Fine-Tuning the Fed

REP. Henry Gonzalez (D) of Texas is tilting at windmills when he grills Federal Reserve Board chairman Alan Greenspan about reforming the Fed. As much as politicians on Capitol Hill grumble about the Fed's tight-money policy, other matters weigh more heavily. When Mr. Gonzalez complains that the Fed wields too much power to act like a secret club, he has a point - but not the votes.

Still, Mr. Greenspan and his colleagues at the Fed should take the criticism to heart. Accountability is crucial for an institution as powerful as the Fed. A balance must be struck between accountability and the deliberative process that leads to informed, if not always popular, economic decisions.

Several changes Gonzalez and Rep. Lee Hamilton (D) of Indiana propose fall short of an all-out assault on the Fed's independence. Where to start? As Gonzalez has proposed:

* Allow full General Accounting Office audits of the Fed's budget. The taxpayers indirectly pay the Fed's costs; the Fed is thus accountable.

* Release decisions of the Federal Open Market Committee within a week. The committee controls the nation's money supply largely by raising or lowering interest rates. Bond markets anticipate the FOMC's decisions; savvy Fed watchers on Wall Street and elsewhere figure out the FOMC's decisions within a short time anyway, based on market behavior. It makes little sense to withhold from the public information that is clear to investment professionals.

We take issue with the gentleman from Texas, however, on appointments and their impact on accountability. Currently seven governors, including the chairman, manage the Fed in Washington; each is nominated by the White House and confirmed by the Senate. Gonzalez would extend that process to cover the presidents of the dozen regional federal reserve banks.

The case for change is weak, at best. If the issue is accountability, it already exists in the board of governors and chairman. Extending it to the regional presidents - who now are appointed by each bank's board of directors to five-year (renewable) terms - would no more guarantee accountability than would the appointment to a four-year term of a Fed chairman who still pursued economic policies that make a politician wince.

Nor is Gonzalez's idea of videotaping FOMC meetings, and releasing the tapes, conducive to the Fed's deliberative process.

The Fed can take steps toward greater accountability without sacrificing its independence. A few changes now could forestall the frontal assault on that independence that so concerns Greenspan.

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