US Rep. Barney Frank's newest bill would change the face of the Federal Reserveby removing the five rotating regional Fed governors, he told CNBC Tuesday.
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"I think it undermines the legitimacy [of the Federal Reserve] when you have people who are in the financial industry picking people to vote on setting interest rates," said the Massachusetts Democrat.
The monetary policy-setting Federal Open Market Committee has 12 members, five of whom represent regional Federal Reserve banks and are chosen by the boards of private financial institutions.
"I would have the [seven] people appointed by the president [and] confirmed by the Senate be the voting members," said Frank. The involvement of financial institutions in picking the regional governors is "totally inconsistent with any kind of theory of democracy."
"Who better to set interest rates? The people who have to buy houses, the small business people who have to borrow money to invest in their businesses, the average citizen who’s affected by this." Financial institutions could still make their points during the FOMC meetings, he said.
Rather than limiting its independence, Frank said his bill helps the Fed.
"I’ve been a supporter of protecting the Fed’s functions from a lot of people who I thought were obsessively critical of it. I think Ben Bernanke’s done an excellent job," he said, noting the Fed is now more transparent in its operations.
"We did away with the power they had from the 1930s, from Herbert Hoover’s days, to make loans of the sorts they made to [American International Group ] with no constraints whatsoever. You can’t do that anymore," he said of the Dodd-Frank law he co-sponsored.