Originally published July 7, 2016
I just finished Peter Conti-Brown's excellent new book on the Fed. Brown looks at the Fed from the perspective of a political scientist and legal scholar, not an economist, and this produced a lot of interesting and fresh insights.
Is the Fed unconstitutional? Probably not, but Conti-Brown says that one aspect of the Fed is unconstitutional. The problem is the regional bank presidents. These very important policymakers are not appointed by the President. Nor do they report to any presidential appointee, as required by the Constitution. This is especially troubling in the case of the very powerful New York Fed President.
I've often argued in favor of splitting off the banking regulation part of the Fed from the monetary policy committee. Each field requires great expertise, and we often end up with people doing important public policy, who are not experts in their field. I've been especially concerned about the FOMC, which contains people who are not experts on monetary policy. Conti-Brown emphasizes the opposite problem, banking regulators whose actual expertise is in monetary policy.
In one amusing anecdote, Laurence Meyer is nominated for a position on the Board, and Joe Stiglitz calls to tell him that, "he didn't want to pressure me on any issues on behalf of the Clinton administration, but he did want me to know that the administration was strongly in favor of CRA". Up to this point in time, Meyer had never even heard of the CRA. Conti-Brown reports that, "Immediately after hanging up, Stiglitz sent Meyer a sixty-five-page history of the Community Reinvestment Act for Meyer's educational benefit." Then Conti-Brown provides this quote from a book Meyer wrote in 2004 (which I'm guessing he now wishes he'd never written):
. . . not much more than a year later, I was named head of the Board's oversight committee on consumer and community affairs. I became the member of the Board to testify before Congress on issues related to the CRA. I went around the country and supported work that community groups in banks were doing in providing affordable housing for low and moderate income groups. In other words, I was CRA all the way. I guess I am a fast learner.
Even before reading Conti-Brown's book I had a rather negative view of the Fed's structure. Now I think it's even worse than I imagined.
Conti-Brown also points out that President Obama paid little attention to the Fed, and left many Board seats open, often without even providing a nomination. As a result, the regional Presidents had more power than otherwise (in theory the Board holds a 7 to 5 majority on the FOMC). Monetary policy was often being set by an FOMC dominated by the regional presidents, whose power is of doubtful constitutionality.
Here's another quote that I liked:
Second, while most other general councils at administrative agencies are not presidential appointments, the Fed's chief lawyer makes judgments of extraordinary importance that are unlikely ever to be reviewed by a court. Courts have made clear for eighty years that they will not review the Fed's decisions about important monetary policy, including when those decisions require novel interpretations of the law. And in the crisis, the Fed made emergency decisions that have been effectively removed from judicial review, despite potential violations of state corporate law and even the Constitution. While courts do review many of the Fed's regulatory determinations, in places where value judgments are of the most consequence, the Fed's lawyer is the first and last word on what the law allows for bids.
Avoiding judicial review may be a feature, not a bug. The idea of protracted litigation tying up emergency lending or monetary policy changes is not a good one. But that only shifts the need to be more transparent with respect to the appointments of those lawyers who will fulfill this monitoring role. For this reason, the Fed's chief lawyer should be a presidential appointment . . .
Never again will I wonder if the Fed has the power to set up tiny little prediction markets. The Fed can do pretty much whatever it wants (within reason) as long as it doesn't attract a lot of negative attention in Congress.
I highly recommend this book for readers interested in the Federal Reserve System. Conti-Brown is an assistant professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania.