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The Power and Independence of the Federal Reserve
An in-depth look at the history, leadership, and structure of the Federal Reserve Bank
The independence of the Federal Reserve is considered a cornerstone of its identity, crucial for keeping monetary policy decisions free of electoral politics. But do we really understand what is meant by "Federal Reserve independence"? Using scores of examples from the Fed's rich history, The Power and Independence of the Federal Reserve shows that much common wisdom about the nation's central bank is inaccurate. Legal scholar and financial historian Peter Conti-Brown provides an in-depth look at the Fed's place in government, its internal governance structure, and its relationships to such individuals and groups as the president, Congress, economists, and bankers.
Exploring how the Fed regulates the global economy and handles its own internal politics, and how the law does―and does not―define the Fed's power, Conti-Brown captures and clarifies the central bank's defining complexities. He examines the foundations of the Federal Reserve Act of 1913, which established a system of central banks, and the ways that subsequent generations have redefined the organization. Challenging the notion that the Fed Chair controls the organization as an all-powerful technocrat, he explains how institutions and individuals―within and outside of government―shape Fed policy. Conti-Brown demonstrates that the evolving mission of the Fed―including systemic risk regulation, wider bank supervision, and as a guardian against inflation and deflation―requires a reevaluation of the very way the nation's central bank is structured.
Investigating how the Fed influences and is influenced by ideologies, personalities, law, and history, The Power and Independence of the Federal Reserve offers a clear picture of this uniquely important institution.
The independence of the Federal Reserve is considered a cornerstone of its identity, crucial for keeping monetary policy decisions free of electoral politics. But do we really understand what is meant by "Federal Reserve independence"? Using scores of examples from the Fed's rich history, The Power and Independence of the Federal Reserve shows that much common wisdom about the nation's central bank is inaccurate. Legal scholar and financial historian Peter Conti-Brown provides an in-depth look at the Fed's place in government, its internal governance structure, and its relationships to such individuals and groups as the president, Congress, economists, and bankers.
Exploring how the Fed regulates the global economy and handles its own internal politics, and how the law does―and does not―define the Fed's power, Conti-Brown captures and clarifies the central bank's defining complexities. He examines the foundations of the Federal Reserve Act of 1913, which established a system of central banks, and the ways that subsequent generations have redefined the organization. Challenging the notion that the Fed Chair controls the organization as an all-powerful technocrat, he explains how institutions and individuals―within and outside of government―shape Fed policy. Conti-Brown demonstrates that the evolving mission of the Fed―including systemic risk regulation, wider bank supervision, and as a guardian against inflation and deflation―requires a reevaluation of the very way the nation's central bank is structured.
Investigating how the Fed influences and is influenced by ideologies, personalities, law, and history, The Power and Independence of the Federal Reserve offers a clear picture of this uniquely important institution.
368 pages, Hardcover
First published January 26, 2016
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Displaying 1 - 12 of 12 reviews
September 1, 2021
The Power and Independence of the Federal Reserve, Peter Conti-Brown, 2016, 347pp, ISBN 9780691164007. Library-of-Congress HG.2563.C596.2016 College Library. Dewey 332.110973
A glimpse behind the curtain of an institution of power, secrecy, and proximity to private bankers in New York. pp. 203, 256, 262.
"If the people will keep their money in the banks everything will be all right." --J. Pierpont Morgan, 1907. p. 17.
"Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represented?" --Woodrow Wilson, 1913. p. 21.
"Hard work means more production, but thrift and economy mean less consumption. Now reconcile those forces, will you?" --Marriner S. Eccles, 1932. p. 26.
"The airline safety board shouldn't be in charge of protecting the financial viability of the airlines." --Larry Summers, 2010. p. 243.
"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has a one-in-five chance of putting the family out on the street." --Elizabeth Warren, 2007. p. 243. https://democracyjournal.org/magazine...
Interest rates climbed above 22% in 1981 and came permanently below 10% only in 1984, causing a recession, millions of jobs lost, businesses closed, ending inflation. p. 55. The author considers this way of ending inflation a "success" of Paul Volcker. p. 137. Volcker reduced the money supply, as Milton Friedman wanted. p. 234.
The Fed has bailed out "too-big-to-fail" banks since 1984. p. 57.
"Since I've become a central banker, I've learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said." --Alan Greenspan, 1987. pp. 61-62.
Alan Greenspan was a devotee of Ayn Rand. p. 63. "By the time I joined Nixon's campaign in 1968, I had long since decided to advance free-market capitalism as an insider." p. 64.
The benefits of risk taking in the market were for the participants; the costs were for the public. p. 67.
Paul Krugman was excluded for 10 years from the Fed's annual conference because of his criticisms of Alan Greenspan. p. 92.
The banks that join the Federal Reserve System must buy stock in the Reserve Banks, and receive a dividend set by statute at 6%. p. 104.
