In the debate just concluded with friend and co-blogger Daniel Hemel, I mentioned that the constitutional issues around Fed governance—and there are serious questions, Daniel and I both agree—can obscure the policy issue around Fed governance. The Constitution provides here a minimum, not a maximum. As I mention in my book, the constitutional remedies do more than nothing, but they would largely leave in place a tangled Fed governance structure that feeds conspiracy theories and obscures public accountability without giving clear, countervailing benefits for these large costs.
Part of the argument against reforming the Fed’s governance is that there just hasn’t been much enthusiasm for these questions. Many conservatives more likely to be suspicious of creative governance structures in the administrative state have doubled down on their enthusiasm for the Federal Reserve Banks, and liberals have usually been interested in other areas of Fed reform. Given, too, the Reserve Banks’ exceptional political clout via the very mechanism of private directors that I regard as so problematic, I concluded in the book that these kinds of legislative reforms were very unlikely to see the light of day.
Consider me somewhat surprised, then, that Secretary Hillary Clinton , former New York Fed senior official Peter Fisher, and even the august pages of The Economist have come to view the participation of private bankers as creating a governance problem. I like the way The Economist put it , that the Fed’s current governance structure, among other defects, “comes perilously close to letting bankers serve as their own regulators—not so much a revolving door between Wall Street and government, as a shared executive suite.”
The Economist and these others conclude that it’s time for a reform, and I agree. But one of the strongest counter-arguments I’ve heard is that even if I’m right about the Fed’s flawed governance, there’s no guarantee that I will like whatever result comes out the other end of the sausage-and-legislation-making process. Don’t let the perfect be the enemy of the good, the thinking goes. That’s a strong argument, and one that has kept me more comfortably in my academic corner of the sandbox rather than beating a political drum. But The Economist’s counter to the counter-argument is worth considering:
Some fear that any reform attempts would provide an opening for all those other barmy ideas. That is not an idle worry. But private-sector involvement in the Fed arms the critics and conspiracy theorists. It reinforces the corrosive notion that self-serving elites write economic policy. In the long run, reform would protect the Fed from undesirable meddling.
The Economist is likely right—there is great harm in the status quo, not least in the way it encourages political interference by feeding the conspiracy theorists. And legislation is always going to be messy. Whether now is the time to launch this refounding of the Fed on a more stable—and constitutionally defensible—basis is a separate question, perhaps. But it’s a debate worth having.