More thoughts on bankers, lawyers, and lobbyists at the Federal Reserve

Reader mail is all over the map on this post. This post responds to questions and critiques.

Last week, I wrote about Governor Michelle Bowman’s decision to hire three representatives of the banking industry to the staff of the Division of Supervision & Regulation at the Fed.

The post generated a higher-than-usual amount of reader mail, most of it with quibbles, corrections, and concerns. I loved it all — keep that engagement coming. Here I respond to these questions and critiques, which I will characterize in my own words to preserve anonymity (but readers will recognize as their own, I am sure).

It is not fair to lump Aleksandra Wells of Goldman Sachs with the Bank Policy Institute; Wells wasn’t a lobbyist.

As I said in the original post, I don’t know Wells or Covas and don’t impugn their expertise or integrity. My point is that the logic of lobbying is narrow and rooted in an epistemology of power. I think that logic and epistemology is inappropriate for the Fed.

Are Wells and Goldman’s Government Affairs office part of that tradition? Here, I will admit ignorance and guardedly accept the criticism. I know people who work inside banks and other financial institutions within the regulation and government affairs groups that are among the most sophisticated and thoughtful analysts of risk, regulation, and public policy. Not having more direct experience with Goldman means I should have stayed stronger in my own radical uncertainty and admitted that I don’t have enough to go on here. My priors would suggest that Goldman’s Government Affairs office is more like BPI — whose work everyone in my world knows intimately well because BPI will not allow us to be neutral on them — but that is a hunch. Let me hereby open up a distinction, then, between hiring lobbyists from BPI versus bankers from Goldman.

You were too easy on Randy Guynn.

There is no distinction between the way lobbyists think about risk and the way bank lawyers do, my reader argued: They are all part of the same corruption and do not belong inside the Fed.

The key difference I see between lobbyists and lawyers is the difference between the rule of power and the rule of law. Lobbyists rule by power. This is not an allegation of corruption (here I differ from my interlocutor). Democracy works through power. What lobbyists do is seek to exert the maximum levers of power to accomplish their goals for their clients.

Lawyers are part of a profession that requires us, at our best, to serve justice first and clients second. That means the epistemology is the rule of law, not the rule of power. I trust good lawyers to recognize strong and weak arguments in a way that I would never trust lobbyists. The lobbyists’ arguments are simply those that serve a predetermined end. Lawyers are more constrained; the constraint here is the rule of law.

Some would view this take as unduly Panglossian, that we live in a world where the rule of law no longer exists, that it is power all the way down. That’s a great way to wind up in the Reign of Terror in my view, the sacrifice of law at the altar of power. Perhaps I am more Montesquieu than Voltaire (or better, Robespierre), but I’ll die on this hill. The American experiment in law-constrained democracy is not dead. Lawyers especially have a duty to preserve it.

What I will be watching — and commenting on — is whether the Fed’s S&R division under soon-to-be Vice Chair Bowman simply turns into BPI on Constitution Avenue. If it does, I will admit that my prediction here will be off. I don’t think it will. I think it will be the Republican version of good banking regulation, something we should expect to see in a democracy following a Republican electoral sweep.

You have your history wrong.

Fed Governors did not have dedicated staffers after the 1990s, my reader wrote. This only occurred during the Yellen Era (beginning in 2014).

I should have an errata section for the blog, because my characterization of the history here is impartial and requires correction (thanks to this reader and the research it inspired).

There was an episode in the mid-1990s that emerged in congressional testimony, which is how I learned of it. (Here is some reporting in the Washington Post from 1996.) The problem was Chair domination of the staff and the staff insistence that they need not answer to the Governors in their work. A Fed insider at the time told me that after this Governors could draw on a kind of secondment from the general staff pool as part of a compromise that emerged from these disputes, but I have now checked with two others who were active at the time—this wasn’t so. The compromise that emerged was just greater general staff interaction with Fed Governors.

