March 18, 2016
Book Club: Balancing Technocracy with Democracy
Posted by Matt Bodie

A thesis: Fed appointees cannot have the expertise necessary to do their job without also being wed to some of the economic and banking orthodoxies that led to the 2008 financial crisis.  This is just a thesis, and perhaps a demoralizing one at that.  But I wonder if the "sweet spot" of wise and industry-independent Fed folks that Conti-Brown seems to be aiming at actually exists.

Just to elaborate: one of the great strengths of The Power and Independence of the Federal Reserve is its portrait of the culture within which the Federal Reserve operates.  It is a culture dominated by bankers and economics Ph.Ds.  To a significant extent, this makes sense -- much of what the Fed does is incredible sophisticated and requires a great depth of expertise.  Indeed, as Conti-Brown persuasively argues, the Fed needs a lot of discretion because it needs to be nimble and creative in applying its various powers.  And this discretion requires an understanding of how to use it.  At the same time, Conti-Brown persuasively describes the influence of private bankers, international central bankers, and economists in shaping the Fed's use of its power.  And these communities have strong ideologies as to many of the critical policy issues that face the Fed.  So a reformer may not have anyone with the know-how to run the Fed that actually has the background and understanding of the Fed to keep the economy humming.  In other words, technical expertise may be inexorably intertwined with certain ideological commitments.

My thesis here may be seen by reformers as an undue elevation of technical "expertise" that ends up with a unending cycle of insiders shuffling through the system to maintain the status quo.  Bankers and economists want to convince everyone that only they can run the economy so that they can keep things the way they are.  But it is undoubtedly true that the Fed could really fly off the rails if it was run by an amateur or an ideologue who doesn't respect what it does well.  I'm a believer in the idea that the 2008 Crisis would have been a lot worse if the Fed and Treasury folks did not reach out to save our financial institutions, in ways that the average voter finds offensive or ludicrous on their face.

So ultimately, my thesis is more of a question: how do we avoid ideological capture at the Fed without sacrificing the knowledge and experience that are required to run it?  And to provide another angle on this question: who would Bernie Sanders appoint to chair the Fed?  Or who would Rand Paul appoint?  Both have shown deep suspicions for the Reserve.  On the Sanders side, Joseph Stiglitz comes to mind as a potential appointee.  But is he enough of a reformist for the reformers?  And how deep is the bench behind him?

Conti-Brown does seem to believe that there is potential middle ground between industry capture and populist naivete.  I'd be interested to hear more about this in specific terms -- where is that ground to be found?

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