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WSJ Editorial: Barney Frank's Fed Packing Plan

Washington, September 21, 2011 -

A proposal to punish the hard-money regional bank presidents.

Among Washington's modern ironies is that liberals think a Federal Reserve that is increasingly a creature of the White House and Congress has too much independence. So along comes Barney Frank with a plan to make the central bank even more political than it already is, in particular by cutting out its regional presidents and replacing their votes with political appointees.

In a remarkable white paper released last week, the former Chairman and now ranking member of the House Financial Services Committee targets the role of the 12 regional bank presidents. Today the presidents are allotted (on a rotating basis) four of the 12 voting slots on the Fed's Open Market Committee, or FOMC, which sets monetary policy. The other eight are the president of the Federal Reserve Bank of New York and the seven Fed Governors, who are appointed by the President and confirmed by the Senate. Mr. Frank wants to strip the regional banks of any voting membership.

The 12 presidents are selected by regional bank boards, and Mr. Frank writes that this "anomaly" is "not simply an imperfection in our model of government based on public accountability" but influences "in a systematic way the decisions of the Federal Reserve." That would seem to be the point, though what Mr. Frank means is that the regional presidents have historically tended to favor sound money and thus have "now become a significant constraint on national economic policy making."

The Congressman's timing is especially notable, coming only days before the latest two-day FOMC meeting that ends today. One plausible inference is that Barney is walking point for White House political advisers who want to intimidate the Fed presidents from sticking to a harder-money policy but can't say so themselves. He's certainly in line with the latest consensus among liberal economists, who are urging a burst of inflation to reduce U.S. debt and pump up the economy before Election Day.

Mr. Frank is nothing if not candid about his own political agenda, specifically citing the August Open Market Committee announcement that it would keep the short-term interest-rate target near zero through 2013. Three regional presidents dissented, favoring less accommodative language.

Mr. Frank believes such dissent is leading the Fed "to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment." In other words, Mr. Frank's Fed restructuring is a familiar plea to use monetary policy to save Democrats from the slow-growth consequences of their fiscal and regulatory policies.

The regional Fed banks are an important bulwark against political pressure because they have independent bases of support outside of D.C. Mr. Frank claims the presidents are dominated by "business interests" on the regional bank boards, but those interests provide an important counterweight to the Wall Street and Washington voices that tend to favor easy credit as a policy default.

It's true that the Fed has always presented a conundrum for democratic accountability. The Fed is a creature of Congress and shouldn't be off-limits to political debate and scrutiny. But countries that let politicians dictate monetary policy—e.g., Argentina—typically come to grief. Our complaint is that the Fed under Alan Greenspan and Ben Bernanke has grown too close to the Treasury and White House, and too involved in fiscal policy and the allocation of credit.

One antidote would be a new Fed Chairman in the mold of Paul Volcker. Congress could also repeal the Fed's dual mandate so it focuses only on price stability, not full employment too. Even better would be a revival of rules-based monetary policy that relies less on the judgment or intuition of the Fed Chairman and staff.

But as long as we have fiat money, the Fed needs a structure that insulates its monetary decisions from political meddling. The voting power for bank presidents is one way to do that, and Republicans ought to be looking for ways to strengthen their role.

A surprising and welcome political development this year has been the emergence of a hard-money populism among Republicans. GOP candidates have noticed that Fed policies have produced spikes in food and energy prices that are hurting middle-class real incomes. Some have taken up Ron Paul's call for an audit of the Fed, but this is mostly political symbolism.

A better campaign theme would be a call to restore the Fed's independence and its focus on price stability. One concrete proposal would be to give more voting power on the FOMC to the regional presidents—the opposite of Mr. Frank's plan for more Washington control.

If easy money alone could conjure prosperity, we wouldn't have 1% growth and 9.1% unemployment after 32 months of near-zero interest rates and two bouts of quantitative easing. Mr. Frank is giving Republicans an opening to stand up for Fed independence and speak up for the purchasing power of the American middle class.

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