The Executive and Legislative branches already exert a fair amount of influence over monetary policy and the Fed. For instance, the President nominates, and the Senate confirms, the seven Board of Governors of the Fed, including the Chairman. But the terms of office are 14 years, their terms are staggered, and they are generally limited to one term. This greatly diminishes the influence politicians enjoy over their operations.

The 7 Fed Governors, together with 5 Presidents of the Regional Federal Reserve Bank, make up the key group that controls national monetary policy. The Regional Presidents are chosen by independent boards, themselves controlled by member banks. As professionals chosen by bankers, they exert a strong influence over monetary policy.

There are two main ways that governance could change, IMHO:

1. Change the terms and staggers of the Governors. This is not likely, because it would be too much of a direct attack on the Fed’s independence.
2. Do as the writer above mentions: give politicians control over appointment of the Regional Fed Bank Presidents.

Because of the staggers, a POTUS will appoint at least two Governors; if the POTUS also can “hire and fire” Regional Presidents, they will gain effective control over FOMC policy. The second has the advantage of being sellable to the general public; it is easy to see how this change would be spun:

The bankers are the ones who screwed up our system by taking imprudent risks to earn outrageous profits and bonuses. How can we let them keep control of the Fed? We have to let the people, and their elected representatives, make these critical appointments. It’s too important to be left to bankers, and we have to protect our economy, our citizens, and our way of life.

So what is the limit of the power of the Federal Government? Where do we draw the line? The Federal Reserve Bank is, to be sure, an imperfect institution. But it is also independent, and that is why it is a threat to Washington’s hegemony.

The other interesting question is: if we accept that there should be a limit – i.e. we have a conservative worldview – when do we know we’ve gone too far? At Enron, each step seemed perfectly reasonable and defensible – what begins as a perfectly legitimate transaction (a sale of assets to a third party) becomes a twisted, bizarre monstrosity (a sale of assets to an entity controlled by our CFO with a put back to us, so the CFO locks in huge profits for himself while helping us manage and inflate our earnings).

For the students of human nature here at the Belmont Club, a quiz:

At what temperature does a frog jump out of a hot kettle? At 100ºF? 200ºF? 211.9ºF?

When do we say enough is enough? And – between elections – how?

Please show your work.

L3