Obama failed to appoint three of the seven Fed governors--leaving private bankers' representatives with a five-to-four majority on the Open Market Committee. And he didn't appoint a vice chair for bank supervision. pp. 116-117, 247-251, 256. Biden is doing it too: https://www.brookings.edu/opinions/wh...
Reserve Bank presidents make federal policy without conforming to the constitutional requirements of presidential appointment and Senate confirmation. pp. 117-118, 255-256.
Federal courts refuse to hear challenges to the constitutionality of the Fed, "out of respect for Congress." p. 119. Courts refuse to review even those Fed decisions based on "novel interpretations of law." p. 253. Bankers' political power has thwarted congressional attempts to reduce their authority. pp. 123-125.
Economics exams' questions don't change, but the answers do. p. 129.
To raise the interest rate banks charge each other for overnight loans, the Fed sells short-term government debt, at the market price. To lower interest rates, the Fed buys short-term government debt, at the market price: pp. 131-134. By affecting the availability of money, the Fed changes the price of money. This interest rate is called the "federal funds rate." You'd think these are mostly money-losing transactions that add to the public debt. However, the Fed says it earned a net $88 billion in 2020 in interest on debt it held, most of which it transferred to the U.S. Treasury. p. 207 & https://www.federalreserve.gov/public... Table G.9. Senator Rand Paul in 2015 claimed, nonsensically, that the Fed was nearly bankrupt. p. 263.
The Fed creates from nothing the money it loans. p. 207.
The U.S. dollar has been a fiat currency since 1973. p. 210. Although the Constitution gives Congress power over money creation, few members found the details interesting enough to learn about the process. p. 215.
The Fed lends directly to banks at an interest rate called the "discount rate." p. 134. The Fed loaned $1.6 trillion in 2008. https://www.federalreserve.gov/public...
The Fed sets banks' "reserve requirements:" how much cash the bank must keep on hand: as of 2012, the largest banks had to keep 10% of "assets" in cash (smaller banks less). pp. 134-135. It's to meet these requirements that banks borrow money from each other over night. https://www.federalreserve.gov/public...
As of 2020, the reserve requirements are zero: https://www.federalreserve.gov/public... (Table G.3)
In January 2009 we were in a recession, yet the Fed had lowered the interest on short-term debt so near to zero that there was no reason to lend; no reason not to borrow--yet it didn't help. Still, 20-year and 30-year debt was getting about 3% interest. The Fed bought that debt too, to reduce long-term interest rates: in March 2009, it held nearly $2 trillion of it: still recession. The Fed bought mortgage-backed securities. By October 2014 it held nearly $5 trillion of debt (up from 0.8 trillion in 2008, still 4.6 trillion as of the writing of this book in 2016). This was called, "quantitative easing." pp. 140-145. The Fed had promised it would continue its free-money policy until inflation rose or unemployment came down. This promise was called, "forward guidance." pp. 143, 235.
[The book says not a word about it, but, though consumer savings-account interest went to and stayed at essentially zero, credit-card interest rates stayed up at usurious rates. Rents stayed high. Market-dominating corporations sat on and still sit on semi-infinite piles of cash, with no need to part with any of it; small businesses close, unable to compete with the gorilla. When the housing bubble burst, financial institutions that claimed to own mortgages, called the sheriff to put borrowers out of their homes, then tried in vain to sell those houses at much lower prices at lower interest rates. The original borrowers were never offered to refinance at the now-market price and the now-market interest rate. The jobs that eventually came back were worse jobs, at lower pay. https://www.federalreserve.gov/public... Funny how flooding big banks with public money didn't fix any of that. What banker would've proposed limiting mortgage debt to the now-current market value of the house, at the now-current interest rate? (That's all the bank can hope to recover after foreclosing.) Or, requiring a financial institution to prove it owns the mortgage, before foreclosing? What banker would propose a remedy other than giving banks money?]
A bank's "assets" include the loans it is owed by homeowners; its "liabilities" include the deposits that savers can demand at any time. p. 152.
The Fed and the Bush & Obama administrations picked winners and losers in the financial markets, in and after 2008. p. 157.
By 1932, 25% of all U.S. banks had failed. p. 160.
The Fed is supposed to examine banks and ensure their compliance with laws and regulations. In fact, a Fed bank-supervisor who doesn't act as the private bank's lap dog, is fired. pp. 164-170. The Fed failed to police the risky mortgage-backed-securities trading that led to the 2008 crisis. p. 228.
New York Fed president William Dudley was a managing director at Goldman Sachs for more than 20 years. p. 228. "The line between paying attention and taking direction is hard to draw." pp. 230, 256.
Clinton cut government spending at Greenspan's instructions. pp. 195-197.
