Bring the Fed into the Democracy

From: Deception and abuse at the Fed, by Robert D. Auerbach, 2008
Chapter 12

Bring the Fed into the Democracy


Turn Off the Shredders and Begin Timely Accountability

Stop destroying the unedited transcripts of the policy-making committee of the nation’s central bank, the Federal Open Market Committee. Stop developing the nation’s monetary policies, foreign loan policies, and all other FOMC deliberations, including discussions of how to play the public and Congress, off the record. Anything the twelve decision makers have to say about Fed policies, including strategies on how to play Congress and the public, should be in the transcripts. All deliberations of this twelve-person committee—five of whom are internally appointed—should be recorded, and the unedited transcripts should, ideally, be available within one month to the chairmen and ranking members of the Senate and House Banking Committees, provided that they have security clearances.

FOMC transcripts should be edited by a committee that includes professional archivists from the National Archives and Records Administration. The committee would decide on redactions according to specific legislated rules.[1] The edited FOMC transcripts must be published within sixty days. Accountability cannot wait five years. The issuance of incomplete “minutes” without attributions should be ended. Only a clearly worded directive should be published immediately after a policy change. The meetings of the boards of directors of the Fed Banks and their branches should follow the same policy. The minutes discussed in Chapter 2, which include “Murder at the Richmond Fed” and vacuumed minutes, vividly demonstrate the need for complete transcripts.

Unelected Fed decision makers should not be given carte blanche to decide what the public should know about how they are running the central bank. The full record of what they are doing must be preserved. Financial markets work best when they receive full information—not rumors, leaks, and opaque, coded garblements—from the nation’s central bank.

No More Subservient FOMC Members: Only Constitutional Officers Should Serve

The Fed Bank presidents are internally appointed and are subservient to the members of the Board of Governors. Their salaries and their retention are in the hands of the Board, which means the chairman. As a result of their yearly review by the Board, they can fall behind other Fed Bank presidents in salary or even be told to leave. This means that there are FOMC members who are under pressure to support and vote with the chairman. Many Fed presidents would not admit this pressure exists: they knew the score when they were appointed, and they may have accommodated themselves and their views to the reality of their position.

No one should be given the immense powers bestowed on the Board of Governors and the FOMC without having his or her credentials publicly examined. All Fed officials voting on the FOMC should be constitutional officers, which means that they should be appointed by the president and confirmed by the Senate. FOMC members should serve eight- or ten-year terms instead of the current fourteen-year terms. This would still be a long enough tenure to allow them to carry out short-term monetary policy without the pressure of short-term job insecurity, although the record of their FOMC deliberations should provide full public accountability for their actions.[2] Ten years has been the term of the comptroller general of the GAO, a period that has provided enough job security to attract competent, principled people.

The appointment and term of the chairman and vice chairman of the Board of Governors should be simultaneous with the four-year term of a presidential administration. Fed chairman Burns killed this change in the 1970s because he thought it would make the appointments too political. A continuation of the present procedure can lead to serious, disruptive political problems if an administration does not like the Fed chairman it inherits. An example was discussed in which a gang of four reportedly rebellious FOMC members appointed by the Reagan administration managed to assist in showing Fed chairman Volcker the door. Such interference can sidetrack monetary policy and lead to unnecessary fights with the administration. The administration should have to take full responsibility for the long-range monetary targets set by the Fed and not be able to blame them on a chairman from a previous administration.

There should be a targeted range for inflation and precise policy changes to be made if economic activity slows and unemployment rises. The targets should not be immovable. A simple rule with weighted precise objectives will not fit all environments. The first key to credibility and the reduction in leaks, rumors, and false information is full, accurate, public disclosure of the Fed’s targets. The second key is publication of the complete record of individual decision makers’ skill in developing policies to achieve these targets, as shown in the transcripts of its meetings.