This appears to have changed in 2014 when Chair Yellen—one of the original complaining Governors in the 1990s—permitted dedicated staffers. Today it is customary for Governors to have dedicated staff, one each in monetary policy and regulatory policy, to assist.

I regret the error and am grateful for the correction.

As I mentioned last week, I think the idea of Governor-specific staff is very good. I think if Governors are to govern the System, including to provide oversight of the Fed Chair as is their statutory duty, the current staffing structure even since 2014 is inadequate. I would like to see Governors staffed and compensated on par with the Federal Reserve Bank presidents. This would permit them to stay their course for longer periods, provide more independent judgment in Board and FOMC deliberations, and permit more democratic accountability where it matters on these critical issues.

It would be messier, to be sure. Fed Chairs strongly prefer a more unified board. But that unanimity comes at a cost.

This corrected history also means that Bowman’s decisions are a more radical departure from the past than I suspected (even though I called the hires “remarkable” and characterized them as “buck[ing] a trend” historically.

What these hires mean is that we are not only out of the world where Governors draw on staff resources. That world was gone at least by 2014 (where I thought it had ended in 1996). We are also out of the world where Governors are rooted in a single consistent tradition of staffing.

I welcome the change at a general level. But I also strongly urge the Fed Chair to permit each Governor to do the same. Those Governors appointed by Democrats and Republicans should be well prepared to understand the policies they are enacting. Some will be technical, where technical expertise is crucial. Some will be political, where political expertise is the key. Governors ill-advised on either dimension will not be able to perform their roles adequately.

These hires are a prelude to something bigger: replacing the staff director of the Division of Supervision & Regulation with someone more attuned to politics/industry than Fed staff.

Another reader writes me to say that the biggest concern about these changes is not what they mean in the moment, which was my focus for last week’s post (and most of this post). It is what it might portend. Will the next Fed Chair appoint one of these three from industry as the next Director of the Division of Supervision & Regulation, one of the so-called “barons” of the Federal Reserve System?

I don’t know. My reader is the first to bring this question to my attention. I would strongly oppose that move. The next Division Director should be someone with significant experience from inside the Fed. I would view anyone coming from industry — or politics, or academia, or activism — as disqualified.

Some context here. The Board is organized into divisions. There are, apparently, fifteen: (I think: I will confess that I only learned about some of them today!) Their primary responsibilities differ by subject matter, but what division directors have in common is that they organize the Fed’s staff resources on behalf of the Board of Governors to accomplish the Board’s statutory responsibilities.

I have written before that I think some of these division directors wield enormous power over value-laden decisions that require more oversight than they have had before. One of my first op-eds, for example, was to propose that the Fed’s general counsel be a Senate-confirmed role, similar to the General Counsel at the CIA.

I have evolved on this question. I don’t think I agree with 2017 Conti-Brown anymore.

My main concern is what we might call the independence of the staff. We want staff resources to be rooted in some kind of knowledge apparatus that differs from those of the politically accountable (and thus politically inflected) Governors. We want the staff to give inputs into the Governors decision making that will differ from what they are receiving from the political coalitions that support them.

There is a tension between the two impulses I describe in this post. On the one hand, I want the Governors to staff up to reinforce their political bases. On the other, I want the Division Directors to be insulated from those precise political bases.

The resolution here is to recognize that the hundreds of experts at the Fed perform a vital role that is reinforced by their careers at the Fed. It is that view that can give the Fed a medium-term lens on which it can assess the world. The political expertise, as vital as it is, should not become the only expertise, any more than the technocratic expertise become the primary mechanism for value-laden decisions.

I have seen nothing that suggests that Governor Bowman or any other member of the Board of Governors is planning to upset this tradition at the Division of Supervision & Regulation. If this change is afoot, watch this space. I will be barking like a junkyard dog.

Bottom line: thanks for reading. I love hearing from you and will continue to correct, expand, amplify, or push back in response.