The Fed releases transcripts of its meetings--/five years later/! p. 205. It gives /minutes/, with limited information, 3 weeks after the meetings. p. 231.
The market can stay irrational longer than you can stay solvent. p. 221. A banker lends an umbrella when it's sunny, and demands it back at sight of rain. p. 223. In 1998, hedge fund Long Term Capital Management made bad bets, threatening to collapse the financial system. New York Fed president William McDonough persuaded banks and brokers to lend LTCM money. pp. 220-224.
The total value of all the contracts in the global derivatives market in June 2007 was $516 trillion. Global GDP that year was about $50 trillion. Contracts were scrawled on scraps of paper by traders talking over the phone. What could go wrong? Then-New-York-Fed-president Timothy Geithner rounded the major traders up and persuaded them to upgrade to electronic trading. pp. 224-225. The 2008 crisis would've otherwise been worse. p. 229.
If the Taylor Rule is the best policy, don't amend the Federal Reserve Act; appoint John Taylor to the Open Market Committee. p. 265. (John B. Taylor, /Getting off Track/, 2009. https://www.goodreads.com/book/show/6... )
A glimpse behind the curtain of an institution of power, secrecy, and proximity to private bankers in New York. pp. 203, 256, 262.
"If the people will keep their money in the banks everything will be all right." --J. Pierpont Morgan, 1907. p. 17.
"Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represented?" --Woodrow Wilson, 1913. p. 21.
"Hard work means more production, but thrift and economy mean less consumption. Now reconcile those forces, will you?" --Marriner S. Eccles, 1932. p. 26.
"The airline safety board shouldn't be in charge of protecting the financial viability of the airlines." --Larry Summers, 2010. p. 243.
"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has a one-in-five chance of putting the family out on the street." --Elizabeth Warren, 2007. p. 243. https://democracyjournal.org/magazine...
Interest rates climbed above 22% in 1981 and came permanently below 10% only in 1984, causing a recession, millions of jobs lost, businesses closed, ending inflation. p. 55. The author considers this way of ending inflation a "success" of Paul Volcker. p. 137. Volcker reduced the money supply, as Milton Friedman wanted. p. 234.
The Fed has bailed out "too-big-to-fail" banks since 1984. p. 57.
"Since I've become a central banker, I've learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said." --Alan Greenspan, 1987. pp. 61-62.
Alan Greenspan was a devotee of Ayn Rand. p. 63. "By the time I joined Nixon's campaign in 1968, I had long since decided to advance free-market capitalism as an insider." p. 64.
The benefits of risk taking in the market were for the participants; the costs were for the public. p. 67.
Paul Krugman was excluded for 10 years from the Fed's annual conference because of his criticisms of Alan Greenspan. p. 92.
The banks that join the Federal Reserve System must buy stock in the Reserve Banks, and receive a dividend set by statute at 6%. p. 104.
Obama failed to appoint three of the seven Fed governors--leaving private bankers' representatives with a five-to-four majority on the Open Market Committee. And he didn't appoint a vice chair for bank supervision. pp. 116-117, 247-251, 256. Biden is doing it too: https://www.brookings.edu/opinions/wh...
Reserve Bank presidents make federal policy without conforming to the constitutional requirements of presidential appointment and Senate confirmation. pp. 117-118, 255-256.
Federal courts refuse to hear challenges to the constitutionality of the Fed, "out of respect for Congress." p. 119. Courts refuse to review even those Fed decisions based on "novel interpretations of law." p. 253. Bankers' political power has thwarted congressional attempts to reduce their authority. pp. 123-125.
Economics exams' questions don't change, but the answers do. p. 129.
To raise the interest rate banks charge each other for overnight loans, the Fed sells short-term government debt, at the market price. To lower interest rates, the Fed buys short-term government debt, at the market price: pp. 131-134. By affecting the availability of money, the Fed changes the price of money. This interest rate is called the "federal funds rate." You'd think these are mostly money-losing transactions that add to the public debt. However, the Fed says it earned a net $88 billion in 2020 in interest on debt it held, most of which it transferred to the U.S. Treasury. p. 207 & https://www.federalreserve.gov/public... Table G.9. Senator Rand Paul in 2015 claimed, nonsensically, that the Fed was nearly bankrupt. p. 263.
The Fed creates from nothing the money it loans. p. 207.
The U.S. dollar has been a fiat currency since 1973. p. 210. Although the Constitution gives Congress power over money creation, few members found the details interesting enough to learn about the process. p. 215.
The Fed lends directly to banks at an interest rate called the "discount rate." p. 134. The Fed loaned $1.6 trillion in 2008. https://www.federalreserve.gov/public...
The Fed sets banks' "reserve requirements:" how much cash the bank must keep on hand: as of 2012, the largest banks had to keep 10% of "assets" in cash (smaller banks less). pp. 134-135. It's to meet these requirements that banks borrow money from each other over night. https://www.federalreserve.gov/public...
