Congratulations are in order for our own Gordon Smith, who was recently named the new dean of BYU Law School beginning May 1! Anyone who has spent much time talking to Gordon knows that he is a visionary, someone who is always asking how to make this institution, this organization, this conference, even this blog, better. I am very excited to see how he applies his boundless energy and creativity to the deanship here at BYU. Obviously, being a law school dean these days has its challenges and opportunities, and I trust wholeheartedly Gordon's judgment and care in this regard. I doubt any of us will get much sleep for the next five years, but I can guarantee that this institution will be all the better for it.
I've got an article on the constitutionality of the SEC's administrative proceedings (bottom line: they are clearly constitutional), and Chris Walker has a take on the issue, and the paper, over at Notice and Comment.
My thanks to my inimitable friend and colleague David Zaring for hosting this book club and for inviting me to respond. It’s a real pleasure to be back among the Glomerati—my first venture into academic blogging was on these digital pages back in 2011, including a real-time record of my finding the primary source for the “punch bowl” metaphor that figures so prominently in my book. I still love those stories about Stanford’s Erika Wayne, equal parts document sleuth and librarian.
I wanted to write a few responses to the excellent posts from David, Matt, and Usha and in the process write a bit more about what I see as the central intellectual puzzle of Federal Reserve independence, governance, and accountability, which is this: how can such a technical field benefit from democratic processes without corrupting the entire enterprise? As I wrote, I realized I was going to end up droning on and on, so I’ll keep this a bit more limited than the quality of these responses warrant.
This framing gets at the pith of Matt’s first post. He asks, “is it okay to ‘Bork’ a Federal Reserve appointee?” This question can be broken into two—should there be a more searching assessment of Fed appointees subject to the Appointments Clause, and what is the standard at which the senatorial consent should be withheld?
On the first, I think the answer is a resounding yes, with one clarification. The more searching assessment I would hope to see would not necessarily be at the Senate level alone—we’ve had plenty of closed-door politicking on Fed appointments that have led to some extraordinary appointments and also some very regrettable decisions. On the unfortunate side, I’m thinking of Senator Shelby’s decision to block Peter Diamond from a Fed governorship because Diamond was “unqualified,” just as he received the Nobel prize in economics. I’m thinking, too, of the regrettable—and hopefully temporary—decision to “pair” Fed appointments on a partisan basis, such that Jeremy Stein (a Democrat) could only get through the Senate with Jerome Powell (a Republican), despite no partisan balancing requirement in the Federal Reserve Act. We don’t need more Senators trying to play fast and loose with Fed appointments; we need more public attention on these appointments.
An example of this that I find exactly in line with my vision of a successful public engagement on the Fed was in the summer of 2013 when the Obama Administration leaked that the president was considering Janet Yellen and Larry Summers for the Fed Chairmanship, and leaned Summers. The reaction was swift and very public: from every corner of the democracy came searching assessments of these two proto-candidates’ personalities, histories, ideologies, expertise, and more.
At the time, some lamented this attention to the Fed from outside the temple of full-time Fed watchers as corrosive and lamentable. I think they are exactly wrong. There was plenty of frivolity, gossip, and consideration of extraneous factors in the public vetting we saw in Yellen vs. Summers. But the level of public attention was also impressively substantive. My favorite example in this phenomenon was the non-ironically titled “Seventeen academic papers of Janet Yellen’s that you need to read.” (Full disclosure: I used to work indirectly for Summers at Harvard and continue to have enormous respect for him.)
To Matt’s first question, then, I would like to see more of this kind of public attention to these appointments. The authority of the Fed governors is extraordinary. It’s important that the public have a role in selecting them so that their values are as known as they can be.
To the second question—when should Senators reject a candidate?—I’ll confess something that may make my liberal friends cringe. I’m not convinced that Robert Bork himself should have been Borked. I would prefer a model of Senatorial advice and consent that looked much more like a brake on cronyism than on a sustained attack on a candidate’s (or the sponsoring Administration’s) politics. The Senators’ role, then, is to prevent presidents from rewarding their talentless but politically or financially connected friends with jobs that require policy expertise. It’s not to attempt a redo of our most essential of institutions, the quadrennial presidential election.
To take Supreme Court history (not to say the Supreme Court present) as an example, there was simply no question that Bork was qualified to sit on the court, even if his values and judicial philosophy (and beard?) were out of sync with the Democratic and perhaps American majority. But minus the beard, what about Bork was different from Antonin Scalia, who sailed through the nomination process? Not much that could be known at the time. And it’s not clear to me that the kind of judging we see in the jurist who took Bork’s place—Anthony Kennedy—is better for our democratic institutions, even as I have endorsed and celebrated some of the outcomes in cases that make Kennedy so famous.
