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A Frank ‘cure’ for the Fed

Posted Sept. 28, 2011, at 4:13 p.m.

“If two people always agree,” said Ben Bernanke, “one of them is redundant.” So, imagine what the Federal Reserve chairman thinks of Rep. Barney Frank’s legislation designed to dampen dissent within the Fed.

Fond of diversity in everything but thought, a certain kind of liberal favors mandatory harmony (e.g., campus speech codes). Such liberals, being realists at least about the strength of their arguments, discourage “too much” debate about them (e.g., restrictions on campaign spending to disseminate political advocacy). Now Frank wants to strip the presidents of the Fed’s 12 regional banks of their right to vote as members of the policymaking Federal Open Market Committee.

Five presidents are permitted to vote at any one time, and Frank’s bill is partly a response to three of them voting incorrectly, in his opinion. In August, the FOMC voted 7-3 in favor of an indefinite extension of the very low interest rates of the last three years.

Frank says he has “long been troubled” from a “theoretical democratic standpoint” by the “anomaly” of important decisions affecting national economic policy being made by persons “selected with absolutely no public scrutiny or confirmation.” It was not, however, until August that this affront to Frank’s democratic sensibilities became so intolerable that he proposed a legislative remedy.

When three regional presidents voted their skepticism about cheap money, Frank decided to act against the problem, as he sees it, that allowing five regional bank presidents to vote “has the effect of skewing policy to one side of the Fed’s dual mandate.” That is the side of preserving the currency as a store of value — controlling inflation. This comes, Frank thinks, at the expense of the other side, which he calls “promoting employment.” The actual language of the mandate speaks of promoting “maximum employment,” which is problematic: “Maximum” means “the highest attainable” and this might depend on ignoring the other half of the mandate.

The results are skewed, Frank says, because the regional bank presidents come from “a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the president and confirmed by the Senate.” That is, members of the boards of directors of the regional banks select those banks’ presidents and those members are — here we come to the crux of Frank’s complaint — “overwhelmingly representative of business,” and particularly the financial sector, therefore “they are not in any way representative of the American economy.” Not “in any way”?

Heavy representation of the economy’s financial sector in the governance of the central bank does not seem bizarre. But Frank is indignant that in the past decade 80 percent of dissents in the FOMC were from members concerned about excessively cheap money, and that 97 percent of those dissents came from presidents of regional banks. Frank’s prescription for institutionalizing a policy of cheap money comes as Europe’s economy seems about to follow America’s into convulsions caused by monetary gorging.

Nowadays it is obligatory to present any proposal as a cure for the decline of comity in Washington. So Frank says that “until recently, the tenor of Federal Reserve deliberations was one that promoted consensus,” but now “the Federal Reserve has been affected by the disdain for consensus and the contentiousness that has affected our politics in general.”

Note Frank’s insinuation: Any dissent from the policy he favors — he is not satisfied with 70 percent support in the August FOMC vote — constitutes “disdain for consensus” and unhealthy “contentiousness.” He says such dissent “has now become a significant constraint on national economic policymaking,” but is unpersuasive about how the constraining works: He says a 7-3 decision “is clearly less effective” influencing economic behavior than unanimity would be. Therefore, dissent must be discouraged as inimical to the national interest.

When Frank complains that the regional bank presidents are “neither elected nor appointed by officials who are themselves elected,” he is almost asserting what he is clearly implying — that the Fed itself should be tamer, more compliant to the political culture, at least when liberalism sets its tone. The 2010 elections cost Democrats their House majority and Frank his chairmanship of the Financial Services Committee. So his legislation is not an immediate threat to the Fed’s independence. Nevertheless, it is notable that the left now has its Ron Paul. Notable and, in a sense, appropriate because one of liberalism’s steady aims is to break more and more institutions to the saddle of centralized power.

George Will is a columnist for The Washington Post Writers Group. He may be contacted at georgewill@washpost.com.

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