Change Fed Facilities That Reflect the Population in 1913

The Fed is an out-of-date, inefficient governmental bureaucracy with a bloated hierarchy. The obsolescence of much of its workforce was plainly evident from the body blows it began receiving from modern digital information technology (discussed in Chapter 7). In 2007 it still had twelve district banks, which had been placed according to political influence and the distribution of private banks in 1913, when the Fed was created. Because of the distribution of population and private-sector banks in 1913, the western United States was given only one district. Today that district, the twelfth, with the San Francisco Fed Bank as its headquarters, advertises the poor allocation of Fed districts when it notes that it is “home to approximately 20 percent of the nation’s population.”[3]

Interested citizens of Missouri may not wish to highlight this subject, since Missouri received two of the twelve Fed Banks, one in St. Louis and one in Kansas City, Missouri. Citizens of Washington, D.C., may praise the highlighting of the location of the Fed’s facilities, since the nation’s capital has been without any Federal Reserve facilities. Richmond, Virginia, has a Fed facility, and this is where D.C. banks must send an officer to obtain Fed loans. The primary sponsor of the Federal Reserve Act of 1913, the act that created the Fed, was Senator Carter Glass, a Democrat from Virginia. Baltimore, Maryland, has a Fed facility for clearing paper checks and for withdrawing and depositing U.S. currency and coin for D.C. banks. This continued lack of Fed facilities in the nation’s capital has a single cause. The District of Columbia does not have a voting member in Congress.

On May 2, 2000, the Fed held a groundbreaking ceremony for a cash-operations facility in Phoenix, Arizona. The Fed’s new Phoenix facility was needed because it was inefficient to transport currency and coin to the LA branch bank 400 miles away. This new facility was a step in recognizing the change in the distribution of the population since 1913. Hopefully, this process can continue under a reorganized Fed that is primarily constructed for cash facilities and emergency backups for the electronic payment system.

Most officials and legislators from the twelve cities with Fed Banks consider a Fed Bank an important sign of status. One state did not want a Fed facility: Hawaii.[4]

End the Fed’s Severe Conflicts of Interest and Place Bank Regulation in a Separate Entity

The Fed should concentrate on monetary policy and end the extreme conflicts of interest generated by sharing its operations with the financial institutions it regulates. The regulation of financial institutions should be under a separate federal regulator. The Federal Reserve should concentrate on monetary policy without all the surrounding hodgepodge. That muddle includes boards of directors, two-thirds of whose members are elected by the bankers in the twelve supposedly private—but really governmental—Fed banks, and the Board of Governors. This change to an entity concentrating on monetary policy was made at the Bank of England under Prime Minister Tony Blair’s government.

Bank regulation and functions such as currency and coin services should be centralized in a separate entity that combines all federal bank regulation and supervision under one authority. This would reduce the nightmare for bankers, who are inspected by numerous federal regulators, each enforcing different regulations. The present regulatory maze increases the costs of banking services. It may be politically impossible to put the whole tangled web of federal bank regulation under one regulator. For many bankers—but not one of the leading trillion-dollar conglomerates with ample resources—the number of regulators marching into their office can drive them up the wall. The Federal Reserve regulates financial holding companies, corporations that own one or more banks. National banks are regulated by the Comptroller of the Currency. The Federal Deposit Insurance Corporation (FDIC) regulates all banks with federal deposit insurance. These three federal regulators should be combined into one entity—but not the Fed.[5]

The hodgepodge of bank regulation was made less efficient by the 1999 Financial Services Modernization Act (the Gramm-Leach-Bliley Act). It stipulated that the part of a bank responsible for selling insurance should be, under normal operating conditions (that is, when the bank is not failing), regulated by state insurance regulators. It added the Securities and Exchange Commission (SEC) as a bank regulator.[6] The SEC was needed for the part of the financial holding companies that operates brokerages and underwrites new stock offerings.

Small independent bankers are at a substantial disadvantage. They cannot afford the services of teams of accountants and lawyers specialized in banking regulation.

At the beginning of the Clinton administration, in 1993, officials from the Treasury lobbied Congress to pass a rational bank regulatory system by consolidating the bank regulators into one agency.[7] A large audience of House Banking personnel, both Republican and Democratic staffers, including me, gathered in the House Banking chambers to hear the under-secretary of the treasury pitch the proposed regulatory-consolidation bill. When the undersecretary finished, I suggested this proposed legislation would never get past the Federal Reserve bureaucracy, which had tremendous political muscle and little taste for giving up power. The Treasury official dismissed this concern because the Clinton administration’s plan was based on a rational improvement. Of course, the Greenspan Fed would not support the plan, which then went nowhere, and the Treasury official soon took a high-paying job with a large commercial bank.

