FORTUNE — U.S. Congressman Barney Frank took on Wall Street as one of the writers of the Dodd-Frank financial reform bill. Passed last year, the law intends to clean up the way America’s biggest financial institutions conduct business following the nation’s banking crisis. As he observes how financial regulators apply the new law, which will largely determine the legislation’s success, Frank has a new target in his sites: The U.S. Federal Reserve.
Last week, the Democratic congressman representing Massachusetts’ 4th district unveiled a bill that would restructure the central bank’s Federal Open Market Committee, a group that decides the direction of interest rates and other monetary policies that influences everything from credit conditions to unemployment and inflation. Over the past few months, the committee has undergone scrutiny, as millions remain jobless. All the while, many of the committee’s 12 voting members have become increasingly vocal—regional bank president Tom Hoenig of Kansas, in particular —and divided over the right prescription to give the slow-growing economy a boost.
Frank’s bill, if passed, would downsize the committee by doing away with the five regional bank presidents. His main issue is that, unlike the seven Fed governors selected by elected officials, the bank presidents are selected by a board made up of community business leaders.
Fortune caught up with Frank, who is known for his quick wit and sharp tongue, and he certainly has no qualms about finishing other people’s sentences or, ahem, their questions. Up until this year, he served as chairman of the House Financial Services Committee that oversees Wall Street and its regulators. We chatted about his new proposal, the ongoing implementation of the Dodd-Frank Act, and the government’s latest high-profile investigation into Wall Street.
The following is an edited transcript of the interview.
Why do you think we need to restructure the Federal Open Market Committee?
First of all, it’s a matter of democratic principle. You have people on the FOMC who are not elected and not appointed by people who are elected making important decisions. I think having Federal Reserve policies set in part by people who have no democratic sanction, no electable root reduces their legitimacy.
Second, the Federal Reserve has a dual mandate for being concerned about unemployment and inflation. There is a tendency by members picked by regional business people to focus much more on inflation and not enough on unemployment. So the current structure biases the Federal Reserve away from one half of its duty. I want there to be equal attention to unemployment and inflation.
Is the restructuring intended to reduce the influence from business?
No. I believe it would diminish inappropriate sources of influences. In fact if you look at history, the Federal Reserve regional presidents have usually been lobbyists for higher interest rates. They have been critical of the Federal Reserve’s efforts — some of them — to apply quantitative easing, which I think has been very helpful.
You’ve mentioned that the bill would make the Fed’s decision-making process democratic. But wouldn’t it also reduce the number of voices included, potentially having the opposite effect that perhaps you intended?
No. It would be undemocratic to have them voting on public policy matters. I think they should continue to go to the meetings and speak out. I just don’t think they should have a vote.
Some say it might be better to reform the selection process for regional bank presidents, rather than concentrate power in Washington. What do you think of that idea?
That’s something I’m open to but they would have to be appointed by the President and confirmed by the Senate. I must say, though, I think we have a fairly diverse group appointed to the Federal Reserve. They don’t all come from Washington. Senators all work in Washington but they don’t all come from Washington.
Dodd-Frank passed last year. How do you think the implementation is going?
I am very pleased with it. I think the regulators are doing a very good job. There’s a lot of work to do, but I think they’re moving along in a reasonable fashion.
The problem is Republicans are trying to slow it down. For example, when we first considered the interim budget for 2011 the Republicans voted not to provide sufficient funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission. However, the funding levels were increased in the compromise bill.
They’re also now trying to stop the anti-speculative rules (provisions which restrict speculative use of derivatives) and trying to weaken the Consumer Financial Protection Bureau.
But given the concentration, power and scale of banks such as Goldman Sachs and and Citigroup, do you think it could reasonably be argued that America’s financial system is more risky than ever before?
No, not at all. In the first place the big banks will be subject to stricter rules. They will be given stricter capital requirements. Derivatives, for example, the kind of transactions you saw with American International Group and Goldman Sachs, can’t happen again. There are margin requirements and capital requirements.
Last week, the U.S. government sued Deutsche Bank AG for more than $1 billion, accusing the bank of fraud for lying to obtain federal guarantees on mortgages it issued. What kind of message, if any, does this send to Wall Street?
Well, I’m not familiar specifically with the suit. But I would hope the message is to stop the irresponsible practices. By the way, we have outlawed the kind of mortgages that were an issue in that suit. And we have added a rule that says that if you were going to make mortgages, unless they’re very solid, you can’t securitize them. You have to keep part of the risk.
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