Peter Conti-Brown wrote an interesting take over at Politico on the constitutional problems with so many vacancies on the Federal Reserve Board. Which leads to the question: who should fill the empty slots? What sorts of backgrounds should they have? Some in Congress have called for representation by community bankers. Recently, at the Harvard Business Review site, Justin Fox had an interesting historical take on how, over decades, economists have gradually taken over the most important spots on the Federal Reserve Board (i.e. the Chair and membership on the Open Market Committee), while the representation of lawyers has declined.
It provides food for thought. First, what value do lawyers add to the Fed leadership? I agree with the quoted remarks of Alan Blinder that it is hard to conceive of a chair without an economics PhD given the highly technical data coming from Fed staff. However, lawyers can clearly contribute mightily to the regulatory mission of the Fed, an area that critics charge was neglected under Greenspan in favor of monetary policy (see here for one critique).
One retort is that this is not the area on which the Open Market Committee focuses. Even so – I have argued (in this article and in my book) that changes in the law and financial regulation often have an enormous monetary impact. Consider how regulatory arbitrage and regulatory changes midwifed the birth of the shadow banking system, which had a profound impact on monetary policy in the years before and during the crisis. Scholars (like Margaret Blair and me) argue that the fact that monetary expansion occurred through regulatory means rather than traditional “channels” (like central banks buying and selling bonds) may have blinded many macroeconomic policymakers from realizing that a bubble was forming and what was driving it. The upshot: if legal change can have monetary impacts, then lawyers can help understand when that change is occurring. We need better coordination of prudential regulation and monetary policy-making.
Second, and more provocatively, Fox’s article points out how the real drop in representation among the Fed’s Open Market Committee comes in members without a graduate economics degree, J.D., or MBA. Others have recognized this trend before. Some, like Tim Canova, have called for a return to the Fed of the ‘30’s and ‘40’s, which they see as much more democratically accountable.
Even if you don’t agree with that position, consider the parallels to the Supreme Court, which has also been criticized for having an increasingly homogenized makeup in terms of professional background even while it has diversified in terms of gender. All the current justices studied at a very small number of law schools and have a similar mix of appellate/professorial backgrounds.
I’m sure there are other examples of powerful public bodies being homogenized professionally. This dynamic means that some courses are, and some course will not be, served at the intellectual feast.
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