As of 2020, the reserve requirements are zero: https://www.federalreserve.gov/public... (Table G.3)
In January 2009 we were in a recession, yet the Fed had lowered the interest on short-term debt so near to zero that there was no reason to lend; no reason not to borrow--yet it didn't help. Still, 20-year and 30-year debt was getting about 3% interest. The Fed bought that debt too, to reduce long-term interest rates: in March 2009, it held nearly $2 trillion of it: still recession. The Fed bought mortgage-backed securities. By October 2014 it held nearly $5 trillion of debt (up from 0.8 trillion in 2008, still 4.6 trillion as of the writing of this book in 2016). This was called, "quantitative easing." pp. 140-145. The Fed had promised it would continue its free-money policy until inflation rose or unemployment came down. This promise was called, "forward guidance." pp. 143, 235.
[The book says not a word about it, but, though consumer savings-account interest went to and stayed at essentially zero, credit-card interest rates stayed up at usurious rates. Rents stayed high. Market-dominating corporations sat on and still sit on semi-infinite piles of cash, with no need to part with any of it; small businesses close, unable to compete with the gorilla. When the housing bubble burst, financial institutions that claimed to own mortgages, called the sheriff to put borrowers out of their homes, then tried in vain to sell those houses at much lower prices at lower interest rates. The original borrowers were never offered to refinance at the now-market price and the now-market interest rate. The jobs that eventually came back were worse jobs, at lower pay. https://www.federalreserve.gov/public... Funny how flooding big banks with public money didn't fix any of that. What banker would've proposed limiting mortgage debt to the now-current market value of the house, at the now-current interest rate? (That's all the bank can hope to recover after foreclosing.) Or, requiring a financial institution to prove it owns the mortgage, before foreclosing? What banker would propose a remedy other than giving banks money?]
A bank's "assets" include the loans it is owed by homeowners; its "liabilities" include the deposits that savers can demand at any time. p. 152.
The Fed and the Bush & Obama administrations picked winners and losers in the financial markets, in and after 2008. p. 157.
By 1932, 25% of all U.S. banks had failed. p. 160.
The Fed is supposed to examine banks and ensure their compliance with laws and regulations. In fact, a Fed bank-supervisor who doesn't act as the private bank's lap dog, is fired. pp. 164-170. The Fed failed to police the risky mortgage-backed-securities trading that led to the 2008 crisis. p. 228.
New York Fed president William Dudley was a managing director at Goldman Sachs for more than 20 years. p. 228. "The line between paying attention and taking direction is hard to draw." pp. 230, 256.
Clinton cut government spending at Greenspan's instructions. pp. 195-197.
The Fed releases transcripts of its meetings--/five years later/! p. 205. It gives /minutes/, with limited information, 3 weeks after the meetings. p. 231.
The market can stay irrational longer than you can stay solvent. p. 221. A banker lends an umbrella when it's sunny, and demands it back at sight of rain. p. 223. In 1998, hedge fund Long Term Capital Management made bad bets, threatening to collapse the financial system. New York Fed president William McDonough persuaded banks and brokers to lend LTCM money. pp. 220-224.
The total value of all the contracts in the global derivatives market in June 2007 was $516 trillion. Global GDP that year was about $50 trillion. Contracts were scrawled on scraps of paper by traders talking over the phone. What could go wrong? Then-New-York-Fed-president Timothy Geithner rounded the major traders up and persuaded them to upgrade to electronic trading. pp. 224-225. The 2008 crisis would've otherwise been worse. p. 229.
If the Taylor Rule is the best policy, don't amend the Federal Reserve Act; appoint John Taylor to the Open Market Committee. p. 265. (John B. Taylor, /Getting off Track/, 2009. https://www.goodreads.com/book/show/6... )
January 28, 2020
A pretty interesting book with plenty of research that's hard to come by. The thesis is that existing models of the Federal Reserve falls short because reality is more complex. For example, the classic theory of Fed independence is that short term politics will favor inflation to stimulate growth, so an independent entity (though historically the president and Congress have been able to influence the Fed through yelling or "promotions" out) is required to pump the brakes. But that model ignores inflation hawks in popular politics as well as the other roles of the Fed.
Another major theme of the book is how much institutional practice including the ideology of the Fed Chairmans, governors and others fills out and in some cases really almost overrides the written law (whether that's a good thing or bad, it's an interesting study into the nuances but almost more importantly limits of administrative law). For example, I was surprised to learn that the independence of the Fed from the Treasury is not formally declared in statute but has its roots in a relatively bland "accord"/ press release in the 1950s. In theory governors are independent of the president because they have 14 year terms, and chairs are dependent because they have 4 year terms. But in reality, the governors never serve their entire term, and often yield the remainder of their term to the chair, allowing a chair to theoretically serve almost three decades. Or how in theory the 7 board of governors overrides the 5 fed presidents (New York, plus four rotating seats) in the FOMC, but in reality due to governor vacancies, sometimes the presidents have the majority. The independence of the Fed is as much established by personality as by statute or law. The Fed's ability to finance itself through monetary operations is an accident, mostly because the world went off the gold standard (removing a limit on money supply) and the Fed stopped limiting its activities to discounting bills of exchange for direct commercial transactions.
