Notice & Comment

The Three Waves of Professionalization at the Federal Reserve: the Role of the Lawyers

Most of official Washington is focused on the vacancy at the Supreme Court, but for watchers of financial regulation and central banking a new vacancy is surely more important: Thomas Baxter, the long-time general counsel at the Federal Reserve Bank of New York has announced his retirement. He’s a New York Fed lifer—his retirement comes at the end of 36 years of service. And his was a key post throughout the crisis. Pick up any account of the crisis and Baxter’s name will show up as a decisive decision-maker. He has articulated coherent defenses of governmental action, including in the AIG litigation. While we have had disagreements, say, on the scope of the Fed’s legal authority under the old 13(3), those disagreements don’t obscure the fact I know and respect Baxter very much. Indeed, it’s not inaccurate to say that any scholarly discussion of central banks’ historic lender-of-last resort function will have to go through Tom’s experiences and his descriptions of that authority.

I won’t rehash some of those debates here. Instead, I want to flag what I think is the beginning of a remarkable transformation in what we might call the professionalization of the Federal Reserve. Early in its history, the Fed was the institution that the bankers built. That is, the relevant professional experience was in banking, not in government or in the academy. Economists were around from the beginning, to be sure, but the policy-making space wasn’t dominated by them.

This began to change in the 1950s as economists rose in significance at the Fed’s Board of Governors and at the Reserve Banks, and after the birth of “macroeconomics” drew increasing academic attention to central banking functions. This transformation accelerated after the Volcker revolution in the early 1980s. It’s telling, in fact, even recent history suggests a non-economics orientation to central banking leadership: Paul Volcker and Alan Greenspan, for example, weren’t academic economists. (Alan Greenspan’s PhD came almost thirty years after his Master’s Degree and on the basis of a not very dissertation-like dissertation.)

Today, the Fed is seen as the place in government where the zeitgeist in academic economics carries the day, where ideas among academic economists are overwhelmingly influential. What Baxter’s influence tells us, though, is that we may be at the beginning of the Fed’s third wave of professionalization, where lawyers are no longer just technical adjudants to central bankers, but making central banking policy themselves. This is true not only in the regulatory space, where lawyering has long been an important professional perch. It is true of the central bank’s core functions, from emergency lending, unconventional monetary policy, international coordination, and much else.

If we are in fact in the midst of this kind of professionalization, I’d argue that Tom Baxter and his associates (especially Fed general counsel Scott Alvarez) are among the pioneers. They weren’t the first influential lawyers at the Fed, but they were there as this generation has reinvented what it means to be a central bank at all. And in that redefinition, if law was important, lawyering was even more important.

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