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Would More Accountability Help the Fed?

The presidents of the twelve regional Federal Reserve banks serve concurrent five year terms, and all twelve district bank presidents will come up for reappointment in February of 2011. Reappointment will be up to the Board of Directors in each district.

The problem with this process is that there is little accountability to residents of the district. When it comes time to consider reappointment, the Board of Directors should ask themselves whether the Fed president has represented the interests of the district in his or her votes on monetary policy. If not, the Fed president should be replaced.

However, that sort of scrutiny is unlikely to occur, and as far as I can tell this will largely be a rubber stamp process. Presidents may voluntarily step down and be replaced, but being forced out by the Board is unlikely. If it does occur, I'll be pleasantly surprised.

This weekend, Brad DeLong stopped by for a short time as he was passing through town on his way back to Berkeley, and I said I thought more accountability to the public might help the Fed quite a bit. If people feel like they have some control over who is setting policy, they may have more confidence in the institution (and for good reason if it results in a process that better serves the interests of residents within each of the twelve districts).

Brad suggested that a way to do this would be for every bank account to come with voting rights for the president in the district, with proxies just as with stock and perhaps weighted by some measure of the relative size of the deposit. Every so often, five years perhaps but maybe shorter, the regional bank president would come up for a vote and depositors within the district could, collectively, choose the candidate for the district bank presidency they think will best represent their interests. (Just to be clear, Brad wasn't taking a position one way or the other on the proposal itself, just suggesting a mechanism that would provide accountability to stakeholders in the district).

A system like this would provide some degree of accountability for five of the twelve Federal Open Market Committee positions -- recall that only five of the twelve regional presidents vote in a given meeting -- but it still leaves the seven members of the Board of Governors as appointed rather than elected positions. That's okay, allowing a president to have influence over the selection process for Fed governors, as now, allow some control over the course of policy. But I would dilute the influence of the seven Governors by allowing additional regional Fed presidents to have a vote in meetings. A twelve to seven split as would occur if all the district bank presidents voted may be weighted too heavily toward the district banks, but perhaps not, and some decentralization of monetary policy decisions away from Washington would, in my view, be a good thing.

But the main question I have is whether having depositors vote for regional bank presidents would do any good. I have my doubts, the connection may not be direct enough, and it may not improve who gets selected. Instead, perhaps an election should be held for the Fed chair at the same time we elect presidents. The connection to the public would be stronger, and the presidential candidates could name their favorites for Fed chair, maybe even select the specific candidates, and that would help to ensure that qualified candidates are in the running. But in the end, whatever process is used, the important thing is that the particular choice would be determined by a vote of the public.

If the public had a say in the membership of the FOMC, would that help the Fed?

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