The complicated options for the Fed's Michael Barr

None of them are good

I wrote earlier this week about the Fed’s Vice Chair for Supervision Michael Barr, after reading an outstanding profile of him from American Banker’s Kyle Campbell. Now the Wall Street Journal has called on the President-elect to fire Barr on, you’ll forgive me, some trumped up charges that simply do not pass the smell test.

In this post, I’ll unpack what is useful about the WSJ’s editorial, what is not useful, what is true, and what is false (or at least misleading). I will also explain the options that Barr and the Fed have in front of them.

Spoiler alert: None of them are good.

Keep Powell, Fire Barr

The Journal calls for President-elect Trump to give Barr the boot, even after disclaiming interest in doing the same for Jay Powell. This distinction is important to make: if a new President can fire the Vice Chair for Supervision, what is stopping him from firing the Fed Chair? Those who like to see continuity and independence in monetary policy have a conundrum on their hands. How do you protect one without the other?

I think there is no such option. Not everyone agrees. In this interesting article, constitutional law scholars Aditya Barzai and Aaron Nielsen see substantial limitations on Congress’s ability to insulate the Fed’s leaders from presidential removal, but not for their monetary policy functions.

A distinction between monetary policy and regulation?

As I have written before, I don’t think that distinction works. As a statutory matter, the leadership roles are identically defined: no language in one way or another about whether these leadership positions are removable, except that their terms are delimited by four years. As a practical matter, there is no plausible distinction in these roles between “monetary policy” for which Barzai & Nielsen, the Wall Street Journal, and many others (myself included, to be fair) would prefer insulation from electoral politics and “supervision and regulation,” which is much more political. That is because the tools of monetary policy are split between the Fed’s various committees inelegantly. The Board controls the discount rate and the rate on reserves, the functional mechanism for monetary policy. The FOMC controls the target federal funds rate, which has fallen largely into desuetude. Various mechanisms of monetary policy are accomplished through supervision; and monetary policy has a profound effect on the solvency and liquidity of regulated banks. (If you doubt the last point, I invite you to read up on a regional bank of some repute in the Valley of Silicon, especially 2022Q4 and 2023Q1.)

To get around these restrictions, the Journal says that it has found “cause” for Barr’s removal through “his regulatory failures.” Among these, it cites Barr’s failure in 2022 to supervise duration risk better than it did, to prevent the collapse of the regional banks in 2023. This critique is hard to take seriously. To begin, Barr started the job in July of 2022 for one. Even more, the very theory of more aggressive risk management by supervisors is the one that the Journal is likeliest to reject. I would love to see political appointees like Barr stand by supervisors that push risk management more aggressively. That is not a position that the Journal takes in this very editorial.

Wrong regulator

The editorial gets stranger still by naming the failures of Signature Bank and First Republic Bank, epic failures both, as Barr’s responsibility. “Where was Mr Barr?” the Journal asks. “He never did explain.”

I’ll explain. Neither Signature Bank nor First Republic Bank are regulated or supervised by the Fed. They were not members of the Federal Reserve System nor did they have a holding company that was regulated by the Fed. They are primarily the responsibility of their state banking supervisors; at the federal level, they were the responsibility of the FDIC.

It also blames Barr for a federal injunction sought by the banking industry in favorable fora notorious for its hostility to regulation. That regulation, a major change to the Community Reinvestment Act, was the primary work of the Office of the Comptroller of the Currency, not Michael Barr. Discussions on it preceded Barr’s appointment.

What we have at the end of this pitch is a lot of nothing. Barr is not a Republican. He does not regulate like a Republican. There are profound policy differences between him and the new Administration.

Powell and Barr, fates tied together

For some, that would be enough. In a thoughtful dissent when the DC Circuit took up the question of for-cause removability, then Judge Thomas Griffith—no one’s idea of a partisan zealot—took the view that policy differences were sufficient basis to trigger for-cause removal. But that is not the law and the best the Journal can give is a long bill of particulars of policy differences that it—and the incoming Trump administration—has with Barr.