Another interesting theme of the book is the problem of the federal reserve banks (the "private" part of the private-public mix). Originally, the Fed was meant to be a concentrated private bank. As a result of compromise (and Democratic election victories) the Fed was first born as a part decentralized private part, and part centralized public control. Eventually this too was scrapped for centralized public control, but the 12 reserve banks remained a residual part (partially because the reserve banks often have boards compromised of powerful local luminaries, which makes abolishing them very politically difficult). This is problematic because at least 5 of the federal reserve president (appointed by the board, which is in turn elected 2/3 by the member banks [1/3 banker board members, 1/3 non-banker board members], 1/3 by non-bankers) vote in FOMC, which determines monetary policy. Some have proposed that the federal reserve presidents bring an anti-inflation bias, though the author is skeptical. This is problematic because this likely violates the appointment clause (which does not allow private appointment of either principal or inferior officers). Even worse, the current structure likely violates Free Enterprise, since the board of governors can only remove federal reserve presidents by threatening to remove the federal reserve boards.
The book also does a good job summarizing various economic ideas necessary to understand the Fed. In particular that Volcker fought inflation by targeting the money supply instead of interest rates but also inadvertently pioneered too big to fail , that Greenspan was willing to loosen money to provide soft landings (the Greenspan put). It provides the now textbook narrative of how the Fed cooperated with the Treasury in 2008 to help merge failing investment banks and the New York Fed through influence only wound down LTCM. It explains pretty well, QE, and the Fed's expansion into longer term securities to twist down longer term interest rates.
The book also criticizes the Fed. In particular, the author is worried about the in-transparency of some of the decision making and possible regulatory capture by the banks (the Fed's role as a regulator was received little praise). The book worries about groupthink amongst the in-transparent staffers, and the lack of democratic accountability for functions (such as regulation and supervision) unrelated to inflation fighting. The book strongly advocates for limiting the role of the private sector as represented by the Federal reserve presidents (though I think he is wrong that they are not anti-inflation, it's natural to assume that banks as creditors generally are anti-inflation).
Parts of the book drag, and the author definitely has his politics (center-left) so the narratives regarding economics and concerns are well-worn (but that doesn't necessarily mean they're incorrect). I feel like some of the chapters could have really been cut out without losing substance. In particular about the role of personalities and ideology in running the Fed as well as the power of staffers and various constituencies like Congress. Those seem fairly obvious. The people are the policy. On the other hand, the book brings so much other information to the table, information that isn't readily available that I feel like this is a very worthwhile read.
Another major theme of the book is how much institutional practice including the ideology of the Fed Chairmans, governors and others fills out and in some cases really almost overrides the written law (whether that's a good thing or bad, it's an interesting study into the nuances but almost more importantly limits of administrative law). For example, I was surprised to learn that the independence of the Fed from the Treasury is not formally declared in statute but has its roots in a relatively bland "accord"/ press release in the 1950s. In theory governors are independent of the president because they have 14 year terms, and chairs are dependent because they have 4 year terms. But in reality, the governors never serve their entire term, and often yield the remainder of their term to the chair, allowing a chair to theoretically serve almost three decades. Or how in theory the 7 board of governors overrides the 5 fed presidents (New York, plus four rotating seats) in the FOMC, but in reality due to governor vacancies, sometimes the presidents have the majority. The independence of the Fed is as much established by personality as by statute or law. The Fed's ability to finance itself through monetary operations is an accident, mostly because the world went off the gold standard (removing a limit on money supply) and the Fed stopped limiting its activities to discounting bills of exchange for direct commercial transactions.
Another interesting theme of the book is the problem of the federal reserve banks (the "private" part of the private-public mix). Originally, the Fed was meant to be a concentrated private bank. As a result of compromise (and Democratic election victories) the Fed was first born as a part decentralized private part, and part centralized public control. Eventually this too was scrapped for centralized public control, but the 12 reserve banks remained a residual part (partially because the reserve banks often have boards compromised of powerful local luminaries, which makes abolishing them very politically difficult). This is problematic because at least 5 of the federal reserve president (appointed by the board, which is in turn elected 2/3 by the member banks [1/3 banker board members, 1/3 non-banker board members], 1/3 by non-bankers) vote in FOMC, which determines monetary policy. Some have proposed that the federal reserve presidents bring an anti-inflation bias, though the author is skeptical. This is problematic because this likely violates the appointment clause (which does not allow private appointment of either principal or inferior officers). Even worse, the current structure likely violates Free Enterprise, since the board of governors can only remove federal reserve presidents by threatening to remove the federal reserve boards.
