A Modest Proposal to Improve Federal Reserve Bank Governance

Recent losses at JP Morgan, and Jamie Dimon’s position on the board of the New York Federal Reserve Bank, have renewed debates as to who should be eligible to sit on the boards of the twelve regional Federal Reserve Banks. In yesterday’s on-line New York Times, Simon Johnson raises additional, and important, questions as to the appropriateness of Dimon’s presence on the NY Fed’s board.

Senator Bernie Sanders (I-VT) has also introduced a bill, S. 3219, that would remove bankers from the regional Fed boards. Representative Barney Frank (D-MA) would go as far as removing the regional bank presidents from the Federal Open Market Committee (FOMC)—although I suspect this has more to do with wanting inflation than anything else. Frank has even proposed replacing those members with additional members appointed by the president of the United States, as if the current Fed is not already too aligned with the White House.

Rep. Frank has called his proposal to pack the Fed with White House loyalists “increased democratization” of the Fed. Frank is, of course, correct to say that regional Fed presidents who sit on the FOMC “… are not subject to a confirmation process by elected officials, and instead are chosen by regional Federal Reserve Bank directors who effectively are appointed by large commercial banks in each region.” [Emphasis in original.]

Here’s my modest proposal to “increase democratization” at the Fed, but to do so in a manner that actually gives more voice to the American public: have the governors of states within the various Fed regions appoint some, or even all, of the board members of the regional Feds. In districts, such a Philadelphia or Cleveland, the governors could appoint multiple members, with over-lapping terms, so that board would have a reasonable minimum size.

To truly increase the “democratization” of the Fed, we should also remove the various vetoes that the DC-based Federal Reserve Board has over regional Fed Bank governance. For instance, Section 4-4 of the Federal Reserve Act requires approval of the DC board of regional bank president appointments.  That allows the Fed to reject anyone who might challenge the status quo. Under any circumstances, having the Fed Board appoint a third of the directors (class C) of the regional banks is also problematic.  Rather then represent Washington’s interests, all regional directors should be either appointed or elected within the region, and without the need for Washington’s approval.

These modest changes could improve the accountability of the Fed, helping the break the dominance of the current Cambridge-Wall Street-Washington group-think that has so badly undermined the Fed. Of course none of this should deter us from exploring alternatives to the Fed.