Former Yellen Adviser Proposes Sweeping Reform of Fed System

  • Andrew Levin urges seven-year term limits for policy makers
  • Says Fed should open up process of picking regional presidents

Janet Yellen, chair of the U.S. Federal Reserve, listens during a Senate Banking Committee hearing in Washington on Feb. 11, 2016.

Photographer: Andrew Harrer/Bloomberg

A former aide to Federal Reserve Chair Janet Yellen has broken ranks with his former employer and issued a blueprint for a sweeping reform of the U.S. central bank, including regular government audits and shorter term limits for policy makers.

Dartmouth College professor Andrew Levin targeted four areas of change for the Federal Reserve system: make the Fed a fully public institution; ensure the process of picking regional Fed presidents is transparent; set seven-year term limits for regional presidents and Board governors; and make the entire Fed subject to external review.

The proposals were taken up by the union-backed activist group Fed Up, which promoted them Monday in a conference call with journalists, and come during an election year where the central bank has been a campaign topic.

“There is one key principle in this document which is the Fed needs to become a public institution,” Levin said. “Pragmatic, reasonable Fed reform should be able to be passed by the Congress, by both parties. That is my hope.”

The Dartmouth professor worked two decades at the Fed, and was a special adviser from 2010 to 2012 to former chairman Ben S. Bernanke, and Yellen when she was vice chair, according to his biography page at the university.

Legislative Plans

Republicans in the U.S. Senate and the House of Representatives last year proposed legislation that included reforms of the central bank, though none has become law. Fed spokeswoman Michelle Smith declined to comment.

As recently as February, Yellen said that while the Fed might be structured differently if it were created today, she believed it still worked well and wasn’t “broken.”

“Of course the structure could be something different and it’s up to Congress to decide that -- I certainly respect that,” she said at a Senate hearing. “I simply mean to say I don’t think it’s broken the way it is.”

The Fed system, which sets interest rates for the U.S. economy, is made up of a Board of Governors in Washington and 12 regional Fed banks. It was created by an act of Congress, yet private banks hold stock in the regional Fed institutions as a result of the way the capital structure was set up when the Fed was born more than a century ago.

“The Federal Reserve is the only central bank that I know of that isn’t a fully public central bank,” Levin said in an interview.

Levin said the 12 regional banks should become fully public entities, meaning they have to somehow eliminate or repurchase the stock they have issued to private member banks. He also proposed banning anyone affiliated with financial institutions overseen by the Fed from serving as a regional Fed director.

Three Classes

Each regional Fed has a nine-member board of directors which includes three Class A directors who represent private member banks, three Class B directors picked by the private banks to represent the public -- typically local business people -- and three Class C directors chosen to represent the public by the Fed board in Washington.

The presence of financial interests on Fed boards has been a long-standing source of criticism. Currently, for example, James Gorman, chairman and chief executive of Morgan Stanley, sits on the New York Fed Board as a Class A director.

Prior the passage of the Dodd-Frank financial reform act in 2010, Class A directors also helped pick the 12 regional Fed bank presidents, subject to the approval of the board in Washington. That potential conflict of interest, with bankers appointing their own supervisors, was limited by Dodd-Frank, which restricted the selection process to Class B and Class C directors.

Levin said the current system of picking Fed presidents, which is led by regional board directors, is too secretive. He recommended the reserve bank boards accept nominations from the public, publish a list of eligible nominees, and then engage in a “selection process that involves genuine public participation.”

The Dartmouth professor also said that the entire Fed system should be subject to “external reviews” and disclosure requirements “just like every other key public agency.”

“The Government Accountability Office should produce a regular annual review of all aspects of the Fed’s policies, procedures, management, and operations,” Levin wrote in his proposal. The Fed has strenuously objected to calls by Republican lawmakers that monetary policy decisions be subject to GAO audit. In the interview, Levin said the GAO should focus on the management and operations of the Fed system, “not so much on monetary policy.”

“Part of the financial crisis was due to mismanagement in the division of supervision at the Fed,” Levin said in an interview. GAO reviews would provide assurance to the public and Congress that the “Fed is a well-managed organization,” he said.

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