Peter Conti-Brown, my coauthor on a paper-in-the-works on negative interest rate law, has appeared on supplysideliberal.com many times:
- Peter Conti-Brown on Walter Bagehot
- Peter Conti-Brown on Marriner Eccles and the Refounding of the Fed
- On Making the Fed’s Governance Constitutional
- How to Keep a Zero Interest Rate on Reserves from Creating a Zero Lower Bound
- Ulysses, the Sirens and the Punch-Bowl
- Peter Conti-Brown on the Decentralized Fed, Circa 1934
- Peter Conti-Brown on the Complexity of the Idea of “Independence” of a Central Bank
- Peter Conti-Brown on Law
You can see some of the relevance of the legal arguments Peter and I are talking about in my post "Ezra Klein Interviews Ben Bernanke about Miles Kimball’s Proposal to Eliminate the Zero Lower Bound."
I am grateful for Peter's permission to post here his essay on the importance of the Federal Reserve's chief lawyer, which also appeared as an op-ed in the Wall Street Journal on February 15, 2017. Here are Peter's words:
Amid last week’s tumult in President Trump’s Washington came a quiet announcement: Scott Alvarez, the Federal Reserve’s general counsel, is retiring after 36 years at the central bank. This won’t lead the news, but it should. Mr. Alvarez is one of the most important figures in government.
Public discussions of the Fed mostly start and stop with Chair Janet Yellen. Yet the Fed isn’t simply the lengthened shadow of a single person. It is a complex system of people and institutions, and few figures within the central bank command as much authority as Mr. Alvarez. The Fed’s chief lawyer is sometimes referred to as an honorary “eighth governor.”
Experts may blanch at that characterization. The theory is that the Fed’s general counsel should have little influence on policy. Instead he should be a mere technician facilitating the central bank’s work.
Wrong. The Fed’s top lawyer is a policy maker par excellence, whose judgment can direct trillions of dollars and the bank’s extraordinary power. This was true before the financial crisis, as Fed lawyers whittled away the statutory constraints that Congress had placed on financial firms. It was true during the crisis, as Fed lawyers organized the response. And it has been especially true after the crisis, as Fed lawyers designed the new financial regulatory framework. As one regulator put it in 2013, Mr. Alvarez is “a major player in everything. You can’t overstate his role.”
Lawyers were even responsible for the decision to allow Lehman Brothers to collapse, according to former Fed Chairman Ben Bernanke. “We did everything we could think of to avoid it,” Mr. Bernanke wrote in his 2015 memoir. But he said that the law forbade an emergency loan to an institution as far gone as Lehman was. That legal conclusion, however, is far from indisputable—meaning that if Mr. Bernanke’s account is correct, lawyers were driving the policy bus.
How did Mr. Alvarez, who was appointed by the Fed’s Board of Governors, get so much power? First, there is essentially no judicial oversight of the Fed’s monetary-policy making. Courts as far back as 1929 have called the idea of imposing judicial review “almost grotesque” and “an unthinkable burden upon any banking system.” The Dodd-Frank Act extends that protection by making some of the Fed’s most important decisions all but unreviewable by courts. That gives lawyers like Mr. Alvarez the last word, whether the subject is international swaps with foreign central banks, quantitative easing or taking over a failing major bank.
Second, the Fed is dominated by economists ill-equipped to supervise the bank’s lawyers. It may be true, as one former central banker once remarked, that “the Fed’s staff will run technical rings” around any non-economist. But the reverse is true of the Fed’s chief lawyer, who presides over a legal apparatus without significant oversight.
Finally, the Fed’s lawyers are so secretive that there is little outside accountability. Banking lawyers in academia or the private sector cannot check the Fed’s legal work. For example, the Fed has a notorious document called the “Doomsday Book” that is a collection of legal opinions to justify the Fed’s authority if extraordinary measures are required during the next financial crisis. The book’s existence was disclosed in litigation and memoirs, but we have no idea what it says, because the Fed has prevented its release. Is the central bank’s interpretation of its congressionally granted authority justified? Does it conform to a common understanding among lawyers? We don’t know.
As Mr. Alvarez exits the job, this combination of expansive power and minimal accountability should make his office ripe for reform. There are benefits from insulating the Fed’s policy making from daily partisan pressures. But insulation can be thick or thin, and the Fed lawyer’s needs trimming.
The most obvious approach would be to convert the general counsel into a political appointment. The top lawyers at the Defense Department and the Central Intelligence Agency—Mr. Alvarez’s counterparts—are nominated by the president and confirmed by the Senate. Putting the Fed’s chief lawyer through the same process would provide democratic accountability and give the public a chance to evaluate the candidate’s expertise, values and worldview.
Critics may object that this would “politicize” the Fed, but the Fed already is political. The question is: Politicized by whom? To adapt Churchill, subjecting the Fed’s top lawyer to the judgment of democracy may be a terrible idea. But whose judgment is better? The model has succeeded with the Pentagon and CIA.
Mr. Alvarez has been an admirable public servant. He could have left for Wall Street to earn many multiples of his public salary, yet he has stuck with the Fed and gained a reputation for integrity and expertise. That is not, however, an argument for the Fed’s general counsel to remain one of the most powerful and opaque positions in government.