The insiders-only world of the Federal Reserve

Still, the norm of independence is strikingly well-entrenched, even among economists who have been critical of the institution. Mark Thoma, a professor at the University of Oregon and an influential economics blogger, believes the Fed has strayed too far from its decentralized, even populist roots, and that far-reaching reforms — such as allowing regional bank presidents, or even the Chairman of the Board of Governors, to be elected by popular vote — should be on the table to restore public confidence. But a key reason to bolster the Fed’s legitimacy is ultimately to allow the decision-makers at the bank greater freedom, Thoma said. “For me, it’s about preserving independence.”

Thoma’s concern for the bank’s independence is shared by Karl Smith, a professor at the University of North Carolina who was a vocal critic of the Fed’s slowness, over the course of this year, in responding to high unemployment. The Fed has lately moved in the direction Smith advocated; in the process, it has come under withering public attacks. (In an ironic reversal of the usual fears, much of this criticism came from conservatives opposed to the bank’s new expansionary policy, leaving liberals like Vermont’s Sanders to defend the bank’s right to act.) Recently, Smith said he had mixed feelings about his effort to open the debate. The whirlwind of criticism — which came from, among others, Sarah Palin — “is the kind of thing Greenspan always warned against: letting monetary policy become the topic of popular debate,” he wrote in an email. In speaking out, he had concluded that an economist’s role extended beyond “offer[ing] qualified endorsements of the Fed Chairman. Even that, however, seems to have opened the door for an all-out political assault.”

Economists’ preference for an autonomous Fed represents a sincere — and, quite possibly, correct — conviction that an independent, technocratic bank yields better results than one that is subject to outside review. But that independence also gives economists, as a class, a privileged position from which to influence policy. Unlike other social scientists, said Waldman, “they see a place where their good ideas have a direct effect on the economy” without having to first go through the meat grinder of Congress — and it’s understandable that they would be protective of that privilege.

Striking the right balance between technocratic expertise and public oversight is a daunting challenge in the design of any public institution. In the case of the Fed, though, it can be hard not to wonder whether the convention of independence, supported by most insiders, interferes with even a basic level of openness. One line buried in the official minutes of the latest meeting of the Fed’s Open Markets Committee suggested, inadvertently, just how closed to outsiders the current arrangement is: “Participants,” it read, “discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee’s assessment of the outlook and its policy decision-making than is included in Committee’s short post-meeting statements.”

What’s next for the Fed?

In the wake of the housing bust and the financial crisis, and the midst of an ongoing recession, the Federal Reserve’s basic design and function are up for discussion in a way they have not been for at least thirty years. The financial regulation bill passed earlier this year changed the process for selecting regional bank presidents; the three members of the regional boards of directors who represent local banks will no longer have a vote. The law also creates a new position of vice chairman for supervision on the Board of Governors, and directs the Government Accountability Office to study the system by which regional directors are appointed. Elsewhere, proposals for reform are rampant, from full-fledged alternative banking models to strategies that would keep the Fed in place but curb its discretion, making it an even more technocratic but less powerful institution.

But there is no guarantee that the bank will be opened up in any substantial way. Sarah Binder, a political scientist at George Washington University who is now studying the institution, noted that in times of economic crisis Congress often responds not by curtailing the Fed’s powers, but by consolidating and centralizing them in order to deflect blame for economic woes. At the moment, of course, there is more than enough blame to go around — so if history is any guide, the Fed may end up stronger than ever.