With Republicans in Congress unwilling to pass President Obama’s jobs bill, many believe that the Federal Reserve is the only institution left that can lift the economy out of its seemingly perpetual slump.

That has led to the normally quite secretive Federal Reserve, the nation’s most important economic institution, coming under increased scrutiny. This in turn means that the question of who leads the Fed is growing more important.

A new report has revealed that an overwhelming majority of the Fed’s leadership is made up of executives from banks and private corporations, confirming previous American Independent reporting. The report, from the Government Accountability Office (GAO), looked at the membership of the boards of directors of the 12 regional Federal Reserve banks.

Using a voluntary survey of the currently serving directors, the GAO found that over three-quarters of the regional Federal Reserve directors are the president or CEO of the company they work for. Of the directors that have served from 2006 through 2010, only six represented labor and five represented consumers, while 56 represented commerce or industry interests, and 73 represented banking interests.

The report recommends extending director recruitment efforts beyond the senior executive level: “To the extent that director searches are limited to chief-level executives, the Reserve Banks not only limit the diversity of the pool of potential candidates but also risk limiting the perspectives shared about the economy in the formation of monetary policy.”

Federal Reserve Chair Ben Bernanke said in an official response to the report that the Fed has “has already broadened the pool of candidates for these positions to consider qualified candidates who are not chief executives.”

Sen. Bernie Sanders (I-Vt.), who requested the report as part of the Dodd-Frank financial regulatory reform law, called the financial sector’s influence over Fed leadership “unacceptable.”

“Not only do they run the banks,” said Sanders in a statement, “They run the institutions that regulate the banks.”

“Recruiting consumer and labor representatives is a challenge”

The Federal Reserve System is comprised of the central bank in Washington, D.C. and 12 regional Federal Reserve banks. These are charged with carrying out policy dictated by the Federal Reserve guiding committee, the Federal Open Market Committee (FOMC), which in turn is required by Congress to craft policy keeping unemployment low and prices stable. The presidents of the regional Feds, which are selected by the boards of directors, also rotate through five of the twelve voting seats on the FOMC.

Each board consists of nine members: six members are selected by the member banks of the Federal Reserve, and three are selected by the national Federal Reserve Board in Washington. “Class A” members of the regional Fed boards are selected by banks that participate in the Federal Reserve to represent their interests, and are usually commercial bank officials.

The Federal Reserve Act requires that the other 6 directors of each board, 3 “Class B” members appointed by the member banks and 3 Class C members appointed by the national Board, “represent the public” and be “elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.”

But Fed officials told the GAO that “they generally focus their search on senior executives… usually CEOs or presidents.” Officials also told the GAO that “having senior executives on the board of directors helps elevate the stature of the board” and that senior executives “may have a broader view of how their industry is being affected by the economy.”

Despite the fact that Class B and Class C directors aren’t allowed to have ties to the banking industry while serving on the board, the GAO report found that “at least 56 percent [of the surveyed directors] have had some financial industry experience.”

The GAO cited a 2010 memo from the Federal Reserve Board that said recruiting representatives of organized labor and consumers to serve on the regional Fed boards was a “high priority.” But two Fed officials told the GAO that “recruiting consumer and labor representatives is a challenge because many of them are politically active,” and the Board’s policy restricts a director’s political activity.

It’s unclear how the national Board defines “political activity”. TAI’s previous reporting has shown many of the directors have donated generously to political campaigns. And the political activities of at least one director, JPMorgan CEO Jamie Dimon, are regularly the target of speculation by the national media, given his close relationship with the Obama administration and his recent meetings with Republican candidate former Massachusetts Gov. Mitt Romney.

Using data from the Equal Opportunity Employment Commission, the GAO compared the demographics of the Fed board directors with the demographics of “executive and senior level officials and managers” of firms with more than 100 employees, and found that they were quite similar.

Women and racial minorities are extremely underrepresented on the boards: In 2010, 15 of the 108 directors were minorities, and 18 were women. Despite officials telling the GAO that “Class B and Class C directors are a source of demographic diversity on Reserve Bank boards,” only 32 of the 202 Class B and C directors since 2006 have been women, and 23 have been minorities.