It was no surprise to Chairman Henry Gonzalez that Greenspan went on the attack: “In his effort to thwart this reform, Federal Reserve Chairman Alan Greenspan uncharacteristically wrote an editorial for The Wall Street Journal attacking the Administration’s plan. He talked about the need for ‘hands-on supervision,’ though Chairman Greenspan failed to tell us where the Fed really has its hands when it comes to supervising banking competition. . . . The only hands that should be on Federal bank regulation are those of neutral bank regulators.”[8]

In defense of the present system of regulation, the argument is made that the different bank regulators are competing to do the best job. The argument evokes a pretty picture of competition, but it is out of focus for multi-headed federal enforcers. One of the problems with the present system has been the lack of coordination between the many examiners. Governmental entities guard their turfs. Bureaucrats do not want their bureaucracy to be downsized or embarrassed because other bureaucracies are seen as being more effective. Thus, if a regulator were to find some juicy infraction, the least desirable choice could be to tell regulators from another turf to intercede.

This was the problem in the 1970s in a “rent a bank” scheme at a bank in Texas. An investigation by the House Banking Committee showed that the scheme operated by inducing a bank manager to lend most of the small bank’s deposits to some crooks, who would then use the money to buy the bank. Once the bank was bought, all the deposits could be emptied into loans to the crooks and the bank could declare bankruptcy. Since most of the depositors would be insured by the FDIC, they would not be hurt and complaints would be minimal. The crooks would be long gone with the money. The scheme failed, and the crooks met justice. The problem was discovered by the FDIC, which allegedly investigated it without promptly telling the other regulators what it found.

To prevent turf guarding by the withholding of information and to provide uniform principles and report forms, a coordinating entity was established in 1979. Despite its austere, longish name, the Federal Financial Institutions Examination Council (FFIEC) will have a hard time, given its limited resources, accumulating all useful information from the tangled regulatory web and promptly notifying all appropriate parties.[9] The FFIEC does not have jurisdiction over state insurance-regulatory functions that examine the insurance operations in banks. It does not replace consolidation into one efficient bank regulator, an action the Federal Reserve would be unlikely to support unless it were to become the entity that swallowed the other regulators. The FFIEC is likely to have as much effect on the Fed bureaucracy as hitting it with a wet noodle.[10]

Stop Issuing Garblements

The Fed should not issue information about Fed policy that is muddled and nearly meaningless. Fed officials are public servants, not wizards behind a curtain issuing puzzling grunts and sighs for others to try to interpret. Consider part of the Fed press release issued one day before the start of the Iraq War:
In light of the unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision making, the Committee does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth. Rather, the Committee decided to refrain from making that determination until some of those uncertainties abate. In the current circumstances, heightened surveillance is particularly informative.[11]

The attempt to convey zero information with its peculiar, empty, fortune-cookie advice—“heightened surveillance is particularly informative”—may have been successful in the short run, since it did not appear to move the financial markets. This press release probably conveyed the impression that the central bank, not knowing what to do, was powerless. Alan Beattie had another suggestion: “Anxious corporate executives wracked by uncertainty on the eve of a war with Iraq might derive wry comfort from the fact the Federal Reserve does not know what is going on either.”[12]

Hiding behind convoluted language may diminish the credibility of the nation’s central bank, although a case can be made that undecipherable noises embellished the reputation for wizardry of the nation’s former guru, Chairman Greenspan, and promoted him as being the only one who could fully understand his peculiar utterances. It would be better for the long-run credibility of the Fed to simply state, for example, that there is no change in Fed policy and to publish the edited FOMC transcript within a month. This procedure would provide useful information on each FOMC member’s views in developing the nation’s monetary policy. They would be held individually accountable for the policies they prepared, instead of being able to hide behind a buffet of phrases and an empty, fortune-cookie closing. Those who have little knowledge of what they are doing and emit muddled comments would be more likely to be exposed. Presentations at FOMC meetings would likely be better prepared, and the debate on policy more informative.

Remove the Restrictions on GAO Audits of the Fed Operations

Examination of the Fed’s accounting practices and operations is essential. Congressional oversight and audits by the Government Accountability Office (GAO), part of the legislative branch of the federal government, must examine all the Fed’s operations. At present, GAO audits are severely limited by law, thanks to the Fed’s lobbying for broad exemptions. The GAO group assigned to Fed audits must be reconstituted with personnel who are experts in central-bank operations. That way it can provide knowledgeable and complete reports on any waste, security problems, deceptive or corrupt practices, and unneeded personnel.

