The Federal Reserve was designed to represent the diverse interests of the country and to be independent from politics in Washington, and needs to remain so, according to former Fed Governor Randall Kroszner.
“The key is to have some sort of decentralized representation that’s not all in Washington,” Kroszner, 47, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene. “It was that key balance that was the genius of what the Congress did back in the early part of the 20th century, and it would be really valuable to try to maintain that and it would be a shame to lose.”
The Fed beat back efforts this year to strip it of its bank-supervision powers and allow audits of interest-rate decisions. Now lawmakers are demanding increased disclosure and unprecedented transparency after the Fed, often invoking emergency powers, made more than $2 trillion of loans to end the financial crisis. Kroszner, a professor of economics at the University of Chicago’s Booth School of Business, said the Fed has done a “reasonably good job relative to other banks” over the past century, and said any changes should be made with care.
“It’s incredibly important to get this right,” he said.
Senate negotiators on an overhaul of financial legislation were ready to amend the bill to reduce the role of commercial banks in naming Fed presidents, according to a counteroffer released by Senate Banking Committee Chairman Christopher Dodd. Under another change, the central bank, after a two-year delay, would have to identify firms that borrow through its discount window and participate in the Fed’s purchases or sales of assets such as mortgage-backed securities.
A balance of members who represent the country is also crucial, and it’s not necessary that each member hold a doctorate in economics, according to Kroszner, who has a master’s degree and PhD. in economics from Harvard University.
Kroszner resigned from the Fed board in January 2009, a year after his term beginning in March 2006 expired. In May 2007, then-President George W. Bush nominated him for a full 14- year term that would have begun in February 2008. The Democratic-controlled Senate declined to act on Kroszner’s re- nomination.
Obama nominee Daniel Tarullo, a top adviser on international economic policy to former President Bill Clinton, replaced Kroszner. Tarullo, 57, is an attorney and a former law professor.