The education level of the directors is also unrepresentative: An “overwhelmingly majority” of the directors have a bachelors’ degree, and at least 55 percent have some type of advanced degree.

The GAO found that the selection process relies heavily on personal networking, with many directors selected after a personal recommendation from a current or previously serving director. 86 out of the 91 surveyed directors in 2010 serve on some other board of a for-profit or non-profit company.

One official told the GAO that “they look for candidates in a variety of industry lists such as a Forbes’ magazine list of the most powerful women in business,” while other directors have pursued the job by reaching out to the Fed staff themselves.

“The appearance of conflict of interest”

Fed watchers have noted that regional Fed presidents, selected by the boards of directors, tend to have the most conservative voting records on the FOMC when considering whether to use extraordinary measures to reduce unemployment. Reuters recently rated FOMC members and Fed presidents on their aversion to further stimulating the economy, and found that the most hawkish or anti-stimulus members of the Committee were all regional Fed presidents.

The importance of diversity in the country’s most important economic institution can be seen in the unemployment statistics: While the unemployment rate for people with at least a bachelor’s degree was 4.2 percent in September, for those with only a high school diploma it was 9.7 percent. For whites, the unemployment rate is 8 percent, but for Hispanics it’s 11.3 percent and for African-Americans it’s 16 percent.

Rep. Barney Frank (D-Mass.), the Ranking Member of the U.S. House Financial Services Committee, has proposed eliminating the voting power of the regional presidents. Frank says that all of the voting members of the FOMC should be directly appointed by the president and confirmed by Congress, rather than selected by boards made up of business leaders.

The GAO appears to agree, at least in part, with Frank: “The statutory requirement for three classes of directors was intended to provide representation of both stockholding banks and the public… However, the existence of Class A and to a lesser extent Class B directors on the boards creates an appearance of a conflict of interest, particularly in matters involving supervision and regulation.”

This became especially apparent during the recent financial crisis, when the Fed created multiple emergency programs that provided direct financial support to the country’s largest banks.

The report found no instance of a director being directly involved with the supervision of a program that benefited his or her banking institution. Nevertheless, the GAO recommended that any waivers granted to directors in the event of a conflict of interest be made public.

Two days prior to the vote, the top four GOP leaders in Congress sent a letter to Federal Reserve Chair Ben Bernanke urging the FOMC to refrain from using monetary policy to stimulate the economy. The letter garnered considerable controversy since it was made public on Tuesday, given it represents an unusual attempt by the leaders of a political party to influence the Federal Reserve. Senate Majority Whip Dick Durbin (D-Ill.) told The Hill the letter was “wrong-headed” and quoted a former Fed official who said it was “outrageous” that the Fed receive “direct political communications from Republican leaders.”

However, three FOMC members appear to agree with Republican leaders, voting against Wednesday’s statement announcing “operation twist.” These members are Richard Fisher, Narayana Kocherlakota and Charles Plosser. According to the FOMC statement, they ”did not support additional policy accommodation at this time.” These members are also three of the five regional Fed presidents who currently sit on the FOMC, alongside Bernanke and four members of the Federal Reserve Board. Two other seats on the Board are currently vacant because President Obama’s nominees to fill the positions have yet to be confirmed by the Senate.

Voting on the FOMC has traditionally been very close to unanimous in order to avoid the perception that its decisions are politicized. Transcripts of FOMC meetings are released on a five-year lag in order to disconnect their deliberations from day-to-day politics. The fact that Bernanke and Federal Reserve Board member Elizabeth Duke, both originally appointed by Republican President George W. Bush, have voted in favor of the easing policies that Republican leaders vociferously oppose throws the dissenting votes from regional Fed presidents into sharp contrast with the Board members’ commitment to consensus.

A flash graphic from Reuters that rates where each Committee member stands in relation to the recent easing decisions confirms the regional Fed presidents are systemically more “hawkish,” or fearful of inflation, than the other members:

(Image via Thomson Reuters)

Construction of regional Fed boards

Regional Fed presidents are chosen by the boards of each of the regional Federal Reserve banks. These nine-member boards are divided into three “classes.” Class A and B are appointed by the “member banks” — private banks that are shareholders in the regional Fed. Class A board members are chosen “to represent member banks.” Class B board members are chosen to “represent the public.” Class C members are appointed by the national Federal Reserve Board. The Federal Reserve Act stipulates that both Class B and Class C members “shall be elected … with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.”