The book also does a good job summarizing various economic ideas necessary to understand the Fed. In particular that Volcker fought inflation by targeting the money supply instead of interest rates but also inadvertently pioneered too big to fail , that Greenspan was willing to loosen money to provide soft landings (the Greenspan put). It provides the now textbook narrative of how the Fed cooperated with the Treasury in 2008 to help merge failing investment banks and the New York Fed through influence only wound down LTCM. It explains pretty well, QE, and the Fed's expansion into longer term securities to twist down longer term interest rates.
The book also criticizes the Fed. In particular, the author is worried about the in-transparency of some of the decision making and possible regulatory capture by the banks (the Fed's role as a regulator was received little praise). The book worries about groupthink amongst the in-transparent staffers, and the lack of democratic accountability for functions (such as regulation and supervision) unrelated to inflation fighting. The book strongly advocates for limiting the role of the private sector as represented by the Federal reserve presidents (though I think he is wrong that they are not anti-inflation, it's natural to assume that banks as creditors generally are anti-inflation).
Parts of the book drag, and the author definitely has his politics (center-left) so the narratives regarding economics and concerns are well-worn (but that doesn't necessarily mean they're incorrect). I feel like some of the chapters could have really been cut out without losing substance. In particular about the role of personalities and ideology in running the Fed as well as the power of staffers and various constituencies like Congress. Those seem fairly obvious. The people are the policy. On the other hand, the book brings so much other information to the table, information that isn't readily available that I feel like this is a very worthwhile read.
January 24, 2016
A wonderful and engaging introduction to the history and significance of the mysterious cabal of bankers, economists, and bureaucrats who ostensibly operate the levers of power in our capitalist society through a surprising array of mechanisms. Entering the book, I had no substantial knowledge of the Fed beyond the idea that the Fed adjusts interest rates to encourage or slow growth, as necessary. I now feel reasonably oriented to the strikingly diverse functions of this paradigm-defining central bank and its striking opacity to outsiders in a modern democracy.
[NB: I have a competing interest; the author is my brother]
[NB: I have a competing interest; the author is my brother]
May 8, 2023
A very insightful look into the Federal Reserve. As someone who has worked in Finance, I was always a little bit ashamed of myself for being confused about the Fed's organizational structure: there were so many different committees and governing bodies that I thought I was missing something. Conti-Brown does a deep dive into the Fed's origins, and makes me feel a little better by walking through the historical events that led to the Fed's current form, which he admits is unnecessarily complicated. He also concludes the book with my favorite chapter, which had several recommendations to reform the Fed.
Overall, it is as easy of a read as it could be, given the complexity of the subject matter. Conti-Brown avoids the length trap many authors make: he fits everything into the book while keeping it at an approachable 270 pages, though it could easily have been expanded to be 400+ pages. The writing is mostly conversational, and full of some very fun words like "bailiwick" and "anathema".
Overall, it is as easy of a read as it could be, given the complexity of the subject matter. Conti-Brown avoids the length trap many authors make: he fits everything into the book while keeping it at an approachable 270 pages, though it could easily have been expanded to be 400+ pages. The writing is mostly conversational, and full of some very fun words like "bailiwick" and "anathema".
January 2, 2024
This is a good, solid, clear-eyed description of the Federal Reserve, how it functions, what it does, and how it could be improved. There’s a lot of mystery and drama out there about the Fed. I chose this book because it seemed like it would provide a dispassionate, rational picture of what the Fed is and does for someone basically clueless about the whole concept of central banking. Bingo! It does just that!
March 15, 2017
Good look at the Fed from a legalistic perspective.
April 12, 2021
Thorough - but a historical, technical account.
Read
May 28, 2021good reading during the market debacle that followed the onset of covid
July 20, 2016
Conti-Brown sets out to explain the nature of the Fed's independence. He does a very nice job, drawing on his expertise in the subject and approaching it from a legal perspective. A few highlights:
Conti-Brown focuses on the "three foundings" of the Fed, highlighting the notion that the present institution cannot be explained by the Federal Reserve Act of 1913. The other foundings he notes are the Banking Act of 1935 (which largely created the modern FOMC) and the Fed-Treasury Accord of 1951 (which resulting in William M. Martin taking over as Fed Chairman).
