The partisan and institutional politics of Michael Barr

The left has attacked Barr for his "baseless capitulation". What he did instead is promote a vision of Fed leadership that is precious, easy to lose, and important to defend.

The Democrats’ Lament

The left-wing banking lobbyist Better Markets issued a statement yesterday on Michael Barr’s decision to demote himself. It is worth reading in full, as it captures some legitimate critiques of this singular moment in Fed history. Here are the key sentences.

The Vice Chair said today in his shocking resignation that a ‘dispute’ over his position as Vice Chair for Supervision ‘could be a distraction from our mission,’ but his baseless capitulation to deregulation zealots will in fact destroy that mission quicker and more thoroughly than any dispute over the position. Facilitating that – while destroying the independence of the Vice Chair position and gutting a key post-2008 crash reform – is an abdication of responsibility proved by the Fed’s simultaneous statement that it ‘does not intend to take up any major rulemakings until a vice chair for supervision successor is confirmed.’ The entire mission and mandate of the Vice Chair for Supervision will now likely be a dead letter as a deregulator will undoubtedly be installed in that position.

I think the Democrats have a lot to justify their bitterness at what happened in bank regulation during the Biden Administration. The Republican efforts during 2017-2021, under the leadership of the first Vice Chair for Supervision Randal Quarles, were wide-ranging, ideologically coherent, supported by their united coalition, and managed by someone with significant subject-matter expertise and remarkable institutional political talents.

When the Democrats’ turn came, they received no such result. I do not know which of the factors above, or other factors altogether, that mattered.

What is indisputable is as the dust settles on the Biden era for the Federal Reserve, there is almost nothing we can see that compares to even the least of the Republican accomplishments.

From the spirit of that moment, Barr’s resignation does indeed look like a capitulation. I think Democrats should do their best to think through what stymied them so completely where the Republicans had succeeded so spectacularly. Their experiences in bank regulation were very different from, say, what they did at the FTC and CFPB. I regard understanding those cleavages as the most important political story in financial regulation of the last few years.

But blaming Barr’s decision yesterday misunderstands the legal and political climate, in my view. Or, perhaps better—and to channel my inner philosophy spirit animal, Ludwig Wittgenstein—they are playing a different language game than I am, and a different one than I think is optimal for the unique circumstances of the Federal Reserve and its political economy.

Should the Fed be more like the SEC?

The world as Better Markets sees it depends on two related ideas. First, that banking policy is a zero-sum political bar fight that Democrats lose through norms and institutions of consensus and bipartisanship. And second, that the Fed is not different from other political institutions. We should stop treating it differently because that different treatment is itself a political act that rewards some constituencies and punishes others. It should, in a word, be more like the SEC.

From the perspective of 2023-24 and the failed Barr-led effort to finalize Basel III capital rules, it is difficult to dispute the view that I here attribute to Better Markets. The political bar fight that the banking industry launched against the Fed was unprecedented in its scope and success. The Republican effort in 2017-2021 faced no such political countermovement.

The decision to concede that fight I thought then and still think now was an error. I regret it. I wish the Fed had stayed its course and called the fight. Basel III would today be wrapped up in litigation, no doubt, but the standard that the Fed follows elections and Democrats and Republicans take their cues from the electorate would not have been compromised.

Yesterday’s announcement is not in the same vein. The defining difference is that the electorate spoke clearly in 2024. The Republicans received their mandate. The idea that Democratic leadership would continue to lead this part of the executive branch while Republicans led the rest is simply untenable.

The strength of Barr’s legal case

More than untenable, it was likely to be found unconstitutional. I am less optimistic than Barr purports to be about his chances in court, even though I think he should win any legal fight. I just don’t think he would have won it. But, as Barr also concluded, even winning would have been a loss. Litigation would have destroyed the Fed’s credibility more than just about anything I can imagine, more even than the inflation of 2022-2024. The Fed, through Barr, would have been in the posture of literally fighting the President of the United States in the federal courts. The nuances of legal and constitutional arguments, which are indeed quite nuanced, would have been completely lost. The Fed’s ability to focus elsewhere would have been lost too.