Under the Dodd-Frank financial regulatory reform bill, Class A board members no longer have any role in selecting class presidents, which under the letter of the law suggests that presidents are now exclusively chosen by “representatives of the public.” In theory, Class B board members are considered representatives of the business community, and Class C board members are considered representatives of the public interest. In practice, current and former business executives dominate both classes in many of the regional banks.

Minneapolis, Dallas and Philadelphia Fed boards

Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, was selected for his position by a board whose current Class B and Class C members are exclusively CEOs. Five are from for-profit companies, one is from a nonprofit HMO.

The chair of the Minneapolis Fed board, John Marvin, is the CEO and chairman of Marvin Windows and Doors. According to the Center for Responsive Politics, he has personally donated to the campaigns of Sen. John Hoeven (R-N.D.), former Sen. Norm Coleman (R-Minn.), Rep. Erik Paulsen (R-Minn.), the Republican National Committee and former Minn. Gov. Tim Pawlenty’s PAC, Freedom First.

The American Independent has determined that, in the past two years, four of the nine Minneapolis Fed board members have disclosed donating exclusively to Republican candidates and party organizations, two have disclosed giving to both Republican and Democratic candidates and one has disclosed donating exclusively to Democrats. The remaining two have not contributed enough to political campaigns to warrant disclosure.

The board of the Dallas Federal Reserve bank, which appointed Richard Fisher, is chaired by the co-founder and former CEO of Southwest Airlines, Herb Kelleher. He leads a board that includes three other current or former executives (one is the president of J.C. Penney), the president of the University of Houston and a finance professor, as well as the three Class A banker members. Three board members disclosed donating exclusively to Republicans and one only to Democrats. Kelleher himself was a McCain supporter who has also donated to Democratic candidates.

Charles Plosser is president of the Philadelphia Fed., whose board currently consists of five current or former executives of for-profit companies and one president of a philanthropic foundation. One board member has disclosed donating exclusively to Republicans, one only to Democrats and three to both parties.

It’s worth noting New York Fed chair William Dudley, who voted in favor of yesterday’s statement, was appointed by a board with greater diversity than many of the other regional Fed boards — none of the New York Fed Class C members are CEOs of for-profit companies — but business executives still have all three Class B seats. And Chicago Fed President Charles Evans, who has been one of the loudest voices on the committee for the Fed taking an even stronger role in promoting economic growth, answers to a board whose Class C members are all CEOs.

The fact that anti-stimulus Fed leaders were selected by boards dominated by business executives is at the heart of Democratic Rep. Barney Frank’s proposal for reforming the Committee, wherein the four members of the Committee not from Washington would be appointed by the President of the United States, just as the other Committee members are.

But the Fed has critics on the left as well, one of which is Rep. Barney Frank (D-Mass.) whose position as ranking member on the House Financial Services Committee puts him in a position of oversight over the central bank.

On Monday, Frank released a position paper restating his proposal for reforming the FOMC. His central focus lies in regional bank presidents, five of which have a vote on the FOMC together with six permanent members and chairman Ben Bernanke. Frank believes the regional bank presidents represent an anti-democratic corporate influence over the nation’s most important economic institution.

There are twelve banks in the Federal Reserve System, and the president of each bank is selected by its board of directors. The nine-member boards of the regional Fed banks are comprised of three representatives from commercial banks, three representatives from the business community and three representatives from the broader public (although under the Dodd-Frank financial reform law, the banker members no longer have a role in selecting the president). This is why Frank and other Fed critics argue America’s monetary policy is set in part by people who are handpicked by business leaders to represent their interests.

Frank’s new position paper lays out his concerns:

For some time this has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their [the regional bank presidents] voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate—specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.