If I were a Senator in 1987, then, I would’ve voted for Bork and then sought to campaign hard in 1988 to say that while qualified, we needed justices of a different philosophy much more likely to be sponsored by a Democratic president than a Republican one. At the same time, I would’ve felt more comfortable voting against Abe Fortas (given the air of scandal and undue proximity to President Johnson) and felt very comfortable voting against Nixon’s nomination of Harrold Carswell (about whom—in his defense—Senator Roman Hruska said “Even if he is mediocre, there are a lot of mediocre judges and people and lawyers, and they are entitled to a little representation, aren't they?”). Qualifications, not politics.
It’s the same analysis for the Fed. There are a few Governors who I think should not have been nominated given their abundant lack of anything except a connection to the President. And as mentioned, there are others who were dinged because of their perceived politics despite sterling credentials. I would want to see more public attention on the expertise and less of the politics, recognizing with Churchillian sobriety that the democratic process will lead to all kinds of regrettable excesses. It’s just better than anything else we might design to take its place.
On Matt’s other post, his hypothesis that “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,” I say that we should have that debate. Not just in the Senate Banking Committee hearing room, but in the blogosphere, editorial pages, academic conferences, and around the water cooler. Let’s inquire about what a potential Fed Governor believes about the world and the Fed’s place in it before we hand over a vote that can influence the development of the global economy. The stakes are just too high to leave it to backroom deals. And this is the overarching point: politics is already happening in and around the Fed. To pretend otherwise is fantasy. The question is whether those politics will be little-d democratic or whether they will be something else.
David highlights the essential importance of looking beyond traditional methodological or institutional paths in trying to get a sense of how agencies work in practice. Like anyone, I’m likely to overemphasize my own methodological approach over others. For example, I am decidedly skeptical that indices of central bank independence coded on the basis of central bank charters tell us much of anything. I think the question of “independence”—to the extent it’s a coherent question at all—is better explored through the methods of narrative history rather than quantitative econometrics. But that’s the point: we need to have multiple approaches in case my view is filled with blind spots and otherwise limited—narrative history isn’t great for doing a 100-nation study, for example.
Finally, I’m delighted Usha brought in her excellent perspective on “fetishization” of independence, an article that has shaped my thinking over the years. I think she’s exactly correct. I’d even go a step further and say that the term itself is devoid of much or any analytical content. Part of my aim in this book is to prompt readerly skepticism anytime anyone—whether in defense of the Fed or in attack—invokes “independence” as the support for their proposition. As I argue at length, and as Usha makes clear in the corporate governance context, Fed independence on the ground is not what those who rely on it have supposed it to be.
Again, my thanks for taking the book seriously and providing a wonderful forum for discussing it.
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.
How much of what the Fed does is controlled by its political leaders? Peter's book makes a case for "less than you would think," and I am generally persuaded by such stories. He's got some great color here. The general counsel of the Fed, for example, has held that job for about two decades, and you'd never see that anywhere else in Washington. Ted Truman, the head of the Division of International Finance, was the person who did the Fed's international relations, occasionally in consultation with the Chair. Truman "thought he was the guardian of the gate," observed on Fed governor, with a tone of what sounds like frustration. Peter documents how influential these "barons" of the agency are in setting policy. And that doesn't even get into the ways that economists can moderate the range of acceptable choices to be made in places where it does look like the political leaders of the Fed play an important role - monetary policy.
It all rather reminded me of this.
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?
Peter's book on the Fed represents, among other things, a take on how you figure out what a particular government institution is up to. You could try to do this quantitatively, especially if the part of the Fed you care about sets interest rates. What market conditions predict what the Fed is going to do? You can also do this by going big history, and critical as a matter of policy. That's what Alan Meltzer has done in his two volume history of the Fed, which processes an enormous amount of archival information - minutes, policy papers, etc - to describe what the Fed has done. These days, Meltzer often finds something to criticize. You could also try to understand it purely as a weird culture, which it very much is. Central bankers all talk to one another, only really do central banking throughout the course of their careers, have Ph.D.s in economics, and stay close to the discipline (but not too close! you write a couple of good articles, and then stick to policy with modest empirics.). It's a super insular, almost quintessentially technocratic community. Or you could simply look at its legal authority and examine its rules and orders.
I take Peter to be suggesting that none of these approaches could, if taken alone, provide you with a full picture of how the Fed works. One of the themes that runs through the book is that consideration of the law alone would lead observers to think that members of the Board of Governors are insulated and empowered, when in practice, they cycle through the Fed quickly, and presidents get to appoint many of them. The culture of the Fed, or at least Fed-watching, on the other hand, reifies the Fed chair, and the FOMC, without paying attention to the truly powerful Fed staff, who never leave, even as their leaders revolve away. Finally, Peter rejects the idea that the Fed is a technocratic exercise in the abstruse, but a place where powerful value judgments are made, and so therefore worth some measure of accountability - Matt talks about that. The Fed is much more than a vehicle for monetary policy, as we found out during the financial crisis, and encapsulates a disturbingly large number of bureaucratic actors - Peter is particularly critical of the continued existence of the regional federal reserve banks, and with good reason.