Conti-Brown has a funny take on monetary policy independence, basically arguing that the rationale behind monetary independence (which he claims is the inflationary bias of politicians) breaks down during times of deflation when politicians are calling for monetary tightening. Whatever the origins of the theory behind central bank independence, there's really no case to be made that it's less important during times of deflation. This is a very odd argument by Conti-Brown. He also makes the odd argument that the zero lower bound on interest rates also negates the argument for independence. It's silly. He also makes a very odd argument about the Fed's lender of last resort responsibilities. He argues that these should not be independent from politics because they are so important, and he praises Bagehot's dictum, but he ignores the fact that much of the political class is likely to oppose LOLR activities for populist reasons, while an independent central bank is the most likely organization to possess the expertise relevant to the tasks. You can't both endorse Bagehot and insist that the LOLR responsibility fall under politician control.
Conti-Brown notes that a central assumption behind central bank independence is that the Fed is staffed by technocrats, but he suggests that this view is wrong since the Fed seems tightly linked to the finance community, international central bankers, and academic economists. My question for Conti-Brown would be: what is your definition of technocrat? Finance practitioners, central bankers, and people with PhDs in economics and finance are exactly the type of people I'd call technocrats when the tasks are monetary policy and banking regulation. Where does Conti-Brown think technocrats come from? Who else would have the relevant expertise?
Some of the most interesting parts of the book occur when Conti-Brown explains the aspects of Fed power that have no legal basis. For example, the Fed's budgetary autonomy is gray area at best, and nowhere is there any legal support for the Fed's practice of returning excess profits to Treasury each year. He also persuasively argues that the key unconstitutional aspect of the Fed is that the regional bank presidents are not meaningfully accountable to either the President of the US or the Board.
Conti-Brown makes three main suggestions for Fed reform. First, term setup of Board members should be reformed so that vacancies are more likely to be filled. Second, the heads of the main divisions at the Board should be subject to POTUS appointments; in his argument for this, he totally ignores the fact that such appointments could easily be left empty for years at a time due to POTUS vs Congress gridlock (as has been the case with many Governor appointments, as Conti-Brown complains about), a major problem given the crucial role of division directors in day-to-day Board operations. Third, regional Bank presidents should be subject to appointment and removal by POTUS and Congress. This last point may make sense, but he packages the proposal with other changes that would essentially destroy the regional representativeness aspects of the current System.
Overall this is a very useful book. Recommended for those with relevant interests.
Conti-Brown focuses on the "three foundings" of the Fed, highlighting the notion that the present institution cannot be explained by the Federal Reserve Act of 1913. The other foundings he notes are the Banking Act of 1935 (which largely created the modern FOMC) and the Fed-Treasury Accord of 1951 (which resulting in William M. Martin taking over as Fed Chairman).
Conti-Brown has a funny take on monetary policy independence, basically arguing that the rationale behind monetary independence (which he claims is the inflationary bias of politicians) breaks down during times of deflation when politicians are calling for monetary tightening. Whatever the origins of the theory behind central bank independence, there's really no case to be made that it's less important during times of deflation. This is a very odd argument by Conti-Brown. He also makes the odd argument that the zero lower bound on interest rates also negates the argument for independence. It's silly. He also makes a very odd argument about the Fed's lender of last resort responsibilities. He argues that these should not be independent from politics because they are so important, and he praises Bagehot's dictum, but he ignores the fact that much of the political class is likely to oppose LOLR activities for populist reasons, while an independent central bank is the most likely organization to possess the expertise relevant to the tasks. You can't both endorse Bagehot and insist that the LOLR responsibility fall under politician control.
Conti-Brown notes that a central assumption behind central bank independence is that the Fed is staffed by technocrats, but he suggests that this view is wrong since the Fed seems tightly linked to the finance community, international central bankers, and academic economists. My question for Conti-Brown would be: what is your definition of technocrat? Finance practitioners, central bankers, and people with PhDs in economics and finance are exactly the type of people I'd call technocrats when the tasks are monetary policy and banking regulation. Where does Conti-Brown think technocrats come from? Who else would have the relevant expertise?
Some of the most interesting parts of the book occur when Conti-Brown explains the aspects of Fed power that have no legal basis. For example, the Fed's budgetary autonomy is gray area at best, and nowhere is there any legal support for the Fed's practice of returning excess profits to Treasury each year. He also persuasively argues that the key unconstitutional aspect of the Fed is that the regional bank presidents are not meaningfully accountable to either the President of the US or the Board.
Conti-Brown makes three main suggestions for Fed reform. First, term setup of Board members should be reformed so that vacancies are more likely to be filled. Second, the heads of the main divisions at the Board should be subject to POTUS appointments; in his argument for this, he totally ignores the fact that such appointments could easily be left empty for years at a time due to POTUS vs Congress gridlock (as has been the case with many Governor appointments, as Conti-Brown complains about), a major problem given the crucial role of division directors in day-to-day Board operations. Third, regional Bank presidents should be subject to appointment and removal by POTUS and Congress. This last point may make sense, but he packages the proposal with other changes that would essentially destroy the regional representativeness aspects of the current System.