That would be the consequence if Barr won. While I think his case is a strong one, I don’t think they will be compelling to a majority of current Supreme Court justices, whose recent decisions along similar lines all point in a single direction: toward presidential control over the administrative state.

The loss of that litigation would have been the end of formal Fed independence from the President, full stop. Fed leadership would have been decided at every presidential election and at any point during a presidential administration when the Fed did something that the politicians did not like. The ability to play a long game of any kind would be lost. Despite some legalistic arguments to disentangle monetary from regulatory leadership roles, the reality of the modern Fed is that there is no meaningful distinction between these duties. They are mutually constituted.

That result may well be what some partisans would have preferred. Better Markets and its fellow travelers might be tired of the intonations that the Fed independence and see it as a loss to partisan goals. Their vision may be to change the mode of governance from that of the Fed and toward places like the SEC, where partisanship is the epistemology of governance.

If Barr had fought to keep his leadership, win or lose in the courts, the end result would have been to drive the Fed much, much closer to an SEC model.

The consequences of Michael Barr

And that is what Barr helped to avoid. His demotion permits President-elect Trump and the Republicans to set a partisan agenda for a field of policy that is itself highly political. And it leaves in place the status quo for the Fed’s other leaders. Its chair and vice chair are each Biden appointees. They will not be reappointed. They will also not be demoted.

That’s not all that Barr accomplished with his announcement yesterday. By staying in place, he does two things. First, as I mentioned yesterday, he limits the President-elect’s appointment optionality to two credible candidates and forecloses the appointment of anyone who is ideologically even less suited to the role. And second—perhaps more important to the partisans who will view yesterday as a “dark day,” to quote Better Markets again—Barr is playing a long game that will benefit the institutionalization of Democratic voices at the Fed for supervision and regulation.

This last point is important. A new Vice Chair Bowman or Waller will immediately encounter four Democratic votes for any regulatory prerogative. The wholesale deregulatory agenda that Better Markets fears can only occur with the permission of four Governors’ votes. Resignations or vote flipping will have to occur before we see the wholesale regulatory change that we saw in 2017.

Following good precedent

There are two antecedents that are helpful here, both Republicans. First, in 1948, Marriner Eccles’s term as Fed Chair expired. When Harry Truman became President in 1945, Eccles offered his resignation as Fed Chair on the view that the new President should be able to choose his own people for these leadership roles. Truman rejected the offer, but did not renew his term again in 1948. (He actually offered him a formal demotion to Vice Chair of the Fed; Eccles, calling Truman’s bluff, accepted the offer but Truman did not follow through.)

Eccles accepted the demotion but did not resign until almost three years later. During those subsequent three years, Eccles did more to establish norms of central bank independence than he had done in his previous 13 years as Fed Chair. The Eccles legacy as a central banker was cemented during those final years when he served as a Governor, not the Chair.

The other example is more recent. Former Republican FDIC Chair Jelena McWilliams resigned in December 2021, nearly a year into the Biden Administration, following a public skirmish with the majority of the FDIC Board. At the time, I was rather appalled that two of the Democrats tried to place FDIC policy though the CFPB, which seemed completely inappropriate. But McWilliams’s decision to resign was both substantively correct and extremely important. If anything, it was one year overdue.

Barr’s institutional political success

Barr has now placed a marker that future financial regulators will have to either honor or answer. There can be no Republican holdover after a Democratic victory. The Barr precedent stands for the view that elections will have consequences and newly-elected Presidents should get to choose their own people for these political positions.

I do not take the view that the Fed’s principals should avoid politics, always and forever. I am currently writing a history of the Fed that showcases the incredible ways that they do indeed wield political power to important ends.

I do take the view that policymaking so completely inflected by partisan politics as regulation and supervision should be accountable to elections. Given that we have just completed an election, Barr’s demotion strikes me as affirming that principle.

For that, I stand by my praise for Barr. He did something very difficult here. We will all be the beneficiaries of it.