I admit that I prefer these sorts of mixed method accounts, on the assumption that more inputs probably creates a more accurate output. It does complexify things, to be sure. But the Fed is a complex beast, and pretending it is anything but is disengenously reductionist.
I wanted to start off our book club on Peter Conti-Brown's engaging and thoughtful book, "The Power and Independence of the Federal Reserve," with a quick reference to the big news of the day. One of Conti-Brown's key points is that we should care more about the people who run the Fed -- their backgrounds, educations, ideology, and policy goals. In making his point, Conti-Brown draws a comparison between the appointment of the Fed chair and the process underway (or maybe not so much underway) with Judge Garland:
Just as senators spar with judicial appointees over the latter's views on, say, abortion or the death penalty, they should expect (and, hopefully, receive) insight into what the central bankers' views are on such ideas as the monetary policy rules, forward guidance, and the other theoretical and empirical components of influential topics in macroeconomics. (p. 235)
Conti-Brown also argues that Fed appointments should be more politicized, as such attention provides "a tremendous amount of insight and accountability to how much personalities matter in shaping the power and policies of the Federal Reserve System." (p. 240) Personalities matter because the Fed's power is by design flexible and difficult to cabin with specific rules or regulations. At the same time, some level of democratic oversight is necessary to prevent industry capture (or, at least, industry culture capture) or unexpected policy shifts from occurring. Along these lines, Conti-Brown also argues that the President should have a broader power of appointment over a larger number of Fed staff members, particularly the general counsel.
I just wanted to press a little bit on Conti-Brown's point and ask: to what extent should the Senate exercise its own discretion in reviewing appointments to the Fed? As Conti-Brown skillfully illustrates in his historical discussion, the Fed must walk a tightrope between a lack of accountability to the people, on the one side, and too much accountability on the other. Many commentators have bemoaned the rising visibility of the Fed's role in the economy, in fear that populism and politics may lead the Fed astray. Similar arguments have been raised about the Supreme Court appointment process: namely, that nominations have become too political, too ideological, and too heated. Those Senate Democrats who rejected the nomination of Robert Bork are often blamed for this development. "Borking" has become a verb that means to pillory a judicial nominee for her or his ideology in an over-hyped and inflammatory manner.
So my question is: to what extent should the Senate be allowed to "Bork" a nominee to the Fed? What discretion should Senators have in voting down a president's nominee for Fed chair? Conti-Brown wants more accountability, participation, and politicization. But I'd be interested in hearing how big a scoop he is looking for.
I was amused when Kai Ryssdal opened "Marketplace" with "Garland, Yellen -- Yellen, Garland . . . We're going with Janet Yellen every single time!" At least when it comes to Ryssdal and his program, the Fed gets more attention than a new Supreme Court nominee. My guess is that Conti-Brown approves!
We're going to put together a few takes on Peter's excellent book on the Fed. He's an invaluable colleague of mine and an already prolific scholar on financial regulation. Stay tuned for some views from us on his book, here's the Wall Street Journal's take, to whet your appetite.
And they are doing well. They - implausibly, by my reading - got a judge not to dismiss claims that Anthony Chiasson's business partner had suffered due process violations, based on the taking of his property, on the fact that their hedge fund was searched based on a misstatement in an affidavit that the business partner knew about the alleged insider trading, and that the supervisors of the lawyers and investigators who brought the claim failed to rein in the unconstitutional conduct of their subordinates. The judge wants discovery.
To me, this order looks bound for a quick reversal, and, as it is a qualified immunity claim that is being rejected, it should be immediately appealable. I'm no expert on searches and seizures. But it would be reasonable to assume that the government, with reason to believe that one of the co-founders of a hedge fund was engaging in insider trading, would search the papers of the hedge fund, including those of the hedge fund's other co-founder, and if the government made a mistake in one of the affidavits supporting the search, that mistake would be immaterial. The defendants in the case are all but absolutely immune prosecutors and law enforcement officials, and the court doesn't even address that issue.
I don't think the interesting thing about the decision is the legal analysis. Instead, it's interesting:
- because Manhattan judges and its US Attorney are in a repeat-player relationship. In this order, one of those judges basically instructed the US Attorney to prepare to be deposed, which is apocalyptically out of the ordinary. It suggests that the judges are really angry about prosecutorial overreaching, or at least that one of them is.
