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June 5th, 2012 2:46 pm
CATO: Reform the Fed by Diversifying Board Members

Cato expert Mark A. Calabria suggests a simple reform that would make decisions by the Federal Reserve Board more responsive to America’s different regional economies – include at least one board member from each Federal Reserve region.

Congress imposed a “geographic diversity” requirement upon the Fed for good reason. Regions of the country do not move together. Nevada’s 11.7 percent unemployment rate, for example, is significantly above South Dakota’s 4.3 percent. If the Fed lacks a wide range of voices, then its policies are not likely to reflect the economic differences across our country. An interest rate policy that might be appropriate for New York City, and its financial sector, might not be appropriate for industrial Ohio. Just the fact that only one current Fed governor, Janet Yellen from San Francisco, is from west of the Mississippi raises questions as to the legitimacy of Fed decision-making.

Calabria points out that another benefit of diversifying board membership is that doing so follows the law.  The Federal Reserve Act requires that, regarding members of the board, “not more than one of whom shall be selected from any one Federal Reserve district,” so that those making monetary policy decisions “shall have due regard to a fair representation of… geographical divisions of the country.”

Unsurprisingly, this easy to apply standard was recently violated when President Barack Obama nominated and the liberal Senate confirmed new members from Massachusetts and Maryland, even though two current members also hail from those states.  Combine this with the New York Fed’s distinction as the only district with a permanent vote, and there is a regional – and arguably illegal – bias in favor of the Northeast.

Every region of the country should be represented equally when the Fed Governors decide how much money to print and where to peg the interest rate.  To be sure, it would be better if the free market was deciding these issues, but that’s not the reality of the 21st century’s administrative state.  With that in mind, perhaps the cry could be, “No manipulation without representation!”

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