The paper highlights the most recent statement from the FOMC, in which the committee said they would target low interest rates through 2013 in order to stimulate economic growth. When the statement was approved by the FOMC, there were three dissenting votes, which came exclusively from regional bank presidents. A 7-3 vote may seem like a relatively high amount of consensus when compared to the polarized votes of the Supreme Court or the U.S. House of Representatives. But historically, three dissenting votes is an unusually high number from a body that has preferred to maintain an aura of unanimity so as to reinforce the impact of its decisions on markets.

Frank suggests that the high level of political polarization that characterizes today’s political debates may have infected the FOMC. Business leaders, after all, tend to be ideologically conservative and vote Republican, and the dissenting votes all came from people selected in part by business leaders.

The suggestion that ideology may be motivating the dissenting votes makes sense when considering the growing belief among mainstream economists that inflation is below trend. Indeed, the Cleveland Fed’s most recent findings that inflation is expected to average at under 2 percent for the next ten years, leading some to question whether the Federal Reserve, tasked with a dual mandate of minimizing unemployment while maintaining price stability, has lost sight of the former while remaining excessively focused on the latter. 

Christina Romer, a UC Berkeley economist and former chair of Obama’s Council of Economic Advisers, captured this sentiment when she wrote earlier this year that “[M]onetary policy makers are all [inflation] hawks now.”

Kenneth Rogoff, an economist at Harvard University and former chief economist of the IMF, has joined Romer in calling on the Fed to increase inflation: ”The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years.”

Among economists, support for higher inflation is bipartisan. Greg Mankiw, a Harvard economist and adviser to Mitt Romney’s presidential campaign, wrote in the New York Times that the FOMC should “aim for a price level that rises 2 percent a year … [and] promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.” While a more moderate proposal than Rogoff’s, a clear commitment to target prices is still considerably more stimulative than what the three August dissenters would presumably agree with.

Barney Frank’s proposal is unlikely to gain traction in a Republican-controlled House. With the leading GOP presidential candidates repeatedly saying that they oppose Bernanke’s tenure as Fed chair (with Gov. Rick Perry even suggesting that Bernanke’s efforts to stave off the recession in the wake of the 2008 crisis as “treasonous”), few are expecting Congress to push the Fed towards more inflation.

Frank has received pushback from those who say he is trying to concentrate Fed power in Washington. But he appears to be listening to these critics. Earlier this year, Frank proposed removing voting powers from the regional bank presidents on the FOMC, and leaving policy decisions up to the seven members appointed by the President. His new paper says he favors appointing board members from different parts of the country, as long as the business- and bank-controlled regional boards don’t have a say.

“I have finally taken into account the argument that some diversity from a geographic standpoint would be a good thing,” he says.

To kick off the day, NCIA held a press conference this morning that included presentations by medical marijuana dispensary owners, cannabis researchers and U.S. Representative Jared Polis (D-Colo.), an avowed supporter of medical marijuana rights.

One of the panelists was David Guard of the analysis firm See Change Strategy. He and his colleagues have recently released a “State of Medical Marijuana Markets 2011” report, which Guard called the “first credible business analysis of medical marijuana.” Guard said that estimates on the size of the legal cannabis industry have ranged from a market worth of anywhere from $100 million to $100 billion. See Change arrived at a figure of $1.7 billion based on a comprehensive set of surveys, interviews and research of public records. California alone controls 76 percent of that. If industry trends in states like Colorado, which holds another 16 percent of the market share and boasts the fastest growing market in the country, continue, Guard expects that $1.7 billion to reach $8.9 billion in just five years.

The very existence of a lobbying organization, coupled with the all-business approach of those prepared to weather the storms of battling the federal government, seems to herald the arrival of nothing less than Big Pot — at $1.7 billion, still a fraction of Big Tobacco or Big Pharmaceutical, but perhaps the fastest growing industry in the country, if See Change projections hold true. Accordingly, everyone at today’s press conference vowed to push for the recognition of medical marijuana as a legitimate, legal business across all levels of government, a radical change from the gray area it presently inhabits, which has resulted in an unresolved ever-growing conflict between federal and state laws.

Steve Fox, the chief lobbyist for NCIA, said, “Our members simply want to be treated like business owners in any other industry. We are far from that point now. The IRS and federal bank regulators are taking advantage of statutes enacted to stop truly illicit drug trafficking in order to place unfair and onerous financial burdens on these businesses.”

