By Jonathan B. Wight

Bernie Sanders wrote an op-ed in today’s New York Times that attacks the Fed, “To Rein In Wall Street, Fix the Fed.” He raises some valid issues:

The key complaint is that the structure of voting power within the Fed creates conflicts of interest, since bankers vote to elect each of the 12 regional Federal Reserve Bank presidents. And those presidents, on a rotating basis, vote on monetary policy that affects the profitability of their banks.

Sanders thus notes that:

“During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs.”

Bernie’s complaints about conflict of interest are important, especially when America is suffering from too much pandering to the rich—privatizing the gains on the upswings and the public bailing out the big banks on the downswings.

But the Fed was constructed to allow for—in fact, to create—an insider’s club.  What’s good for bankers was thought to be good for America. Hence, allowing bankers a strong say about policy seemed fair, even prudent. Who better to understand financial markets than financial market experts?

The complaint about the Fed not doing enough to reign in Wall Street relates mainly to the Chairmanship of Alan Greenspan, who let ideology blind him to the moral hazards and failings of enlightened self-interest in securities ratings. Recent Fed Board Chairs have been more pragmatic academics (Bernanke and Yellen). These Presidents have been alert to the nuances of policymaking and opposed to knee-jerk rules.

Yellen’s recent rate hike can be criticized for being inopportune, but she is certainly alert to the problem of discouraged workers and sagging markets overseas. In short, she’s taking a big picture view, but Bernie isn’t convinced that this will help small businesses.

Changing the Fed voting structure would be a messy task with many unintended consequences, particularly if you worry about those with already too much power and influence seeking more power and influence. As Douglass North famously noted, institutions generally change to suit the interests of elites.

The Fed is mentioned nowhere in the U.S. constitution and it has no self-determining authority other than that granted to it by the Congress. In short, the U.S. really does not have an independent central bank, which is a huge problem given the political winds of conspiracy theory and gold fever favored by some presidential candidates.

What Congress created, Congress can change. But reconfiguring the Fed would be akin (in my mind) to having a constitutional convention. You have no idea ahead of time what garbage will come out of it. The only things preventing destruction of our highly successful central bank are traditions and narrow vested interests.

There's more to say about Bernie’s critique and not the time or space to address it here.  His article raises legitimate questions about conflicts of interest, but his solution may present more problems than it solves.

[Thanks to Steve Gillispie for the link.]