Tuesday, September 11, 2007

Piercing the Fed Temple

On last night’s Kudlow & Company, House Financial Services Committee Chairman Barney Frank continued putting heat on Bernanke & Company to begin easing rates and adding more cash to the economy. Mr. Frank is calling for a Fed policy shift on two grounds: First, financial markets have seized up and this could spell trouble for the economy. And second, the Fed should be focusing on fighting slower growth rather than inflation.

Mr. Frank is the rare elected official publicly calling for fed rate cuts. For some reason, most senators and House members are reluctant to take on the Fed in public. But Chairman Frank is a big believer that in a democracy such as ours, everyone has the right to speak out on monetary policy. While he clearly respects the Fed’s independence, he doesn’t believe the Fed is on some distant planet absolved from any public criticism. I agree.

The “Secrets of the Temple” -- as discussed in Bill Greider’s great book twenty years ago -- should be penetrated, especially by elected officials.

As the late economist Jude Wanniski often remarked, money is the most democratic of all economic issues. Everybody has greenbacks in their wallets and purses. Folks have a right to know what the cost and value of their money is. Informed public debate about money can be quite useful to Fed policymakers, other government leaders, and the public at large.

Mr. Frank was also concerned that regional Reserve Bank presidents have an obsessive, built-in bias of slaying inflation at the expense of fostering economic growth. Incidentally, it’s interesting to note that while the seven governors of the Federal Reserve Board are nominated by the President and confirmed by the Senate, the twelve regional Reserve Bank presidents are essentially private sector representatives. They are neither nominated by the executive branch nor confirmed by the Senate. However, they are voting members of the open market committee on a rotating basis, along with the seven governors.

Put simply, of the twelve FOMC votes, seven go to the confirmed Fed governors, one goes to New York Fed head Timothy Geithner (who is a permanent FOMC voting member), and the remaining four votes rotate among the unconfirmed regional presidents who serve one-year terms. So the unconfirmed, regional Reserve Bank president votes are essentially on equal footing as the confirmed Fed governors.

Mr. Frank is on to something here. With the possible exception of San Francisco Fed President Janet Yellin -- who has expressed concerns about the economy -- it does appear that these reserve bank presidents are focusing almost exclusively on inflation. For whatever reason, Kansas City’s Thomas Hoenig, Dallas’s Richard Fischer, Atlanta’s Dennis Lockhart, and Richmond’s Jeffrey Lacker (and of course, Bill Poole in St Louis) all seem to be opposed to easier money.

Chairman Frank is only looking for a mild easing, instead of a full-scale, open-the-spigots approach. And as the Chairman of the powerful House Financial Services Committee, Mr. Frank does have oversight authority over the central bank. In that important sense, I think he is absolutely right to speak out.

If Barney Frank is rocking the monetary boat, then so be it.