Revamping the Fed: The Time is Now

Last November, shortly after the election, I wrote a column that discussed the “claustrophobic, one-dimensional, group-think atmosphere” at the Federal Reserve. “With just a couple of exceptions, everyone on the Fed, voting or non-voting, is an economist, teaches economics, or worked in the banking industry on one side or the other,” I wrote then. No business people, no small business owners, no one “who lives and works in the real world, who has to deal with the edicts the Fed hands down.”

“Wouldn’t that perspective – even one – be a useful new voice to be considered when making monetary policy?” I asked.

Now comes an insider’s look at just how bad things really are at the Fed, what kind of damage it causes to our economy and average Americans, and how urgent is the need for change to avoid another financial crisis.

Danielle DiMartino Booth is a former Wall Street trader turned Dallas Morning News financial writer. Her columns caught the attention of Richard Fisher, the former president of the Dallas Fed, who then hired her, eventually rising to become “his appointed eyes and ears on financial markets,” according to the Wall Street Journal.

Booth has just come out with a new book, “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.” She’s been making the talk show rounds as well as written columns for CNBC and Bloomberg to promote the book. I haven’t read the book yet, but it definitely sounds like a book that deserves a wide audience, especially in Washington, D.C.

According to the blurb for the book on Amazon, “the Federal Reserve is still controlled by 1,000 Ph.D. economists and run by an unelected West Coast radical [I guess that’s Fed Chair Janet Yellen] with no direct business experience. The Fed continues to enable Congress to grow our nation’s ballooning debt and avoid making hard choices, despite the high psychological and monetary costs. And our addiction to the ‘heroin’ of low-interest rates is pushing our economy towards yet another collapse.”

Looking back at the financial crisis, “the culture at the Fed--and its leadership--were not just ignorant of the brewing financial crisis, but indifferent to its very possibility,” the book says. “They interpreted their job of keeping the economy going to mean keeping Wall Street afloat at the expense of the American taxpayer. But bad Fed policy created unaffordable housing, skewed incentives, rampant corporate financial engineering, stagnant wages, an exodus from the labor force, and skyrocketing student debt.”

Unfortunately, “nobody within the Fed seems to have learned or changed from the experience.”

And why would we expect that it has? “Central bankers have invited politicians to abdicate leadership authority to an inbred society of Ph.D. academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink,’” she writes. That has created a mindset of “hubris and myopia.”

The book was particularly timely last week as Yellen faced skeptical Republicans on both the Senate Finance Committee and the House Financial Services Committee, especially on the House panel. Unfortunately, based on Yellen’s comments, she sees nothing that needs to be fixed.

Booth doesn’t advocate “eradicating” the Fed, as some do, which she calls “neither reasonable nor wise” in a January 5 column on Bloomberg.com. That might leave the U.S. economy “open to attack. At the same time, simply auditing the Fed’s monetary policy-making methodologies also comes up short.”

Rather, she says, “Congress should immediately remove the employment maximization mandate that necessarily conflicts with the Fed’s other mandate, the minimization of inflation. The single mandate would ensure that the Fed is less intrusive than it’s been in recent years.”

But more importantly, since “it is the individuals who make an institution,” different types of people must be appointed to the central bank, Booth says, namely “individuals who have been on the receiving end of monetary policy and therefore understand it.”

She calls for “slashing the economics departments” throughout the Fed system, replacing economists with “practitioners -- M.A.s in accounting who can read a balance sheet, for example; Ph.D.’s in finance who can decipher the implications of complicated investment vehicles, and securities attorneys who can measure the liability to which regulated entities are exposed. The economists who remain should be professionals who can gauge the impact of Fed policy actions before the fact, not after.”

President Trump has a huge opportunity to set things in the right direction at the Fed and change the vast majority of Americans’ financial fortunes for the better. Following the recent resignation of Daniel Tarullo, Trump has three vacancies to fill on the Fed’s seven-seat board. While filling empty Fed seats doesn’t get the same media coverage as filling a Supreme Court vacancy, it probably affects a lot more people directly where it counts, in the pocketbook.

“By transforming the central bank, the Trump administration can help the U.S. avert another financial crisis, which is something that four more years of misguided Fed policy would create,” Booth says.

Amen to that.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.