To that end, Fox said, NCIA intends to lobby Congress primarily for changes to banking regulations and U.S. Tax Code. Currently, federal laws have allowed the Treasury Department to block dispensaries from holding bank accounts (DeAngelo reports that he’s had three bank accounts shut down; Jill Lamoureux, a Boulder, Colo., dispensary owner and NCIA board member, said she’s had five bank accounts closed) and the IRS to target dispensaries with debilitating audits.

On that last note, DeAngelo said that section 280E of the tax code was intended for cocaine kingpins, international drug smugglers and crystal meth distributors and should not be interpreted to apply to state-legal medical marijuana dispensaries. He argued that dispensaries like his provide a “safe alternative to the dangerous conditions of the illegal market” and that taxing them out of business would just send their clients running to the black market.

Rep. Jared Polis agreed with this notion. He said that loosening federal restrictions on medical marijuana would be an “opportunity to strike a blow to criminal drug cartels and reduce crime,” as well as minors’ access to marijuana. It would also put an end to the paradoxical set of current federal regulations that only spawn violations—for example, by forcing dispensaries to operate as cash enterprises because of the banking laws, which in turn makes it far more difficult for them to comply with taxation because operating without a bank account makes record keeping a difficult proposition.

In a statement to The American Independent preceding the press conference, Polis expanded on this:

I am aware of and very concerned about the activity of the FBI, DEA and IRS in several states with medical marijuana laws. In my time in Congress I have been in frequent communication with the Department of Justice asking for clarification that the right of states to regulate this industry and enforce the laws adopted by their voters and general assemblies is respected by the federal government.  We have seen less of this confusion in Colorado because our General Assembly has established a robust regulatory framework—the most regulated in the nation—which makes it much easier for businesses in my state to be in “clear unambiguous compliance” which the Department of Justice stated in their October 19, 2009 memo is the metric used for enforcement.

Yet even the increased regulations in the state have not made Colorado dispensaries immune from the federal crackdown. While all of the officially reported dispensaries of the dozens facing IRS audits have been in California, an NCIA board member reports that there are now rumors of at least one Colorado dispensary being targeted.

Back at the press conference, Polis said that the situation isn’t likely to get any better for dispensaries without federal legal reform. “The next level requires congressional action,” he said. To that end, he’s seeking bipartisan support of bills protecting dispensaries. Reps. Ron Paul (R-Texas) and Dana Rohrabacher (R-Calif.) have so far reached across the aisle to offer cooperation, and Polis’s fellow Democrat Pete Stark (Calif.) is working on a bill to revise the tax code, as Polis works on a bill that would open banks to dispensaries.

With actions like Polis’s, even as IRS, Justice Department and Treasury Department efforts to dismantle the industry increase, support for medical marijuana among others at the federal level has grown. Polis, Stark, Barney Frank (D-Mass.) and others are beginning to throw their weight behind medical marijuana, and then there’s the new National Cancer Institute entry on cannabis that touts its medicinal benefits (although a section on its anti-tumor properties has been removed).

On these hopeful notes for the industry, Fox said, “It’s about time. It should be recognized as medicine, and it’s a crime that it isn’t.”

The programs — the Home Affordable Modification Program, HUD’s Neighborhood Stabilization Program, the Emergency Homeowner Relief Fund (passed under the Dodd-Frank Act) and the FHA’s Short Refinancing Program — will be the subject of a March 2 hearing by the Insurance, Housing and community Opportunity Subcommittee. Bill mark-up is expected to take place the following day, March 3.

“In an era of record-breaking deficits, it’s time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners,” said U.S. Rep. Spencer Bachus (R-Ala.), who leads House Financial Services.

“These programs may have been well-intentioned, but they are not working and, in reality, are making things worse.”

The call to end the programs, which are considered key Obama administration projects to combat the nation’s foreclosure crisis, was joined by U.S. Rep. Judy Biggert (R-Ill.), who leads the Insurance and Housing Subcommittee.

“We need to break down barriers that have delayed the housing recovery, including expensive and ineffective government programs that have failed to help homeowners. Unfortunately, these programs were set in haste, executed poorly, and have done little to restore stability in the marketplace,” she said.

