New Zealand's central bank reform of the early 1990s is the clearest model of accountability: the bank was given a price-stability goal and told that failure would first reduce the governor's salary, then require him to explain the miss, and ultimately lead to removal from office.

Members of the Board of Governors have varied and often weak qualifications—some are former bankers, some appointed as political payoffs with little economics training—rather than being uniformly noted macroeconomists or monetary theorists.

The Fed has responsibilities in three broad areas: monetary policy (most scrutinized), bank regulation and supervision, and the least-discussed provision of bank price services such as check clearing and cash distribution, all carried out through 12 regional banks with oversight from the Board of Governors.

In practice the chairman and board staff run monetary policy and regional bank presidents have little real input, because if a chairman cannot get his policy passed he does not remain chairman long—more than one or two dissents at a key turning point would spark speculation he wasn't in charge and should be replaced.

Greenspan controlled the FOMC duplicitously: he would poll members in turn, only propose a funds-rate change if he had the votes, and otherwise leave policy unchanged—using the going-around-the-table procedure to read whether he had support before committing.

Greenspan subverted the will of the FOMC by, after a no-change funds-rate vote on Tuesday, convening just the Board of Governors on Friday to change the administratively-set discount rate (using a pre-arranged proposal from a regional bank board), then instructing the desk to make a 'technical' pass-through change to the federal funds rate in the same direction and amount—effectively setting the funds rate himself without committee consent.

This discount-rate pass-through maneuver happened roughly half a dozen times over a three-year period around 1989-91, and it is verifiable by examining the record for instances where the Tuesday FOMC made no funds-rate change but a Friday discount-rate change was followed by a funds-rate pass-through.

Volcker vetoed the appointments of monetarists Jerry Jordan and Lee Hoskins as regional bank presidents because he wanted to silence dissenting voices—particularly St. Louis's nearly three-decade record of publishing research disagreeing with official Fed positions, and he wanted that research department shut down.

Alton Gilbert used confidential New York Fed trading desk data to show that during the period the Fed claimed to be doing monetary targeting (October 1979 onward) it was 'doing anything but'—and Volcker ordered all copies of the paper destroyed on the pretextual ground that individual trades could be reconstructed from a table of means and variances, a justification Belongia argues is not credible.

The Fed has a single tool—open market operations injecting or withdrawing reserves—with which it can hit only one intermediate target, either an interest rate or the quantity of money; choosing an interest rate as the intermediate target is precisely how the Fed gets into trouble.

The Fed systematically misreads its own stance because it assumes every change in the federal funds rate is caused by its actions, ignoring that the rate (a market price of reserves) shifts with the public's demand for loans: in a downturn loan demand falls, reserve demand falls, and the funds rate falls—leading the Fed to wrongly conclude it has been too easy and to drain reserves, exacerbating the slump (and the reverse in booms, adding fuel to the fire).

In summer 2008 the conventional view held the Fed had been very easy because the funds rate was low, but the five-year growth rate of bank reserves was slightly negative—meaning the Fed had actually been restrictive for five years and was strangling monetary policy, contributing to the recession.

Reading St. Louis Fed research from 50 years ago (e.g., Jim Meigs's essay honoring Homer Jones) shows the Fed was making the same mistakes—confusing tight for loose policy and vice versa—and that there is little difference between then and now in how the Fed conducts and misinterprets policy.

Regional Fed economists largely avoid working on monetary policy and instead write on unrelated academic subjects (jokingly 'ice fishing'), a bureaucratic capture arrangement that serves both the staff—who enjoy freedom to write what they want—and the Board of Governors, which prefers regional banks not get involved in monetary policy so that function rests exclusively with the chairman and his staff.

The number of Fed districts should be reduced from 12 to 5 because the price-services (check clearing, cash distribution) volume has declined enormously and branch offices are already cut, and because sound bank supervision only requires the Fed to oversee roughly the hundred largest holding companies rather than all member banks.

Regional bank presidents who vote only every third year cannot be expected to take their FOMC function seriously; making the five presidents permanent voting members would make them more serious, and they should be appointed by the President and confirmed by the Senate (like governors) rather than by regional boards subject to chairman veto.

Having five independent, strong-willed, thoughtful members who could openly disagree about Fed policy would pull back the curtain on the charade that the Fed is led by an all-seeing maestro, exposing that there is no clearly 'right' federal funds rate to be calculated.

Congress's dual mandate is impossible because, per Tinbergen's rule, an authority with one instrument can pursue at most one independent objective; the Fed has a single lever (control of reserves) and cannot simultaneously achieve both full employment and price stability.