The Fed Should Not Be Allowed to Organize or Support Lobbying by Those It Regulates

According to House Banking chairman Henry Reuss: “The compelling evidence of extensive lobbying on the part of the Fed raises very serious questions. Attempts by regulatory agencies to orchestrate lobbying campaigns against bills affecting their agencies are illegal when money appropriated by the Congress is used. [The relevant law is U.S. Code 18, § 1913.] The Fed is technically exempt from this statute because its funds are not appropriated by Congress. But the spirit which prompted the ban on organizing lobbying by officials of other agencies should certainly be observed in practice by the Federal Reserve as well.”[13] That was said thirty years ago, and little may have changed in the interim.

End the Farce of an Inspector General Who Is at the Mercy of Those Investigated

Inspectors general and their staffs at governmental bureaucracies should be important vehicles for investigating and suggesting remedies for problems. Central-bank employees and members of Congress who believe they have found a problem should be able to trust that their inquiries will be properly evaluated and investigated by the Fed IG.

The Fed IG is at the mercy of the leaders of the bureaucracy he or she investigates. The Board set up the IG office in 1987, with the provision that the “Chairman can prohibit the Inspector General from carrying out or completing an audit or investigation, or from issuing a subpoena, if the Chairman determines ‘that sensitive information is involved.’ ”[14] Furthermore, the Fed’s Office of the Inspector General must receive its financing from the Board, as declared in the Fed’s Annual Report: Budget Review, as a procedure that conforms to the independence of the IG.[15] The writers and the officials who wrote and approved the report must think independence and dependence are synonyms. At present, the IG can issue nicely bound, thin reports and tenderly suggest a few improvements, which can easily be ignored.

The Fed IG should be nominated by the president and confirmed by the Senate. The IG should be given a budget defined by statute and given jurisdiction to examine all Fed operations. He or she should limit but not withhold the exposure of problems of national security to the president, constitutional officers at the Fed, and the chairmen and ranking members of the Banking Committees (those that have security clearances). Fed officials who handle this information should also have the security clearance given other governmental officials by the FBI or the Secret Service.

Eliminate Fed Stock and the Enticing Stash of Meaningless Cash

All national banks are members of the Fed. State-chartered banks can join the Fed if they wish. Each Fed member bank is given stock that can be held only by private-sector member banks. The stock is not like any stock sold in a traditional stock market. Fed stock cannot be sold and must be returned to the Fed if the bank leaves its membership status in the Fed. Owning Fed stock entitles member banks to vote for directors of their district Fed Bank. The stock does not entitle holders to any profits except for the 6 percent interest earned on the stock. This default-free rate of interest looks great when market interest rates are substantially below 6 percent. When market interest rates are substantially above 6 percent, it loses its charm. Fed member banks must pay 3 percent of their paid-in surplus (essentially their profits) to the Fed. This money is kept in a special Fed account that excites periodic congressional interest. It is tempting to say: “Since it’s just sitting there, and is even called the ‘surplus’ account, let’s grab the money and use it to finance my proposed legislation. It won’t cost anything.” This suggestion was made in 2003 in a bill to pay interest on reserves. A newly appointed Fed governor, Donald Kohn, and I both testified on March 5, 2003, before a subcommittee of the House Committee on Financial Services on that subject. We apparently agreed on one point: congressional use of the “surplus account” cash at the Fed would not relieve taxpayers from footing the bill.[16]

One-half the “surplus” funds were used to “finance” the original deposit-insurance system in 1933, as stipulated in the Banking Act of that year. Using the surplus funds to finance governmental expenditures is not costless to taxpayers. The accounting transfer of surplus funds from the Fed to the Treasury represents no additional sources of funds for the federal government taken as a whole. The actual transfer of funds to the government occurs when private-sector member banks send the money to the Fed each year. These funds either reduce a deficit or increase a surplus on the federal government’s books if the transfer is properly recorded to include both the Fed and Treasury. Transferring money between governmental accounts does not produce governmental revenue. End this meaningless stash of cash (the surplus account) by ending the issuance of Fed stock. This action would also eliminate ridiculous rumors about the owners of stock that have no relationship to the reality that Fed stock can be held only by member banks and it cannot be sold.

The Independence Explanation Bypasses Lord Acton’s Warning

The academic literature on what may be called the “independence explanation” is fairly extensive. This explanation alleges that the greater a central bank’s independence from politics, the lower the rate of inflation in the country. The intuitive reason is that once freed from politics, central bankers will have the courage to slow down money growth even when politicians argue for faster money growth to stimulate the economy.