- because this is the sort of relief that judges can uniquely order in business law enforcement. I doubt that the government will ever have to pay Level Global's owners a penny for essentially shutting it down because it thought one of its principals was an insider trader. But courts can force the government to worry about that prospect with intrusive injunctive relief like this, and angered scolding. That's a real remedy, even if the usual remedy - money damages - won't work!
Not to get political, but if you need a refreshing break from the election season, Disney's Zootopia could not have come at a better time. To be honest, most kids' movies these days have a theme of tolerance and acceptance -- our hero may be negatively stereotyped, but (almost always) he has unique gifts and talents. (The Shrek franchise, the Ice Age franchise, Monsters University, Ratatouille, Harry Potter franchise, Wreck-It Ralph, etc.) But Zootopia takes it a few steps further and tells a much more nuanced and complex story of living in a diverse world. Only Disney can make an animated feature about a bunny into a lesson about not only bigotry but tokenism, reverse discrimination, diversity and affirmative action. (Sounds crazy, but it works.)
OK, here goes. At the beginning of the movie, we are told that the mammal world at one time was separated into predators and prey. These categories roughly map on to carnivores and herbivores, though we could quibble. However, mammals evolved and so now have transcended those primitive instincts. Now, mammals can live together in almost harmony in Zootopia (and wear clothing, walk upright and have opposable thumbs.) Zootopia is divided into small contiguous ecosystems (tundra, rain forest, etc.) with a central government. There are only mammals here. I did see a sign for a fish restaurant, so mammal citizens must still eat fish when so inclined. (Pretty much the only other things you see the mammals eat are doughnuts, carrots, cake, popsicles and ice cream.) I guess even Disney couldn't have designed one city for mammals, birds, fish and insects to live in harmony. At the time of most of the action, the mayor of Zootopia (Leodore Lionheart, so yes, a lion) has launched a "mammal inclusion" campaign. Good thing, too, because a bunny named Judy Hopps wants to be a police officer. She gets into the police academy and after a struggle, graduates first in her class, the first bunny to do so (no one says "rabbit," just "bunny."). Her parents on the carrot farm are very anxious for her to go to the big city and fight crime, but Judy is determined. Though she is applauded as the first bunny to be a police officer, she faces more subtle (or not-so-subtle) discrimination on the force. The police chief Chief Bogo (a cape buffalo) basically ignores her and sends her off to be a meter maid.
And here is where the simple "predators rule, prey drool" dichotomy becomes more complex. I can only think this is intended. Buffaloes are more prey than predator, as are elephants, rhinos and hippos. But these megafauna have a lot of power and clout on the force and throughout Zootopia. In one scene, we see an elephant store owner refusing to serve a fox. So some of the stereotyping in Zootopia has to do with predator v. prey, but there are different prejudices as well. Nick Wilde, a fox, has been discriminated in his life and accused of being sneaky. So, he has become a hustler. Prey like rabbit fear predators, particularly foxes, and predators think prey are "cute." (There is a funny scene in which Judy tells a cheetah that bunnies can call each other "cute," but other species can't call them "cute.")
Back to Judy the meter maid. Fourteen citizens, all predators, have gone missing, and the police force seem incapable of finding them. Judy hears Chief Bogo brushing off Mrs. Weaselton's concerns about her missing husband, and Judy intervenes. (Again, Chief Bogo seems to be less concerned about the smaller weasel, and yes, Weaselton is an "easter egg" homage to Frozen.) Bogo gives Judy 48 hours to find Weaselton or she must resign. Because she is unable to get help from within the force, she turns to Nick Wilde to help her figure out the mystery. The ensuing 48 hours uncover a Sherlock Holmes-like plot that will remind adults of modern-day news items of false accusations of bigotry in the name of pushing debate, racial profiling, and more.
Of course, it is a Disney movie, so happiness and inclusion will reign in the end. But Judy sums things up nicely at the end, noting that all animals will make mistakes and that real life is really, really messy. Though the film doesn't have catchy Disney songs or princesses, I consider it one of the great modern Disney movies, like Big Hero 6 or Wreck-It Ralph.
Over at DealBook, I've got a column on international insurance regulation and its discontents. A taste:
The globalization of the rules that govern insurance companies has been extremely quick — too quick for the tastes of many American insurers. They are fighting back by asking for process, process and more process.
I think that the protections sought would be unnecessary, and even counterproductive. But they are classics. The insurers are asking for more notice and comment and more trial-type procedures. Administrative process, and how much of it someone should get, lacks a bit of glamour. But it is something that the government and the financial industry will always fight about.
Go give it a look!
Noted financial institutions professor and friend of the Glom Chris Brummer has been nominated to the CFTC, something that just keeps happening to people in and around this blog. He'd be an excellent commissioner, and we all hope he gets confirmed quickly.