The Sound Dollar Act: A worthwhile debate in Congress

Mr. Brady has also includes a provision to require that the Consumer Financial Protection Bureau, created in the Dodd-Frank legislation, be funded through congressional appropriations. As it stands, the CFPB is funded by the Fed at no cost to Congress. Once you get past the shock that a fiscal conservative wants Congress to allocate more money to fund financial regulation, it is pretty easy to see why. Mr. Brady is seeking to de-fund the CFPB. He is attempting to fix an error made in hast when the Republicans compromised on Dodd-Frank; the goal was to weaken the CFPB by housing it in the Fed, but somehow members of Congress forgot that the Fed is a self-funded entity operating outside of their power-of-the-purse.

Among the remaining provisions, Mr. Brady has proposed that the Fed monitor the prices of major asset classes, gold, and currency values, in addition to goods and services, specifically to prevent bubbles and protect the value of the dollar. At face value this is a very good idea, but it is something the Fed already does. What is unclear from the provision is whether Mr. Brady expects the Fed to then ignore all of the other economic indicators that it also monitors.

The most interesting provision proposed by Mr. Brady involves expanding the Federal Open Market Committee from 12 members to 19, thereby including the presidents of all regional Federal Reserve Banks at all times. This runs directly counter to Barney Frank’s 2011 proposal to eliminate the voting rights of all regional bank presidents. Both men likely put forward these proposals due to the makeup of the regional bank presidents versus the board members. At present, several regional bank members are far more hawkish about inflation than any sitting board member. Still, Mr. Brady’s proposal is rather vexing since he is functionally reducing the power of Congress by making the vast majority of the FOMC not require appointment by the President or confirmation by the Senate. This proposal also ignores the fact that regional Fed banks are not equitably distributed throughout the country, so people in the northeast are still over-represented while the entire west coast, Arizona, Utah, Idaho, Alaska and Hawaii are lumped into one Fed district comprising over 20% of the U.S. population, but still only having just 1/12th the representation.

This representation problem at the Fed highlights the need for outside the box reform ideas. Having every regional bank president vote at each meeting makes sense if we wish to see the regions better represented, but in order to make sure that this representation is equitable the Fed regions need to be redrawn to better reflect the population dynamics of the modern country, not the United States in 1913. Moreover, these regions should also reflect the relevant business sectors in geographic pockets of the country so that a variety of industrial sectors are represented at the Fed, not just bankers. This will also require a change in the regional bank president selection process whereby they are not selected by a cryptic mix of class A, B and C regional board members, but by a more open and democratically accountable mechanism.

Beyond reforms to the regional bank system, there are also several transparency reforms that could improve Fed credibility. On the data side, the Fed could simply release the Beige book and Green book data that influences their decisions on the same day as the FOMC meeting. This will help provide a justification for the policy decisions made by the committee.

Finally, forcing the CFPB to be funded by Congress is an overtly political maneuver for Congress to gut the new agency. Real regulatory reform would entail spinning off the entire Fed regulatory arm into an independent agency. Fed personnel claim that their regulatory duties provide economic information they would not otherwise have, but this indicates a failure of communication, not strength in Fed regulation. The regulatory system as a whole (not just the Fed regulatory arm, but also the SEC, FDIC and Comptroller of Currency) should be consolidated and direct paths for communication between financial regulators and the Fed must be established so that the Fed can focus on the business of monetary policy without sacrificing any information it gains from its regulatory duties.

These general suggestions highlight that although Mr. Brady’s effort to begin this debate is commendable, his proposals are far too “inside the box.” Hopefully he will take these suggestions to heart and Congress can begin an open and thoughtful debate about Fed reform. Unfortunately, not much in Congress has been open or thoughtful in recent months, so I fear this legislation will face the same fate.

Schnidman is a PhD candidate at Harvard University studying political economy. He is also an adjunct lecturer at Brown University.