Sunday, June 5, 2011

Another bad idea: No surprise given the source

In May Barney Frank announced that he was introducing a bill to reform the Fed. After co-authoring one of the worse pieces of legislation in history (the Dodd-Frank Financial Reform Bill), Frank is now outdoing even himself. The new proposed legislation would strip the reserve bank presidents from the Fed's Open Market Committee. This committee has the responsibility for the conduct of monetary policy and is currently composed of the seven Fed governors, the president of the New York Fed and four of the other 11 reserve bank presidents who rotate on one year terms. Although at the FOMC meeting all reserve presidents attend, only five have a vote. Why Frank wants to get rid of the reserve bank presidents is anyone's guess. He states that he doesn't like it that they are not political appointees and are chosen by the directors of their reserve bank. The elimination of the presidents would make for bad policy. As I have written before, one of the problems with the Fed is that it is based in Washington and would make better policy if it were located somewhere else - say Kansas City. Historically, the reserve bank presidents have been a moderating voice on the FOMC. The problem with the Fed's policy making is the opposite of what Frank is trying to accomplish. Instead of getting rid of the presidents, all the presidents should have a vote. This would mean that the governors would no longer have a majority on the FOMC. The presidents have generally been a ballast, tempering the influences of Washington. To get rid of them would make for policy that is more political and less in the interests of the economy. Washington's influence is bad enough, leading this fed to monetize the national debt, to support out of control government spending, driving interest rates down, causing capital flows out of the country, depressing the value of the dollar, driving the monetary base through the roof and paving the way for inflationary recession. Only an idiot would think that we need more of this. And more of this would be precisely what we would get if Frank's bill became law. Perhaps the republicans are asleep at the wheel - no surprise there. But instead of simply opposing Frank's bill, let's hope that someone introduces a bill to expand the FOMC to include all the reserve bank presidents.

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