Tuesday, May 10, 2011

Barney Frank Tries To Re-Centralize US Monetary Policy

Perhaps because his party is now in the minority in the House, Barney Frank's latest zany idea for banking regulation change hasn't had much life after its initial splash on the day he released it and did the tour of business cable channels.

Frank's latest bad idea, to use Gerald O'Driscoll's term (from his Wall Street Journal editorial on Frank's bill) is to remove the presidents of the regional Federal Reserve banks from voting on the FOMC. Currently, the FOMC has 12 members- seven Fed governors and 5 presidents of Regional Fed banks, the latter on a rotating basis.

From this design, it's clear that the FOMC is already composed of a majority of federal political appointees. The Regional Fed bank presidents, meant in the original Fed design to prevent another Bank of the United States, are chosen by the boards of those banks. Thus each Fed district has the potential to be independent in its selection of presidents and the nature of its research. Various indices and research traditions are associated with specific Fed regional banks.

Thus, on one level, it's ironic that a member of the more populist political party would now want to essentially remove all populist influence on the FOMC. In today's financial services sector, restricting the FOMC to political appointees is essentially the same, as O'Driscoll contends, as making it an adjunct of the nation's larger banks and brokerages.

How odd that an institution designed to meet the Democrats' original demands to defuse monetary power from Washington and New York should return, full circle, to this point.

Just knowing Barney Frank was co-author of the monstrous Dodd-Frank bill should be enough to ignore his latest folly.

But there's a deeper theme at play. It may have taken one hundred years, but federalism, combined with the nation's larger capital markets players, never really stop in their quest to concentrate monetary authority among themselves.

Call it the Bank of the US, or the Fed, either way, it represents a consolidation that seems unwise at a time when the Fed has returned to fully monetizing the Treasury's record debt, and then some.

Truly an irony, in an era of global finance and evolution to electronically-based, rather than the older, cronyistic style of open outcry floor trading.

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