March 19, 2016
Book Club: The Independence Fetish
Posted by Usha Rodrigues

In The Power and Independence of the Federal Reserve, Peter Conti-Brown has written an accessible book about the Fed.  Did you catch that?  I'll say it again: Peter Conti-Brown has written an accessible book about the Fed.  More than that, the WSJ calls it "riveting."  And it is--especially for those of us corporate types who have always had the feeling that we should understand the workings of the Fed a lot better than we actually do.  So, go read the whole thing.  For now, I'm going to focus on that resonant word in the title, independence.

We Americans are used to thinking about independence as an unalloyed good.  Heck, we even have an independence day.  But independence one of those concepts defined by what it is not--like good faith, it's an excluder (see Robert Summers' work).  The key question is, independence from what?  In corporate law, we're concerned about independence from conflict of interest.  In the Fetishization of Independence I contrasted the static view of director independence taken at the federal level (in statute and the exchange rules) with the more dynamic, situational definition of Delaware.  While I stressed the difference between these two notions of independence, both jurisdictions are ultimately concerned about a lack of conflict.  

Not so the Fed.  Conti-Brown begins his book by articulating what he calls the Ulysses/punchbowl view of Fed independence: that the Fed must be independent, like Ulysses, tied to the mast to resist the siren song of public demand for easy credit.  Or like "the chaperone who has ordered the punch bowl removed just when the party was really warming up."  The Fed needs to independent of political pressures so that tipsy citizens don't pressure it to introduce easy money policies that lead to high inflation. Thus, independence in Fed terms means "independence from political control"--not from a conflict of interest.  Still, we have definition by absence rather than positive attribute in both cases.

As with corporate law, the inherent irreducibility of independence leads to problems.  The basic problem is the same: how can one reliably verify the absence of something?  There are two problems with this notion of Fed independence that Conti-Brown identifies in his book that I'll highlight here.  The Ulysses/punchbowl conception of independence assumes that sirens and partygoers always act a certain way.  The problem was, the sirens weren't singing on cue in the wake of the 2008 financial crisis, and not all the partygoers were lurching towards the punchbowl of easy money.  Indeed, as Conti-Brown colorfully puts it, "After the crisis, the Fed was in the position of trying to get a bunch of wallflowers to take tequila shots."  The Fed faced political backlash for its quantitative easing policy from Rick Perry among other politicians.  And during the crisis the Fed, far from standing aloof from politics, coordinated closely with Treasury on a response. This coordination, Conti-Brown argues, is perfectly appropriate.  But it illustrates the paucity of the Ulysses/punch bowl metaphor and justification for the Fed's independence. 

The second problem is that independence from political pressure isn't an unmitigated good--it also means insulation from accountability, as Dave and Matt have already mentioned.  I've been thinking a lot about when and why Congress delegates authority (on which more later).  Conti-Brown makes a strong case that the process by which the presidents of the regional Feds are selected is unconstitutional, because of the executive's lack of power to appoint or remove them.  The incredible discretion that the Fed wielded in applying Section 13(3) of the Federal Reserve Act during the 2008 crisis is another example of the Fed's freedom to operate--it could use vague statutory language and lawyerly justifications to lend to Bear Stearns and AIG but not to Lehman Brothers.  A mere 2 years later, with Dodd-Frank, Congress  delegated still more discretion to the Fed--ultimately, to its economists and lawyers, who make "judgements about the permissible scope of banking cities and the requirements of law that are not exclusively, perhaps not even mainly, technocratic.  They reflect the values of the people making them." (By the way, Conti-Brown is very, very good at bringing to life the people of the Fed--Greenspan, Volcker and Bernanke, yes, but whistleblowing examiner Carmen Segarra as well. And who knew O. Henry worked as a bank examiner?).  But I digress.  The main point is, independence from political control and may be wise policy (but see the problem one above).  And it might be expedient to delegate tough questions to the discretion of the central bankers and their lawyers and economists.  But it's not a democratic form of government. 

Ultimately I'm left with independence in the Fed context as being as empty a concept as it is in the corporate world.  Maybe we agree that we want independent corporate directors and independent bankers because it's easy.  Certainly it lets us ignore the meatier question of what we should affirmatively expect of the individuals in these roles.   



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