Barney Frank’s wrongheaded assault on the Fed

November 3, 2009

When you’re a nation getting ready to borrow $10 trillion or more over the next decade, you don’t want markets questioning your central bank’s commitment to controlling inflation.

But Congress continues to risk just such a scenario, whether through aggressively questioning Federal Reserve Chairman Ben Bernanke or pushing a bill to audit Fed monetary policy.

Now Representative Barney Frank, the chairman of the House Financial Services Committee, has suggested curbing the authority of the 12 Fed regional bank presidents.

As Frank sees things, monetary policy should not be influenced by “inappropriately placed private businessmen — or women, occasionally — picked by other private businessmen, and occasionally women.”

Drill down a bit and it’s clear that what really bugs Frank is not so much that regional bank presidents are selected by a nine-person panel, six of whom are elected by bankers. He just thinks they’re too hawkish.

Frank even commissioned and publicized a study that found that 97 percent of the hawkish dissents at Federal Open Market Committee meetings during the past decade were from the regional bank presidents.

Of course, higher rates would have been a good thing, given that the Fed’s extraordinarily easy monetary policy was a huge contributor to the financial crisis. And going forward, the Fed will face the economically and politically challenging task of withdrawing monetary stimulus when economic growth may well be sluggish and unemployment high.

But such medicine may be necessary to prevent an inflation outbreak. Congressional threats and bullying will make a hard job even more arduous.

Moreover, one reason the Fed has a decentralized structure is because of historic concerns about monetary policy serving only Washington and Wall Street.

Yet citizen concerns about the concentration of financial power are as alive today as they were in 1913 at the Fed’s creation. Monetary policy set solely by a presidentially-appointed and Senate-confirmed Board of Governors should certainly set off alarm bells with bond vigilantes concerned that Washington may try to inflate its way out of its debt problems.

If Congress wants to look at how the Fed conducts its  business, better to focus on better ways to make monetary policy reflect forward-looking market gauges such as commodity prices rather than the unemployment rate or output.

Ultimately, though, the Fed’s problem isn’t too much influence from bankers in Kansas City or Atlanta or Chicago. It’s too much influence from politicians in Washington.

4 comments

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It seems James Pethokoukis is ill-informed, uneducated or corrupted when discussing the system that amounts to a giant ponzi scheme where unelected private men decide when to print money with only their own interests in mind.
With his philosophy, if a child burns down the neighborhood, we offer the child more matches a new neighborhood and make him pledge not to do it again. You sir, are the problem.

Posted by brendan | Report as abusive

Brendan,
I think you have it wrong there. What James is saying is that we should not put the Fed in the hands of Washington. The Fed should not be influenced by politics or work solely in the interest of Wall Street banks. This is what Representative Frank wants and it is not a good way to manage the Fed. Should there be changes at the Fed? Absolutely! Should we accept Rep. Frank’s proposal that would put the Fed at the mercy of Washington and Wall Street banks? No!

Posted by Alex | Report as abusive

Why should we “trust” a private bank such as the Federal Reserve? Private banks are commiting fraud and/or failing every day. Without real scrutiny, an audit, we don’t know anything. “Pay no attention to the man behind the curtain!”

Posted by JP | Report as abusive

The Federal Reserve & its system of usury is the greatest scam in world financial history & I can’t understand why highly educated people & economists fail to see the bare truth for what it is. As an irony, not too far into the future, the common masses may well become more aware of what the Fed truly stands for, while educated MBAs continue to argue in vain.

Posted by Mike | Report as abusive