minds prior to a formal decision as well, but have some cover provided by survey data that allows them to claim that they considered consumer expectations and market makers’ own outlooks on the economy.

In the end, the market maker’s proximity to the rate decision and the data the market maker provides trumps at least the notion of democratic participation in a decision that impacts everyone in society.

Alton Drew

19 August 2023

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