Bank presidents have embarrassingly embraced the impossible dual mandate—'running around embracing this dual mandate like little schoolgirls'—instead of telling Congress they cannot achieve it and asking to be given an achievable goal such as price stability, and they do so to keep their jobs.

The Taylor rule should be discarded the way the economics profession discarded monetary aggregates in the early 1980s, because there is no single agreed Taylor rule (Taylor's version and Glenn Rudebusch's give wildly different answers) and some interpretations imply the Fed was targeting implausibly high inflation rates that no one believes.

Nominal GDP targeting fails in stagflation: as Friedman challenged Bob Perry's proposed 6% nominal GDP target, if you face 7% inflation and minus 1% real output you are in a recession with high inflation and cannot say everything is fine—exposing the same impossibility as the dual mandate, since monetary policy cannot resolve both objectives at once.

Monetary policy should have only the single goal of price stability because it cannot influence real variables in the long run or fine-tune the cycle, and by pretending it can do more it introduces uncertainty into the world; other levers (tax rates, etc.) should handle the real economy.

The Fed's published monetary data (M1, M2) are scientifically meaningless because they simply add together dollar-for-dollar accounts that should be weighted differently—especially once banks pay interest on deposits—analogous to how the CPI weights components rather than averaging prices equally; a proper monetary aggregate would weight components by expenditure shares on monetary services.

Properly weighted (expenditure-share) measures of the money supply behave nothing like the official simple-sum accounting data and give 'fantastically different' inferences about testable hypotheses such as the future course of inflation and the relationship between money and the business cycle.

With good monetary data, the Fed should keep the supply of reserves on a slow, stable path to hit an intermediate target of an appropriate measure of money that keeps inflation low and stable, enabling long-term planning—the only thing monetary policy can legitimately do.

Independence and accountability lie at opposite ends of a continuum: the Fed should be independent only in the sense that, once given a clear mandate, it is free to pursue it by any method it chooses (Taylor rule, money supply, or even a Ouija board); accountability means real penalties for failing to achieve the mandated result.

The Fed is not genuinely transparent: despite announcing the funds-rate target after meetings, there is no ex ante or ex post account of how decisions are reached (we cannot even confirm it follows the Taylor rule), and at any moment the public has no idea what weight the Fed places on full employment versus price stability.

The persistence of the dysfunctional Fed is explained by a 'bootleggers and Baptists' dynamic: the public thirsts for the comforting belief that someone is steering the economy (Baptists), while economists within the Fed and politicians reap personal benefits from sustaining that fantasy and have a natural incentive to keep the myth going rather than strip out their own power (bootleggers).

Professionals—doctors, scientists, economists—get into trouble when they oversell what they can do, and the Fed's troubles are largely self-inflicted wounds from overpromising; it would be in the Fed's own self-interest to retrench and tell the public this is what you can reasonably expect, but once public trust and credibility are severely damaged the path is downward rather than back up.

You cannot write legislation that makes an institution function well because outcomes are idiosyncratic to the individuals who take office; you cannot make a Volcker or a Greenspan behave a certain way, but you can change incentives at the margin and look for people willing to say 'that's not our responsibility' or honestly 'I don't know.'

Bernanke transformed from a first-rate academic economist into a first-rate bureaucrat skilled at getting along, and would have said five years earlier that he'd never do what he is doing now—illustrating that the office's incentives, not the individual's prior beliefs, drive behavior, so changing incentives matters more than who holds the job.

The federal funds rate is the competitively-determined market rate banks charge each other for overnight loans to meet reserve requirements, which the Fed influences by injecting or withdrawing money, whereas the discount rate is administratively set (posted, not a market rate) at which member banks can borrow directly from the Fed's discount window.

Greenspan's 'irrational exuberance' speech was a serious error because it implicitly made the Fed responsible for predicting equity markets, when the Fed neither knows the right value for the Dow nor has any tool to act on it—creating a spurious new monetary policy target.

The Fed should not target asset bubbles because no one can reliably define a bubble or predict one in advance, and attempting to deflate bubbles imposes unaccountable costs on the Fed's other supposed targets.

There is still significant input into policy meetings from local offices, and regional bank presidents publicly voice a variety of opinions on whether the Fed should stay the course, ease, or tighten, creating an appearance of genuine difference of opinion about policy.

Homer Jones, as St. Louis Fed director of research from 1957 to 1971, introduced practices the modern Fed now takes for granted—hiring economists to write scientific articles, holding conferences, and publishing data—so the modern Fed owes much of its research vision to him.