Re: Conflict of Interest

["Canova, Timothy" <CANOVA@xxxxxxxxxxxxx>]

>The monetary system is a very complex institution.  Suggesting
>that it should be run by a member of the "common folk" is naive
>in my opinion.  In effect you are saying the Fed BOG should be
>selected by popular vote.  Politicizing the office would be an
>invitation to financial and economic chaos.  We need the best
>expertise possible in that office, and it needs to be insulated
>from politics as much as possible.  In our system, selection by
>the President and confirmation by the Senate is about the best we
>can expect.
>
>William F Hummel
>

Monetary policy is set not by the Fed Board of Governors (BOG), but by the
Fed's Open Market Committee (FOMC) which includes 5 voting members (and an
additional 7 non-voting members) from the privately-owned regional Federal
Reserve Banks.  The presidents of those regional banks are not selected by
the US President and are not confirmed by the US Senate.   Rather they are
accountable to the privately-owned commercial banks that own the regional
Federal Reserve Banks.  Such delegation of the congressional lawmaking
powers to a private industry board was once considered to be
unconstitutional, a violation of the very first sentence of the US
Constitution (that Congress shall make all laws).

Under the non-delegation doctrine, Congress can delegate its lawmaking power
to an administrative agency if it provides an "intelligible principle" to
guide the regulators.  Of course the Humphrey-Hawkins Act does not provide
any intelligible principle, but instead calls on the Fed to deliver price
stability and maximum employment.  The practical effect is that the Fed, and
not accountable elected representatives, get to choose which policy goal has
primacy and when.  (Senator Connie Mack's proposal for a zero-inflation
objective for the Fed is at least consistent).  Moreover, Congress can only
properly delegate its basic lawmaking powers to public agencies, not to
private industry boards.  That was actually one of the grounds that the
Supreme Court used to strike down the centerpiece of the New Deal, the
National Industrial Recovery Act, which had delegated price-setting
authority to private industry boards (this was the Schecter Poultry "sick
chicken" case); and is still good law.

In recent years there have been numerous legal challenges to the
organizational structure of the Federal Open Market Committee (FOMC).  When
private citizens have challenged the constitutionality of the FOMC on
delegation grounds, the US Court of Appeals for the D.C. Circuit has ruled
that private citizens lack standing because they cannot show an injury
caused by the Fed's open market operations.  Of course, such conclusions are
utterly ridiculous.  (I recently received a statement from my credit union
informing me that it was raising the interest rate on my car loan as a
result of the Federal Reserve's recent decisions to raise interest rates).

Members of the US Senate have also brought legal challenges to the FOMC as a
violation of the appointments clause that requires Senate confirmation of
appointments of federal officers.  The D.C. Circuit has dismissed those
cases on procedural grounds as well by inventing the concept of "equitable
discretion."  As far as my research shows, no other US court has ever
dismissed challenges to government structure based on the fuzzy concept of
equitable discretion.

The Federal Reserve System remains autonomous from any democratic
accountability and immune from constitutional challenge.  It is the only
quasi-public/quasi-private government agency that is completely free of
Congressional budgetary oversight.

There are many models of reforming the Federal Reserve System that would
provide more diversity of perspectives and greater public accountability --
reform proposals that are far short of selecting the Fed BOG by popular vote.

Tim




Timothy A. Canova
Assistant Professor of Law
University of New Mexico
School of Law
1117 Stanford NE
Albuquerque, NM  87131-1431

Tel:  (505) 277-5654
Fax:  (505) 277-0068
e-mail:  canova@xxxxxxxxxxxxx