Hillary Clinton on Fed structure
By Scott Sumner
Here’s Ylan Mui of the Washington Post:
Democratic presidential front-runner Hillary Clinton said she would support changes to the top ranks of the Federal Reserve, an issue recently championed by progressive groups amid debate over how long the central bank should keep supporting the American economy.
The Fed is led by a seven-member board of governors based in Washington and a dozen regional bank presidents based across the country, from New York to Kansas City to San Francisco. The governors are nominated by the White House and approved by the Senate, but regional bank presidents are selected by a board of directors with nine seats, whose occupants are chosen by the banking industry and by the Fed governors in Washington.
In a statement to The Washington Post, Clinton’s campaign said she supports removing bankers from the boards of directors and increasing diversity within the Fed.
My view on Fed reform is close to this, but not exactly the same:
1. Views on optimal Fed structure should not be based on whether you are a dove or a hawk, because you should not be a dove or a hawk, because there is no long run trade-off between inflation and unemployment.
2. Instead, we should look for a structure that leads to optimal decisions, not your preferred decision. I’ve always felt that the FOMC should be expanded from 12 members to 7 billion, and shifted from one-man, one vote to one dollar, one vote. In other words, an NGDP futures market.
3. Assuming we stick with the bureaucratic approach, I’ve argued that monetary policy decisions should be made by a panel composed of nothing but monetary experts. I do not favor making that panel diverse in an ethnic sense; indeed I have no problem with on FOMC composed on nothing but white male Jewish monetary economists, as long as it is diverse in an ideological sense. We need to pay a high enough salary to attract the 12 best monetary experts in the world—whatever it costs (within reason).
4. I favor moving away from a “central bank” and toward a “monetary authority”, which is not involved in banking. Clinton’s proposal seems like a baby step in that direction. If the Fed continues to do banking oversight, its regulations should be developed by a separate “banking committee” which has no oversight role in monetary policy. The banking committee should be composed of nothing but banking experts. In this case, I am much more tolerant of “diversity”, as the issues seem (to me) to be far more political, and hence less technocratic, than monetary policy. Making the monetary policy committee diverse is just as absurd as injecting diversity into the (government) NASA committee that decides optimal launch dates.
5. I understand that many will violently object to my vision of a non-political monetary committee. My view is based on the premise that Congress gives the committee its mandate, and filling out that mandate is essentially a technical question. The current mandate is a bit vague, and I interpret that vagueness as the Congress saying, “We don’t know if ‘price stability’ means 0% inflation or 2% inflation, you decide. If we knew, we would have told you. And we don’t know the validity of the Phillips curve model. You decide. And we don’t know if level or growth rate targeting is better. You decide.”
6. Elsewhere I’ve argued that Congress should change the mandate in such a way as to make it easier to determine if monetary policy had been successful. That would involve the Fed revisiting past decisions and then telling us whether, in retrospect, policy had been too easy or too tight. The Fed would also describe the metrics that allowed them to make that determination. They should also be required to construct some sort of transparent policy rule, albeit not necessarily an instrument rule in the “Taylor Rule” sense of the term.
PS. Over at TheMoneyIllusion I have a post responding to Bryan’s recent post on consols and liquidity traps.
HT: TravisV, Ben Klutsey