By Alister Bull
JEKYLL ISLAND, Ga., May 12 (Reuters) - Public fury over U.S. government bank bailouts is building into a shake-up of the Federal Reserve that insiders fear will politicize policy and unfairly hurt an odd, but effective, regional structure.
Powerful congressional players are talking about the need to examine the system and they inserted language into a recent budget bill opening the door for a study into the number and cost of the 12 regional Federal Reserves.
The presidents of these regional banks, together with a seven member Board of Governors in Washington, make monetary policy, run the U.S. payment system, and supervise its largest banks under a blueprint hammered out on Jekyll Island almost 100 years ago.
"There was no requirement for 12 banks in 1907 when they started the discussion...and 1913 when it was formed," said Federal Reserve Bank of Kansas City President Thomas Hoeing.
"It was done because of the need to have an independent view from around the country into major policy discussions that affect the broad financial industry," he told Reuters in an interview on May 1.
Top Wall Street financiers slipped away to Jekyll Island in 1910 disguised as a duck hunting party to devise a blueprint to prevent bank crisis after a severe panic in 1907.
Led by Senator Nelson Aldrich of Rhode Island, who Congress had put in charge of a National Monetary Commission to review U.S. banking rules, secrecy was deemed essential to avoid public outcry over Wall Street shaping policy for the nation.
The party included J.P. Morgan partner Henry Davison, National City Bank president Frank Vanderlip, and Kuhn, Loeb, and Co. partner Paul Warburg. Their discussions formed the basis for what became the Federal Reserve Act of 1913, the foundation of the modern U.S. central bank.
Policy-makers, financiers and academics are meeting at Jekyll Island again this week at an annual conference to figure out what caused the financial panic of 2008 and how to make sure it doesn't happen again.
Given that the prime suspect is complex securities dreamt up on Wall Street, some regional Feds fear they will be unfairly harmed in the public backlash.
"It would be a sad irony if the outcome of a crisis initiated on Wall Street was to result in Wall Street gaining power at the expense of the other parts of the country," Hoenig told the Joint Economic Committee of Congress on April 21.
POLITICAL ACCOUNTABILITY
One objection voiced on Capital Hill is the selection of regional Fed presidents by the board of directors of their individual banks, who tend to be bankers and local business leaders, rather than by democratically-elected politicians.
But to some Fed officials, this sounds more like a strength than a weakness.
"The structure of the system with 12 federal reserve bank has served our nation well," said Richmond Federal Reserve President Jeffrey Lacker on May 4 in Charlottesville Virginia.
"I think it has provided a measure of insulation for the monetary policy process from short-term, partisan, political pressures. I think there is widespread agreement that that insulation is important," he told reporters after a speech.
The U.S. president chooses members of the Board, including both the chairman and vice chairman, who must then win backing from the Senate before taking office.
Regional presidents, chosen by the business community although confirmed by the Board, have a reputation for being more hawkish than Board governors.
That means they are seen as being more likely to raise interest rates to keep inflation at bay which, other things being equal, may slow short-term growth and lift unemployment.
This does not make them very popular with politicians, but helps buttress Fed credibility for keeping inflation low.
"I believe the regional structure of the reserve banks is extremely important for the independence of monetary policy," said former St Louis Fed President William Poole.
"We all have an interest in stable money, a sound financial system. We all have an interest in not having monetary policy decisions affected by partisan politics, and that is what the reserve banks bring to the process," he said.
A key consensus among modern central bankers is that there is no lasting trade-off between inflation and unemployment, and any failure to ensure price stability will mean both slower growth and lower employment in the long run.
Fed Chairman Ben Bernanke reinforced this mantra during a dinner on Jekyll Island on Monday.
"We are ... committed to removing accommodation in a timely way to ensure that as we come out of this episode and we move back to sustainable recovery, we will have price stability, and low and stable inflation going forward," he said.
Critics of the regional structure also point to the location of regional Fed banks, with too many located east of the Mississippi River and two Feds -- Kansas City and St Louis -- in Missouri which they say reflects the U.S. economy of 1913, not 2009.
That aside, the spread of perspective that this structure brings to the policy-making process is also a plus.
"It is very valuable to have that diversity of opinion and diversity of approach in the monetary policy-making process," said former Fed Board Governor Randall Kroszner.