The key insight here is not that Republicans are eager to give Barr the heave-ho. The key is that we could easily produce the same list of complaints for Jay Powell or indeed any central banker. I think Powell is one of the most successful central bankers in the Fed’s history, but that is not a view shared by all. There are plenty of policy differences one could cite in justifying Powell’s removal. The point is that the fates of Powell and Barr are tied together, by statute and by legal posture.

Barr’s options: Stay the course?

Where do we go from here? I wish I knew. I expect the coming weeks and months will be very rough for Michael Barr. ¹

The Vice Chair for Supervision has unquestionable control over the regulatory and supervisory agenda, but not more than that. To actually accomplish anything, Barr will need three other Governors on board. Powell has made clear that a bare majority is not enough; he wants “broad consensus” for any big changes.

At present, Democratic appointees constitute a 5-2 majority on the Fed’s Board of Governors. Even if we stipulate that, on regulatory matters, Powell is a Republican, they still command a majority. That said, they do not have a broad consensus for big changes. Vice Chair Phillip Jefferson appears much less sympathetic with regulatory changes than the other Democrats. If Barr does not have the Board, he has no power. Staying the course and trying to get more policy done sounds extremely unlikely to me. The Barr era of regulatory change, such as it was, is effectively over.

Return to Ann Arbor?

The outcome Barr’s Republican and banker critics hope he pursues is simple resignation. He could leave the Fed, giving Trump the opportunity to appoint someone to the role—as Fed Governor and Vice Chair for Supervision—much more to their liking. Given the tenor of the conflict he confronts, the prospect of returning to the life of a tenured professor at the University of Michigan must surely beckon.

As a matter of pure policy hygiene, I would favor a financial regulatory structure of mostly clean sweeps. That is, a Republican President should get to call the tune for financial regulation and bank supervision upon election; the same for Democrats. (Indeed, this has been my biggest gripe about Powell to date, the asymmetry between his enthusiasm for the Republican Randy Quarles and the lukewarm at best support for Democrat Michael Barr).

But I hope Barr does not follow this course, at least not completely. The Fed at present is not currently structured to have the VCS turn over upon a presidential election, to my regret. While Democrats have clung to norms of governance that disfavor partisan interests more than Republicans when it comes to the Federal Reserve—recall Trump’s failure to reappoint Janet Yellen in 2018 while Biden reappointed Powell in 2022—the asymmetry in wielding power between the parties will have bad consequences for either party’s ability to govern prospectively. It’s bad game theory, bad politics, and bad policy for one party to follow norms that disfavor political interests while the other party does not.

The Eccles model?

There is another option. Barr could resign the Vice Chair for Supervision, which expires in 2026, while retaining his Governorship, which expires in 2032. That was the course taken by Marriner Eccles, whose most important contributions to Fed governance came after his resignation from Fed leadership between the years 1948 and 1951. Such a move would give Republicans the chance to appoint a sitting Fed Governor to the Vice Chair for Supervision while Barr could continue his work as a regulator, with profound (if more limited) influence on the shape of Fed policy.

Or, at least, he can take the issue to court (or, likelier, respond to an attempt to remove him by taking it to court). In that scenario, we leave to courts more and more enthusiastic about redoing the work of legislators in the institutional design of the administrative state one of the most important and enduring elements of Fed independence, the insulation from removal for its leadership. That insulation has preserved the Fed’s ability to make monetary policy without resorting to simple short-term electoral calculations. If we lose it, we lose something that took many decades to build that we would be unlikely ever to recover.

Like I said at the outset, there are no good options.

1. There is another possibility that could potentially arise. It is possible that Barr’s partisan critics engage in a smear campaign against him, cooking up false accusations that, if true, would clear the “malfeasance” bar for “for-cause” removability. If that occurs, unless there is clear evidence of actual wrongdoing, I would hope Barr would fight back and fight hard. (I would invite my readers to regard any such accusations that do arise with extreme skepticism and to treat those who traffic in them with extreme contempt.) There is a reason that “for cause” removability is a high standard. Unless Barr or any other such official has actually engaged in malfeasance for which there is clear and convincing evidence, the only course for Barr and the Fed—at great personal cost, I should say—is to fight hard and win, with the rest of us cheering him on, whether or not we think he was a good regulator.