Economic research, including work in the 1970s on time inconsistency, has long provided a rationale for central bank independence in conducting monetary policy. Indeed, the research encouraged the spread of central bank independence and inflation targeting around the world in the 1990s.

But the rationale for the independence of other activities at central banks, including many financial regulatory activities, is much weaker. At the least one needs to establish a clear connection between monetary policy actions and regulatory actions to justify placing these activities in an independent central bank.

When central banks drift away from monetary policy and go into other areas, their actions bypass the checks and balances so important in a democracy, and this can lead directly or indirectly to poor economic performance.  For example, the Consumer Financial Protection Bureau—with oversight of such activities as payday loans that have little or no connection to monetary policy—is located in the Fed with no appropriation role for Congress.

A sensible reform to deal with this problem would be to require congressional appropriation of funds for regulatory and supervisory activity within the Fed leaving the monetary policy function to be independent and funded by Fed earnings. The Fed already distinguishes between regulatory/supervisory activities and monetary activities in its internal accounting so this would be a reform that could readily be carried out in practice.

The Financial CHOICE Act outlined two weeks ago by House Financial Services Committee Chair Jeb Hensarling includes such a reform. The act has other reforms with good economic rationale: It would encourage banks to have more capital by offering them in return relief from complex regulations which slowdown the economy. It would restore the regular constitutional role of the Congress by requiring congressional approval of major financial regulations based on cost-benefit analysis. It would reform the bankruptcy code with a new chapter to prevent bailouts and financial spillovers of failed financial firms. And it would require the Fed to report on its strategy for monetary policy.

In general, the act emphasizes the use of incentives and market mechanisms operating through the rule of law to raise economic growth. A number of economic experts with a great deal of research and policy experience over many years have signed on to a statement supporting the proposed legislation, including Michael Bordo, Michael Boskin, Charles Calomiris, John Cochrane, John Cogan, Steven Davis, Marvin Goodfriend, Lars Peter Hansen, Robert Heller, Peter Ireland, Jerry Jordan, Robert Lucas, Allan Meltzer, Bennett McCallum, Lee Ohanian, Athanasios Orphanides, William Poole, Edward Prescott, Thomas Saving, George Shultz, John Snow, John Taylor, Daniel Thornton, and Peter Wallison.