There’s a write up in Reuters today that discusses regional Fed President Lacker’s point of view regarding the debate about whether to remove the regional Fed presidents from the FOMC. Here is a quote from the article describing Lacker’s views on the topic:
The Federal Reserve’s Washington-based governors are less insulated from politics than in the past, Richmond Fed President Jeffrey Lacker said on Wednesday, arguing that central bankers from outside the capital are important for good policymaking.
It goes on to quote a speech that was recently given by Lacker:
But because Fed governors in recent decades have often served less than half their 14 year terms, they are “less insulated from the political process.”
“By the end of a president’s term in the White House, it has typically been the case that the majority or every member of the Board of Governors was appointed by a president of the same party,” Lacker said in prepared remarks at Marshall University in Huntington, West Virginia.
“The views of Governors may not be as diverse as intended,” he said in his speech, which did not address the outlook for the U.S. economy and monetary policy.
In my view, being exposed to politics and/or the political process equates to accountability to“We the people”, however indirectly. Considering the situation of the regional Fed presidents of being elected like Jamie Demon is elected, by members of the boards of their respective reserve branches that are more loosely defined as “the bankers” that are shareholders in the regional branches, they have zero political accountability toward the General Welfare, and likely have zero interest in serving it while also enjoying immunity from removal.
The General Welfare is the basic reason that there are no other government policy bodies one can point to that come close to the unique composition of the FOMC which leaves it vulnerable to the concept of regulatory capture. Just imagine something like having investment bankers voting on the SEC, or big oil voting on energy policy, or big insurance voting on ObamaCare regulation. It simply doesn’t happen for obvious ethical reasons.
From the standpoint of a plain reading the US Constitution, having regional presidents voting on the FOMC is somewhat problematic. Monetary sovereignty is delegated to Congress, consisting of people who are elected and accountable, with no mention of ability to delegate it to an unaccountable decision-making body. In the early years of the republic, while some who participated in the drafting of the Constitution were still alive, there were many fights over whether Congress had the authority to establish any kind of corporation, especially a bank. President Jackson’s point of view was that the answer to that question was unequivocally no, especially when said corporation was not under direct political control. Many of us are more than aware of what happened to the head of the Second Bank of the United States when he not only refused to play ball with the politicians, but was also determined to show them how insignificant they were. He was marginalized and eventually fired.
While I do not agree with the body of Jackson’s monetary views in its entirety, I do agree that a nation’s money supply is a public resource and should never be farther than arm’s reach of politics for all of the lessons taught by history, specifically by the rather episodic story of economic tyranny that is the story of the Second Bank of the United States. By the way, there are many references to the political battles taking place over the bank in Abraham Lincoln’s writings (which are an amazing read in themselves – I was completely wowed).
For a moment, however, let’s think about possible reasons for the regional presidents to have been included on the FOMC, the predecessor of which was created in 1932. But I probably need to back up to creation of the Federal Reserve System, which was created in 1914 as a way to manage an ‘elastic’ money supply. We were on the gold standard, for which banks participated in the clearing function locally, because we, for the most part, did not use actual gold as money in everyday transactions. The local banks cleared through the regional banks, which then cleared cross-regionally with each other and internationally through the Federal Reserve. The regional banks then, were an integral part of what was then dubbed as monetary policy, because there were no computers (or helicopters for that matter), and policy implementation depended upon them to both agree and execute.
But as we know, things change. We have now have computers, and computerized clearing for a fiat currency. We no longer have the gold standard, or the complex inter dependencies that came with a mostly well-functioning, regionally-based gold monetary system that required regional cooperation in practice.
Regional banks now serve the function of distributing cash and collecting regional economic data, as well as some research functions. What role do they play in the implementation of monetary policy and maintenance of the monetary supply other than cash distribution to which they are legally bound? I cannot think of any, other than the role of the New York branch where open market operations are conducted.
Against the historical backdrop, and for other egalitarian and practical reasons, I do not find Lacker’s argument for retention of the regional presidents on the FOMC convincing. Rather, his argument that the regional presidents are out of reach of politics as a reason for them for them to remain on the FOMC is a very poor argument to justify the risk of corruption, regulatory capture, and financial bloat associated with existence of regional banks in the Federal Reserve System itself that was created to regulate a public resource. In other words, whether the regional presidents should vote on the FOMC is really the wrong question to be asking. The more practical question is why do we still have these regional banks at all?