03/18/2010 05:12 am ET | Updated May 25, 2011

Frank: Banks Shouldn't Pick Their Own Regulators

House Financial Services Committee Chairman Barney Frank is backing his colleagues in the upper chamber who have called for an end to the practice of banks appointing their own regulators to the Federal Reserve regional banks.

Senate Banking Committee Chairman Chris Dodd (D-Conn.) and ranking Republican Sen. Richard Shelby (Ala.) both said last week that the situation represented a glaring conflict of interest.

"I agree with that, but I think that's a next-year issue," Frank (D-Mass.) said in an interview in his office with the Huffington Post. "You should not have people who are private citizens selected by other private citizens setting monetary policy."

Frank noted that the influence of bank appointees on the Fed's Open Market Committee has been decidedly in favor of increased interest rates. He cited one study showing that 85 to 90 percent of the votes from regional bank presidents -- who are products of private banks -- consistently dissent in favor of higher interest rates.

"So it's not just a random thing. They have been a hawkish presence and yes, I think that should be changed," said Frank.

Dodd and Shelby focused more on the issue of regulatory authority. "Senator Shelby and I agree that it makes no sense for banks to be able to appoint their own regulators. It's absolutely backwards, and we intend to change the system as we write the comprehensive financial reform bill," said Dodd.

"It's basically a case where the banks are choosing or having a big voice in choosing their regulator. It's unheard of. That is not widely known to the American people. It will be," said Shelby. (More on the Fed's bizarre structure here.)

Shelby told HuffPost that Treasury Secretary Tim Geithner -- a former Fed regional bank president himself -- was cool to the idea when he floated it to him. A Treasury spokeswoman declined to comment.

Shelby, told that Frank was on board, reiterated that the conflict of interest must end. He was open, he said, to various ways of ending it, however. If the Fed banks were stripped of their regulatory power, he said, then the regulatory conflict would be ameliorated.

UPDATE: Some readers have asked why high interest rates are good for banks, in general, but bad for banks. "The issue is inflation," says Dean Baker, an economist with the Center for Economic Policy and Research. "Higher interest rates lead to higher unemployment, but lower rates of inflation -- good for bondholders."

Higher unemployment is good for business in general when it keeps wages down. When wages begin to rise, interest-rate hawks push to jack up interest rates to keep paychecks where they are.