As The Iowa Independent reported in 2009, the Home Affordable Modification Program hasn’t performed as well as expected. Despite placement of $29 billion into the program that would allow banks to alter loans to make them more affordable, only 116,000 such modified loans had been made permanent as of the end of February last year. Democrats have charged that the problem lies not with the program itself, but the fact that the Obama administration relied on private mortgage servicing companies to provide the modified loans.

The goal of the program was to have reached around four million struggling homeowners by 2012. As of February 2010, nearly one million homeowners had entered into trial modifications, although there is no guarantee that such altered loans will become permanent after the 90-day trial, according to Phyllis Caldwell, who leads the federal program. And, even if the loans reach permanent status, many homeowners ultimately re-default. Currently, about 500,000 loans have been modified under the program, and only $840 million of the $29 billion invested in the program has been spent.

Although Democrats seem poised to fight for the other three programs on the chopping block, statements issued by U.S. Rep. Barney Frank (D-Mass.), who serves as ranking member of House Financial Services, neglected to mention the Home Affordable Modification Program.

Congress appropriated $7 billion for the Neighborhood Stabilization Program, which included $2 billion in stimulus funds. Two round of funding through the program have been provided to states and localities, but the bill being drafted by House Republicans would prevent a third round of roughly $1 billion in funding.

According to information from the Iowa Department of Economic Development, the state received roughly $21.5 million in funding as an adjunct to the Community Development Block Grant Program to provide emergency assistance to state and local governments to acquire and redevelop foreclosed properties that might otherwise become a source of abandonment or blight. Of that funding, approximately $4 million was earmarked for Des Moines and $1.5 million for Davenport. The cities of Cedar Rapids, Council Bluffs and Sioux City each had about $1.2 million allotted during state formulas, and the cities of Waterloo, Dubuque and West Des Moines were also expect have shares of the money to combat blight. The cities were singled out based on a formula used to calculate “Entitlement Cities,” and the department noted that if any decided not to accept the funding, the monies would instead be moved into a competitive application pot.

Nationally, of the roughly $8 billion that was appropriated for the FHA Refinance Program Termination Act, only about $50 million had been disbursed (about 35 applicants as of December 2010). The bill by House Republicans seeks to terminate the program and rescind all unused funding. It is unclear how much of the disbursed funding, if any, has made it into Iowa.

The Emergency Mortgage Relief Program is a reauthorization of the 1975 Emergency Homeowners’ Relief Act that was made possible by the larger Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in July 2010. It provided $1 billion for the U.S. Department of Housing and Urban Development to make mortgage relief payments to homeowners facing foreclosure for up to 12 months, and provided a pathway to an additional 12-month extension.

Perhaps not surprisingly, this was the piece of legislation most defended by Frank, who said the program is designed not to help people who were “imprudent or irresponsible,” but those that are unemployed. He called it “the single most effective anti-foreclosure program that has been put forward,” and noted that Alabama, Bachus’ home state, had a similar program in place.

If Republicans want to cut spending, Frank said, “there are better ways … than by attacking these programs.”

JoAnne Allen at Reuters reports that Rep. Barney Frank (D-Mass.), one of the key players working on housing reform, argues blankly that the two should die:

“They should be abolished,” Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. “They only question is what do you put in their place,” Frank said.

The Federal Housing Administration should be fully self-financing and Freddie and Fannie should be replaced with a new mechanism to help subsidize housing, Frank said in the interview.

“There is no more hybrid private-public,” the Massachusetts Democrat suggested. “If we want to subsidize housing then we could do it upfront and let the budget be clear about that.”

Fannie Mae and Freddie Mac were government-sponsored enterprises, privately owned companies supported by the government, until the Bush administration took control of the companies in 2008 to save them from collapse.

Frank said that he does believe the federal government should have a role in building affordable rental housing but thinks money should go toward projects by private developers.

On the question of whether the government should still provide some guarantees in the mortgage market, Frank said: “If we have it (guarantees), it has to be self-financed by the people who are benefiting.”

