After 104 years, Fed practices need a facelift. Badly.

The original Federal Reserve Act dictated that, in selecting members of the Board of Governors, “The President shall have due regard to fair representation of the financial, agricultural, industrial and commercial interests, and geographic divisions of the country.” 

How is it, then, over 100 years hence, that the Fed has been overrun by academic economists? This critical question must be boldly addressed by the new administration and Congress. With Daniel Tarullo’s departure, a majority of positions on the board are vacant or will be open imminently.

{mosads}The opportunity to reinvent this incredibly powerful institution, which has become the de facto unelected fourth branch of the U.S. government, and restore it to what was originally conceived, is finally at hand.

President Trump will have the opportunity to fill five or six of the seven seats on the Board of Governors of the Federal Reserve. Economists certainly have their place around the table, especially those who defy the mainstream and accepted orthodoxy.

But vigilance must be exercised in creating an intellectually diverse board filled with those who study the economy and those who create economic activity. An overabundance of similar thinking has poisoned the monetary policymaking process. End that and end it now, then step back and re-examine the organization in a holistic manner.

Mission creep — the expansion of a project or organization beyond its original goals — has increasingly plagued the Fed. Federal Reserve leaders blame congressional malfeasance, claiming monetary policy must offset what Congress refuses to address to ensure the viability of the labor market.

The result has been an increasing atrophying of the workforce as artificially low interest rates inadvertently financed one of the quietest widenings of the social safety net since FDR was in office.

Yes, it would take an act of Congress to fix the situation, but so be it. Resurrect bills that have come to the floor in the past and slice the Fed’s dual mandate in half to the sole obligation of keeping prices stable and move on. Much more must be done before victory can be declared.

Believe it or not, way back in 1913, the drawing of the original Fed districts required gerrymandering just to garner the votes to get the bill through Congress. That means the next stop in reforming the Fed requires a modern-day map and a list of the largest state economies.

Compare that to the map of 1913 and you’ll see that the West now has a massive economic presence, while the Midwest isn’t what it once was. Suffice it to say, the Fed can be both expanded in the West and streamlined in the Midwest. A total of 10 districts, down from 12, will result. 

For good measure, give all 10 new Fed districts permanent votes, equal standing to that of the existing permanent votes of the New York Fed and the seven D.C.-based members of the Federal Reserve Board.

California and Texas don’t rotate out of economic significance every three years, so why should their contribution to the monetary policymaking process? Decentralizing power away from New York and D.C. will carry the added benefit of reducing the politicization of the Federal Reserve Board and the influence Wall Street has on the institution.

As for any audit of the Fed, a first step should be a deep analysis of its research departments. There is a tremendous amount of overlap of activities across Fed districts. It’s worth asking the question — does every district need international and national economics divisions replicating each other’s’ efforts?

Is it any wonder the Fed employs over 1,000 Ph.D.s? Slash the research budget and have each district focus on their region’s unique economic contribution. The Dallas Fed, to take but one example, has an unmatched capability to keep tabs on the economics of energy and immigration. 

Next, take all of that money that’s been saved and invest something that would have helped the Fed see the financial crisis coming. Establish one federal entity to regulate and supervise the entire banking system, both its conventional and shadow components — every type of lender, from credit unions to big banks to private equity.

If you decide that function should remain within the Fed, then make sure those in supervision and regulation can read the most complicated bank balance sheet. Here’s the key — make sure they also know where to look to have a comprehensive understanding of what’s not necessarily on those bank balance sheets — either off-balance sheet or lurking in the presently unregulated shadow banking system.

Once you’ve completely reinvented the institution to excel in the 21^st century, leave it to its own devices to function apolitically and independently. Resist the temptation to intrude upon the new Federal Reserve. That said, Congress might want to revisit the functionality, or as is the case today, the dysfunctionality, of the Federal Reserve more often than once a century.

Danielle DiMartino Booth is the author of “FED UP: An Insider’s Take on Why The Federal Reserve is Bad For America” and the founder of Money Strong, LLC, an economic consulting firm. DiMartino Booth spent nine years as an advisor to Richard W. Fisher at the Federal Reserve Bank of Dallas. Reach her at www.dimartinobooth.com and @DiMartinoBooth on Twitter.

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