I join my fellow colleagues in praising Peter Conti-Brown’s The Power and Independence of the Federal Reserve. The book provides an insightful history of the Federal Reserve since its 1913 inception and is a powerful account of the extent to which “personnel is policy.” In particular, I note his nuanced understanding of “agency independence” as far more than the notions of legal “independence” found in Supreme Court cases from Humphrey’s Executor to Free Enterprise.

As Conti-Brown underscores, we need an “explanatory context where Fed insiders and interested outsiders form relationships using law and other tools to implement a wide variety of specific policies.” (6) While this functionalist understanding of “independence” has long been found in the political science literature, it has only recently been “imported” into the legal literature on “independent regulatory agencies.” One can only hope that we will shortly see more case studies of “independent” agencies from Peter Conti-Brown’s nuanced perspective.

As I am slotted late in this series I will not review already trodden ground and limit myself to four comments.

1. Conti-Brown proposes that the President appoint and the Senate advise and consent to the General Counsel of the Fed (252-3) He faults the General Counsel of the Fed, Scott Alvarez, for the Fed decision to use section 13(3) of the then Federal Reserve Act to bailout Bear Stearns and AIG but not to bail out Lehman Brothers. Conti-Brown tells us (96) that Geithner and Bernanke later testified that their lawyer’s interpretation of the “infamous” section 13(3) required them to allow Lehman to fail (95-96). “Don’t blame me,” they told Congress, “– my lawyers made me do it.”

I am not certain, however, that Conti-Brown fully appreciates the role of a General Counsel of a government agency. He sees the lawyer in senior levels of government as either a technical adjunct to the Secretary or an unconstrained policy maker. These choices, I fear, are caricatures of the GC’s job.

I don’t know enough about the section 13(3) or the Federal Reserve Act to make a judgment about its proper interpretation, but from my experience, the General Counsel’s interpretation of an Act depends in some part on the policy desires of the Secretary he works for. While there is a limit as to how far you can interpret a statute, in most cases there is some elasticity in a statute and a range of interpretation that may be acceptable. And the GC ought to reflect his principal’s policy goals to the extent possible.

We should note that the General Counsel of the NLRB is an “advice and consent” presidential appointment because Congress in the Taft Hartley Act did not trust the judgments of the Labor Board as to which cases to bring and what policies to advocate. So it should be no surprise that there were occasions when the General Counsel of the Labor Board held different policy preferences than the Board leading to different choices on which cases to bring before the Board and how to contour those cases. (The NLRB almost invariably uses adjudication to make policy.)

Do we really want the policy agenda of the Fed Chair to be similarly constrained? I think not.

2. I am pleased that Conti-Brown supported the audit of the Fed’s emergency lending activities that were required in the Dodd-Frank Act. However, he also suggests that “a permanent public audit of the Feds monetary policy adds little to [Congress’] toolkit” (263), I would disagree.

Even if it is the case that transparency in “real time” may roil financial markets (the usual Fed objection to transparency), there is little reason why the Fed should hoard information after the fact. And there is good evidence that they will do so unless forced. Indeed, when Bloomberg News and Fox News sought details about loans made to provide banks at the “Discount Window” during 2008, the Fed refused a FOIA request until the courts ordered them to provide that information.

As Conti-Brown points out, the Fed is in a sense self-funded (in fact they send their yearly surplus to the Treasury) and not subject to the constraints of the yearly appropriation process. And this is as it should be given that yearly visits to the Congressional trough would likely increase short term political pressures on the Fed. But if we skip Congressional input on the front end, surely we should not diminish it at the back end. Without knowledge of what the Fed has done (through the audit process), the Congressional oversight function will be severely impeded. It may well be that Ron (and Rand) Paul’s battle cry to “audit the Fed” is no more than political theater. But as Justice Brandeis has well put it, “sunlight” is the best disinfectant. If we want political accountability we should not be afraid of Fed audits.

3. I would have wished that Conti-Brown had spent more time discussing the relationship between the Fed and the Treasury Department.

As Conti-Brown notes the original Federal Reserve statute included the Treasury Secretary and the Comptroller of the Currency as ex officio members with the Treasury Secretary as Board chairman. The 1935 Banking Act removed the Secretary from the Board, but hardly removed the Secretary’s influence. As Conti-Brown makes clear, Mortimer Eccles, the next Fed Chair, was a full throated member of the New Deal team and hardly required sheet music to sing the Treasury’s desired notes.

In World War II, Eccles went all in for the War effort explicitly stating that the Fed “merely executes Treasury decisions.” And indeed the Fed followed Treasury Department guidance when it came to monetary policy and interest rates. The Treasury-Fed Accord of 1951 presumably changed all that.

Conti-Brown underscores how the personalities of the Fed Chairs after the Accord promoted the “independence” paradigm (even Arthur Burns who tried privately to “program” his inner-Nixon, publically trumpeted his “independence”). Yet the recent fiscal crisis leaves unclear the actual extent of Fed autonomy. It is clear that both the Fed and the Treasury “shared regulatory space” during the 2008 financial crisis but it is difficult to ascertain who led and who followed. Andrew Sorkin’s description of the crisis meetings over the AIG bailout, in his book “Too Big To Fail”, suggests as much. The Financial Stability Oversight Counsel (FSOC) included the Fed, the SEC, and other agency heads with the Treasury Secretary as Chair. Despite its many members, Eugene Ludwig has argued that the FSOC was “a creature of the Treasury.” The relationship of the Treasury and the Fed requires further investigation and will tell us a good deal about notions of Fed “independence.”

4. Conti-Brown’s discussion of the ideologies of the communities that impact on the Fed is very important (218). He uses the term “social learning” (borrowed from Peter Hall) which Hall defines as a process embedded in society but “[n]owhere is the importance of such learning and alteration of perspective more clearly demonstrated than in the economic doctrines prevalent in any given period.” “The ideology,” Conti-Brown suggests, “that animates many of the commercial bankers, traders, hedge fund managers, and other market participants is the same one at the New York Fed (226).”

It is unfortunate that Conti-Brown did not extend his excursus on “social learning” to a discussion of the aftermath of the recent financial crisis. Many believe that it was the “social learning” of the Fed and Treasury heads that prevented them from taking stronger action to require that institutions getting federal “bailout” funds not hoard those funds to improve their balance sheets but lend them out to spur business activity. Or to effectively take on the challenge of “too big to fail.” Or to restrict the award of outsize bonuses to business executives whose banks used TARP funds. Or (together with Justice) seek to have senior Wall Street executives charged with criminal violations.

A future historian may well conclude with hindsight that the growth of the “tea party” on the right and the Bernie Sanders 2016 candidacy on the left may have drawn strength from the view that the shared “social learning” of Wall Street, the Board of Governors and the Treasury led the financial regulators to fail to draw the necessary conclusions from the fiscal crisis of 2008. That is the larger question I hope Peter Conti-Brown will address in future work.

 

Marshall J. Breger is a professor of law at the Columbus School of Law, The Catholic University of America.

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This post is part of an online symposium reviewing Peter Conti-Brown’s new book The Power and Independence of the Federal Reserve. You can read the entire series, as well as other posts on the Federal Reserve, here.