Some of the statistical evidence of independence is based on the length of service or turnover of central-bank officials. If they disappear rapidly, that is taken as an indication that the central bankers have little power and that the politicians are really running things. There are reasonable intuitive rationales that, along with some statistical results, support the independence explanation. There have been serious errors, such as assuming that the low inflation policy of the Bank of Japan was related to its independence, when in fact it has been a dependent bank under the control of the minister of finance.[17] The average tenure of governors in the U.S. central bank has been falling. It is probably not a sign of decreased independence. Rather, it is likely due to wage-enhancing job opportunities.

The most important problem with the independence theory and the goal of independence from political constraints is that it disregards the possibility that central bankers may abuse the power they have been given and act against the public interest. As described in this book, these deleterious actions go beyond monetary policy. There are many reasons for such actions, including the desire to preserve the power and prestige of the central-bank bureaucracy. The independence explanation bypasses Lord Acton’s often-quoted aphorism: “Power tends to corrupt and absolute power corrupts absolutely.”[18] Applied to the Fed, it warns about the effects of independent power. A democracy cannot afford its government to be detached from politics.

This book contains a record for a central bank that most economic studies hold to be independent. Arthur Burns and G. William Miller ran this model, independent central bank during a period of rapid inflation. The Burns and Miller Feds played a major role in contributing to rapid inflation. These records are not innocuous outliers for the United States, which suffered severe depressions in the 1980s before the inflation was tamed by Volcker. The abusive and deceitful practices of the Burns and Greenspan Feds described in this book had many deleterious effects that may not show up in tests of the independence explanation.

The second major problem concerns initial causes of central-bank policies. Germany had a non-inflationary monetary policy before it adopted the euro. Its central bank was used as an example of an independent central bank. The underlying reasons for its central-bank policies were two devastating periods of hyperinflation that Germany had suffered. The population would not tolerate a policy producing another rapid inflation, whether or not its bank was independent as measured in tests of this theory. This means that in a well-functioning democracy, politics in the best sense—the will of the people—can have a primary effect on the country’s monetary policy. If Fed decision makers were confirmed constitutional officers who served for ten years, as suggested, they would have enough job security to allow them to guard short-term monetary policy from changes they deemed inappropriate. Of course, there is no real guarantee against someone not being swayed by short-term political winds, except perhaps a perfectly motivated, brilliant dictator who could disregard the public will—an ethereal concept of absolute power.

Limiting the Power of Governmental Officials in a Democracy

After reading the record presented in this book, one might readily conclude that some Fed officials would strongly reject most of the suggested remedies. This is an understatement. The Fed’s reactions might include the brush-it-under-the-rug approach: a cordial acknowledgment to an inquiring legislator of different opinions, as occurred when corrupted records were found in the operation of its airplane fleet. As Greenspan testified: “In hindsight are there some decisions that should have been made differently? Almost surely.”[19]

The Fed might issue an opaque reply that draws on the talents of some of its 500-plus economists, who can assist in constructing erudite convolutions that lead nowhere. Its PhD economists should not be used to “pile higher and denser” the Fed’s efforts to camouflage its operations and policies. It might issue false and deceptive statements, as it did in connection with hiding its source records for seventeen years and then misleading Congress in 1993, a practice revealed by the plans that were recorded before its officials testified. It might simply continue to feed its source records to the shredders. Real changes that Henry B. Gonzalez sought—and partially achieved—are required to protect our great democracy from the consequences of Lord Acton’s warning, which belongs on the Fed’s front door in a slightly changed form: “Independent power corrupts absolutely.”


Chapter 12 - Notes

1. The editing should be done by governmental archivists in conjunction with Fed officials and staff under explicit rules. Any personnel decisions, proprietary information about other central banks, and items of national security should be redacted. Redacted material should not be removed from the source records.

2. Since twelve Fed Bank presidents and seven members of the Board of Governors would have to be nominated and confirmed, the process could become too burdensome to allow for the complete examination of each nominee. The presidents who serve on the FOMC in rotation should be allowed to serve more than their present, one-year term if other Fed Bank presidents have not yet been confirmed. Legislation authorizing these changes should specify that due consideration be given to knowledge, experience, and political diversity. Although these considerations would not be legally binding on the president, they would become an important factor in the selection of nominees. If the number of Board members were to fall below five, the president should make one-year interim appointments. The Board members would concentrate on monetary policy and appoint administrators for each of the Fed’s facilities. All speeches to private-sector groups by Fed officials should be publicly announced in advance and open to the press; this has not been the case. Officials’ comments that are intended to telegraph views on monetary policy and the future state of the economy should be limited to FOMC meetings. This means that most speeches should be stopped.

3. From the Web site of the Federal Reserve Bank of San Francisco: “The Twelfth Federal Reserve District includes the nine western states—Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington—and American Samoa, Guam, and the Northern Mariana Islands. Branches are located in Los Angeles, Portland, Salt Lake City, and Seattle. The largest District, it covers 35 percent of the nation’s landmass, ranks first in the size of its economy, and is home to approximately 20 percent of the nation’s population” (
http://www.frbsf.org/publications/federalreserve/annual/2002/ack.html
).

4. Hawaii’s banking representatives expressed their views during the negotiations I was assigned to hold regarding the Monetary Control Act of 1980. They did not want a Fed facility because their bankers were more efficient at clearing paper checks with their own couriers than the Fed’s slow, antiquated system. Their couriers carried paper checks from tourists back to distant mainland banks the following morning, whereas the Fed was then taking up to two weeks to clear checks, long after the tourists had left, and some checks had bounced. Digitized check imaging, discussed in Chapter 7, may have changed the views of Hawaii’s bankers.

5. State banks are regulated by state regulators as well as by some federal regulators. State regulators would not be discontinued, since they are necessary for a dual (state- and federal-chartered) banking system, a financial innovation that remains.

6. Since banks have been authorized to buy other businesses, such as brokerages, there will necessarily be some role for the SEC.

7. There have been attempts to legislate the one-regulator concept since at least 1964, when a consolidation bill was drafted by the late Grasty Crews (who was in the House legislative office and then on the staff of the Banking Committee).

8. Gonzalez, “Reduction in Regulatory Control of Federal Reserve Board Is Subject of Proposed Legislation,” 2–3.

9. The Fed was one of five federal-government entities that reported to and paid a fee to support the FFIEC.

10. From the FFIEC Web site: “Federal Financial Institutions Examination Council (FFIEC): The Council is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS), and to make recommendations to promote uniformity in the supervision of financial institutions” (
http://www.ffiec.gov/
).

11. Federal Reserve, press release, March 18, 2003; available at
http://federalreserve.gov/boarddocs/press/monetary/2003/20030318/
.

12. Alan Beattie, “Fed Admits Its Ignorance in the Face of Global Uncertainty,” Financial Times Web site, March 19, 2003,
http://search.ft.com/ftArticle?queryText=alan+beattie+%22fed+admits&y=5&aje=true&x=14&id=030319000609
.

13. Henry Reuss, “What the Secret Minutes of Federal Reserve Banks Meetings Disclose,” speech on the floor of the House, May 24, 1977, Congressional Record 123: H 6236. This technicality may not hold.

14. Board of Governors of the Federal Reserve System, Office of Inspector General, Semiannual Report to Congress, April 1, 1994–September 30, 1994, 31.

15. The Annual Report: Budget Review (2002): “In conformance with statutory independence of the office, the OIG [Office of the Inspector General] presents its budget directly to the Chairman of the Board of Governors for consideration by the Board” (25).

16. Governor Kohn argued that the Fed should pay interest on the required reserves it held. There was bipartisan support for this position. I was opposed for a number of reasons, including the likelihood that the payment would not be substantially passed through to depositors in the form of higher interest payments on their accounts. I testified that $16.7 billion (the present value of the stream of payments, in my estimation) given by the government to banks could have positive welfare effects if it were transferred to depositors as interest on their deposits. Some economists, by assuming that banking is a competitive industry, have theorized that this is what would happen; I said that this was the wrong model. The Financial Services Regulatory Act of 2006 authorized the payment of interest on these reserves.

17. Thomas F. Cargill, “The Bank of Japan: A Dependent but Price Stabilizing Central Bank.”

18. Acton to Bishop Mandell Creighton, April 3, 1997; quoted in Louise Creighton,
Life and Letters of Mandell Creighton, vol. 1 (1904). Lord Acton (John Emerich Edward Dalberg Acton, 1st Baron Acton), 1834–1902, was an English historian, a professor of modern history at Cambridge (1895–1902), and the founding editor of the twelve-volume Cambridge Modern History (1902–1912).

19. Senate Banking Committee, General Accounting Office Report on the Federal Reserve System: Hearing before the Committee on Banking, Housing, and Urban Affairs . . .July 26, 1996, 104th Cong., 2nd sess., July 26, 1996, 14–15; statement of Alan Greenspan; Greenspan’s full statement is available at
http://www.federalreserve.gov/Boarddocs/testimony/1996/19960726.htm
.

See also: When 500 Economists Are Not Enough