Overall this is a very useful book. Recommended for those with relevant interests.
April 13, 2016
Peter Conti-Brown has written a most enlightening book. He bares the myriad of influences and pressures on the Federal Reserve. While some seek to exert influence for the public good, many are promoting selfish interests. Their efforts cause innocent people in the US and worldwide to lose their savings, their livelihoods, their homes and their futures. Young people find their careers forever harmed and their prospects diminished.
With the understandable prudence of a professor who aspires for tenure, the author avoids overtly laying blame and leaves the reader to conclude the obvious. From Nixon’s pressure on the hapless Arthur Burns which resulted in stagflation to more recent Congressional attempts to stifle the fragile economic recovery, the author dispassionately chronicles and organizes efforts to control monetary policy and curtail bank regulation.
Republicans are indeed the most egregious culprits. They are keenly aware that an economic collapse can destroy an incumbent president and ensure his party’s defeat in upcoming elections. Congress has the means to trigger such a collapse and cause great financial harm to ordinary Americans.
After inflicting the Great Recession on the world with their dogma of fiscal austerity, less domestic government spending, military adventurism and shifting the tax burden to low income citizens, the Republicans reacted angrily as the Federal Reserve’s monetary easing engineered a recovery from the worst economic collapse since the Great Depression. They marshalled prominent economists to warn stridently that hyperinflation would surely erupt as quantitative easing drove down long term interest rates. Not only did inflation fail to materialize but the economy remains under constant threat of deflation. They railed against low short term interest rates. They refused to confirm or even consider appointments to the Federal Reserve Board of Governors, thereby enhancing the influence of bank appointed regional bank governors who are often not as technically qualified in macroeconomics and more susceptible to political influence.
The author debunks the foolish “Audit the Fed” legislation proposed by Senator Rand Paul whose inane utterances expose that he barely understood his own proposal. The other Republican idea of having monetary policy be determined by an equation in the form of the Taylor Rule also exposed an incredible lack of understanding. They had hoped the equation would justify higher short term rates and trigger another recession before the presidential election. Instead, for a large part of 2015, the Taylor Rule would have prescribed drastic monetary easing in the form of a negative Federal Funds target rate.
With the understandable prudence of a professor who aspires for tenure, the author avoids overtly laying blame and leaves the reader to conclude the obvious. From Nixon’s pressure on the hapless Arthur Burns which resulted in stagflation to more recent Congressional attempts to stifle the fragile economic recovery, the author dispassionately chronicles and organizes efforts to control monetary policy and curtail bank regulation.
Republicans are indeed the most egregious culprits. They are keenly aware that an economic collapse can destroy an incumbent president and ensure his party’s defeat in upcoming elections. Congress has the means to trigger such a collapse and cause great financial harm to ordinary Americans.
After inflicting the Great Recession on the world with their dogma of fiscal austerity, less domestic government spending, military adventurism and shifting the tax burden to low income citizens, the Republicans reacted angrily as the Federal Reserve’s monetary easing engineered a recovery from the worst economic collapse since the Great Depression. They marshalled prominent economists to warn stridently that hyperinflation would surely erupt as quantitative easing drove down long term interest rates. Not only did inflation fail to materialize but the economy remains under constant threat of deflation. They railed against low short term interest rates. They refused to confirm or even consider appointments to the Federal Reserve Board of Governors, thereby enhancing the influence of bank appointed regional bank governors who are often not as technically qualified in macroeconomics and more susceptible to political influence.
The author debunks the foolish “Audit the Fed” legislation proposed by Senator Rand Paul whose inane utterances expose that he barely understood his own proposal. The other Republican idea of having monetary policy be determined by an equation in the form of the Taylor Rule also exposed an incredible lack of understanding. They had hoped the equation would justify higher short term rates and trigger another recession before the presidential election. Instead, for a large part of 2015, the Taylor Rule would have prescribed drastic monetary easing in the form of a negative Federal Funds target rate.
December 24, 2016
Interesting but a little too much history that wasn't super compelling to me. Well written and I liked learning about the evolution of the institution and growth of its power. Particularly interesting in light of how the job of the Fed has changed so much and how the group that was supposed to slow the party down when things got too good became the ones who had to lead the bailout and cheap money when things got bad. Also interesting that the most recent Fed chairs were all nominated by Presidents different than who they are most associated with (Volcker nom Carter ass Reagan, Greenspan nom Reagan ass Clinton, Bernanke nom Bush ass Obama)
August 26, 2016
An incredible book that explains the inner workings of the federal reserve in a fun and easy to read manner. I've never read anyone with a better understanding of how the federal reserve operates and who has presented it in such an easy to follow way. The author mixed in plenty of political and business history and stories to add another layer of enjoyment to this excellent book.
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