Monday, July 6, 2009

Move the Fed!

The Federal Reserve is a curious creation. In an effort to keep it insulated from the political whims of the president and the congress, it was made as independent as a central bank can be - with one exception. Its seven governors serve 14 year terms and once appointed by the president and confirmed by the senate cannot be fired - only impeached. Its chairman is appointed to a 4 year term which is staggered with that of the president's so a new president has to wait two years to appoint the chairman. The Fed is off budget and self funding so congress cannot influence the Fed's decisions by controlling its funding. The Open Market Committee which sets and implements monetary policy is made up of the 7 governors, the president of the New York Fed and three of the other 11 reserve bank presidents who serve on a rotating basis. The banks that are members of the Fed have limited influence on the Board of Governors and the chairman in that they do not have direct input over Fed decisions. The member banks do elect directors of the reserve banks, but those directors essentially serve only a limited advisory role and have no direct voice in either the running of the reserve bank or on monetary policy. I know there are all sorts of conspiracy theories out there but none make a great deal of sense once scrutinized. The recent financial "reform" legislation introduced would give the Fed some additional oversight responsibilities but that legislation discussed below goes in the wrong direction. The Fed argues that it needs hands on regulatory authority in order to conduct monetary policy. This is bogus. The Fed has always been a power hungry institution and simply wants to gain more power - like any politician or regulator. In reality regulatory oversight distracts the Fed. It should not write banking regulations, it should not regulate state member banks, bank holding companies, financial holding companies, foreign banks operating in the US or US banks operating abroad. The Fed should only concentrate on monetary policy. Oh. As to the one thing missing from insulating the Fed? It should not be located in Washington, DC. Here the Fed is acutely aware of the pressures applied by the administration and the congress. Fed governors live in the area surrounded by neighbors who live off the Federal government and are directly influenced by Fed decisions. Research has shown that the Fed is influenced by all these factors if only by osmosis. What can be done? Move the Fed to Kansas City. There, surrounded by real people who have to actually work at productive ventures for a living, the Fed would make better and more rational decisions.

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