Essentially, Frank argues that the government needs to clarify the government’s housing goals and better arrange funding flows to meet them. This is a point Timothy Geithner, the Treasury secretary, made yesterday, as well.

Matthew Yglesias does a good job of describing the problem: Before, Fannie and Freddie was encouraging people to buy more expensive houses, subsidizing all kinds of mortgages, competing with private companies, and taking on certain low-income housing goals. Their tasks became muddled, in part because their mission was muddled, as profit-seeking entities with a government mission and government backing.

The allegations have percolated for months. In March, The Wall Street Journal reported that Waters, against the advice of Rep. Barney Frank (D-Mass.), the head of the House Financial Services Committee, had boosted the bank and called the Treasury Department on its behalf:

When Rep. Barney Frank was looking to aid a Boston-based lender last fall, the Massachusetts Democrat urged Maxine Waters, a colleague on the House Financial Services Committee, to “stay out of it,” he says. The reason: Ms. Waters, a longtime congresswoman from California, had close ties to the minority-owned institution, OneUnited Bank.

Ms. Waters and her husband have both held financial stakes in the bank. Until recently, her husband was a director. At the same time, Ms. Waters has publicly boosted OneUnited’s executives and criticized its government regulators during congressional hearings. Last fall, she helped secure the bank a meeting with Treasury officials.

When Waters called, her husband no longer sat on OneUnited’s board, but did hold its stock. Waters has vocally supported the minority-owned bank, which got into financial trouble due to its holding of Fannie Mae and Freddie Mac stock. It eventually received funds from the Troubled Asset Relief Program. OneUnited executives have given $12,500 to Waters’s election campaigns, the Wall Street Journal says.

Waters has reportedly elected to go through an ethics trial, like Rep. Charles Rangel (D-N.Y.), rather than accepting the charges. The trial will take place around the time of the midterm elections.

It’s hard to blame them. Reforming Fannie and Freddie might prove as complicated as reforming Wall Street. The two government-sponsored enterprises are currently backing around nine in ten new mortgages, propping up a weak housing market at a cost of hundreds of billions to taxpayers. Housing experts worry acting too rashly could crater the tentative housing recovery, but also note that the government, at some point, needs to re-regulate mortgage finance, reform Fannie and Freddie and let the private market take over.

Back in April, the Treasury Department released a list of seven questions to this end, asking for experts to submit ideas for reform. Last week, Rep. Barney Frank (D-Mass.) said he will start work on a housing finance bill this fall. And today, the Obama administration announced it will hold a conference on Aug. 17, bringing together community groups, consumer advocates, housing industry figures and economists to contemplate how to fix the multi-trillion dollar market. In its announcement on the Conference on the Future of Housing Finance, the administration said it will have a housing finance reform bill ready by January — the first concrete date it has set, to my knowledge at least.

“The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country,” Treasury Secretary Tim Geithner said in the press release. “Now is the time to build on the foundation we laid with the historic Wall Street Reform legislation President Obama signed last week and aggressively move forward to improve our nation’s housing finance system. The Obama administration is committed to delivering a comprehensive reform proposal that protects taxpayers, institutes tough oversight, restores the long-term health of our housing market, and strengthens our nation’s economic recovery.”

Frank said:

I need people to understand she’s not a zealous advocate but a very smart operator. Sometimes people think those are separate. That if you care a lot about an issue, you’re not going to be effective in putting it forward. I never had a better partner on a tough fight than I had in Elizabeth Warren. Her knowledge is great. Her compassion is great. She stands out as the person who ought to be running that agency.

He also noted:

I sympathize with President Obama. He’s been criticized by some of my liberal friends. We didn’t get a public option and other things we wanted. That wasn’t his fault. The economic recovery bill, the stimulus, it wasn’t as big as it should have been. That wasn’t his fault. He couldn’t get the votes. With regard to appointing Elizabeth Warren, that’s his decision. No one can stop him from making it. I hope he will appoint her.

And Treasury Secretary Timothy Geithner, without outright supporting Warren, had warm words for her this week as well:

She represents to a large part of the country — not just people caught up in the damage of the crisis, but people who view this system as being fundamentally broken — she represents, again, one of the most compelling advocates for reform.