WEBVTT - The Growing Risk to Fed Independence That Wall St Isn't Watching 0:00:02.480 --> 0:00:15.840 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.040 --> 0:00:21.280 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.400 --> 0:00:22.840 I'm Tracy Alloway. 0:00:22.520 --> 0:00:23.720 And I'm Jill Wysenthal. 0:00:23.960 --> 0:00:26.200 Joe, it's been a big week for us. We were 0:00:26.320 --> 0:00:30.000 cited in an SEC filing for the interview he did 0:00:30.080 --> 0:00:32.360 with Brad Jacobs. I think it's the first time I've 0:00:32.360 --> 0:00:34.840 ever seen a full podcast transcript. 0:00:34.880 --> 0:00:37.280 It's nice because we used to write transcripts and I 0:00:37.640 --> 0:00:39.199 was getting to be so much work. And then it 0:00:39.320 --> 0:00:42.199 turned out so we recently were interviewed Brad Jacobs. His 0:00:42.280 --> 0:00:44.840 team did a full transcript and submitted it to the SEC. 0:00:45.000 --> 0:00:45.879 Yeah, it was very nice of. 0:00:45.800 --> 0:00:47.840 This doing our work for us. And then the other 0:00:47.880 --> 0:00:50.920 thing that happened is we were also cited in a lawsuit. 0:00:51.200 --> 0:00:52.080 All in one week. 0:00:52.240 --> 0:00:54.480 All in one week, that's right. You know, we've done 0:00:54.480 --> 0:00:57.600 some episodes. We were down in DC recently and we 0:00:57.640 --> 0:01:01.279 had the opportunity to interview the new chair of the 0:01:01.320 --> 0:01:05.240 FTC under President Trump, and a section of that interview 0:01:05.360 --> 0:01:08.440 actually got included in a news lawsuit. Actually, you could 0:01:08.480 --> 0:01:09.120 take a listen to it. 0:01:09.200 --> 0:01:12.720 There's also I think some benefits in certain circumstances to 0:01:12.760 --> 0:01:17.360 having multi member agencies with people from both parties. I mean, look, 0:01:17.400 --> 0:01:21.040 if you have an agency that is exceeding the law, 0:01:21.400 --> 0:01:25.240 abusing the companies that are proporced to regulate, it's helpful 0:01:25.360 --> 0:01:29.720 for markets, for courts, for litigants, for government transparency to 0:01:29.800 --> 0:01:32.360 have people in the other party pointing this out and 0:01:32.440 --> 0:01:34.520 saying it in dessense, like you know, I wrote four hundred 0:01:34.560 --> 0:01:37.440 plus pages of descents during my time as a minority commissioner. 0:01:37.640 --> 0:01:39.040 I think that that adds value. 0:01:39.600 --> 0:01:43.000 Right, So we spoke to Andrew Ferguson. He was talking 0:01:43.000 --> 0:01:46.920 about how much he loves having minority commissioners, and then 0:01:46.959 --> 0:01:49.920 the very next day there was news that Trump had 0:01:49.960 --> 0:01:55.240 fired the two Democratic commissioners, Alvarro Bedoya and Rebecca Kelly Slaughter. 0:01:55.480 --> 0:01:58.800 And so they have since filed this lawsuit in which 0:01:58.840 --> 0:02:02.960 we're cited, are arguing that they were illegally fired. Commissioners 0:02:02.960 --> 0:02:06.200 are supposed to be fired based on an actual reason. 0:02:06.280 --> 0:02:08.480 You have to have cause, and I don't think there 0:02:08.560 --> 0:02:13.000 was any really sighted in this. And the interesting thing 0:02:13.040 --> 0:02:15.840 here is, I know it seems like a very niche topic. 0:02:16.200 --> 0:02:19.560 Why are we discussing this FTC lawsuit other than the 0:02:19.600 --> 0:02:22.120 fact that we're mentioned in it, but it could have 0:02:22.240 --> 0:02:23.679 really broad implications. 0:02:23.760 --> 0:02:25.840 Yeah, no, this is the key thing, right, and so 0:02:25.880 --> 0:02:28.760 it's not just FTC. There have been some other instances 0:02:28.880 --> 0:02:33.600 already in this administration of President Trump removing people who 0:02:33.639 --> 0:02:37.040 are sort of part of various entities that exist within 0:02:37.080 --> 0:02:41.960 the federal government, which at least formally in recent administrations, 0:02:42.120 --> 0:02:45.679 have had some notion of independence. And there's this popular 0:02:45.760 --> 0:02:48.240 sort of conservative legal theory that all of these are 0:02:48.320 --> 0:02:53.399 kind of illegitimate, that there are three branches of government judicial, legislative, 0:02:53.480 --> 0:02:56.200 and executive. There's not really room for these other things 0:02:56.200 --> 0:02:58.840 that are literally outside the executive. And so what we've 0:02:58.880 --> 0:03:03.120 seen is this sort of assertion through these removals, firings 0:03:03.560 --> 0:03:07.240 of the FTC commissioners, plus others of this idea like, no, 0:03:07.560 --> 0:03:10.000 these entities are all under the president. Some of the 0:03:10.040 --> 0:03:11.399 implications could be pretty big. 0:03:11.520 --> 0:03:15.280 Right, Well, there is the Federal Reserve as an independent agency, 0:03:15.360 --> 0:03:19.000 and we know there is this populist feeling, let's put 0:03:19.080 --> 0:03:22.400 it that way against the Federal Reserve. You know, people 0:03:22.480 --> 0:03:25.840 think about it as this sort of ivory tower filled 0:03:25.880 --> 0:03:30.880 with unelected technocrats. Speaking of unelected technocrats, did you see 0:03:31.240 --> 0:03:34.280 Elon Musk's speech in Wisconsin over the weekend. 0:03:34.600 --> 0:03:35.560 I missed that he was. 0:03:35.480 --> 0:03:37.760 Talking about the FED. Someone asked him, do you plan 0:03:37.880 --> 0:03:40.160 to do something with the Fed? And he basically said, yeah, 0:03:40.200 --> 0:03:43.080 and the Fed and then said in a competition between 0:03:43.080 --> 0:03:47.080 a magic eight ball and the central Bank for interest rates, 0:03:47.080 --> 0:03:49.119 I don't know exactly what that means, but he said 0:03:49.120 --> 0:03:50.480 the magic eight ball would win. 0:03:51.000 --> 0:03:53.800 Well, look, I would just say this that premise of 0:03:54.160 --> 0:03:58.040 central bank independence is probably one of the most revered 0:03:58.120 --> 0:04:01.080 ideas and sort of modern or the ox economics, the 0:04:01.120 --> 0:04:04.040 premise that we have an independent and there are some 0:04:04.120 --> 0:04:06.720 critics of it, and there are some like sympathetic critics 0:04:06.760 --> 0:04:08.800 to it, but I think, for like Wall Street and 0:04:08.840 --> 0:04:12.680 how we do econ policy in this country, the premise 0:04:12.760 --> 0:04:17.680 that the FED exists independently of immediate direct political controls 0:04:17.720 --> 0:04:21.680 such that it can pursue its two goals full employment 0:04:21.760 --> 0:04:24.680 or maximum employment and price stability in a way that's 0:04:24.680 --> 0:04:27.599 outside the elections, outside of political control, is this sort 0:04:27.600 --> 0:04:30.560 of core thing that we many people take for granted, 0:04:30.960 --> 0:04:34.359 and there's this building question of whether that will remain so. 0:04:34.680 --> 0:04:37.240 All right, so a lot to talk about, and we do, 0:04:37.360 --> 0:04:39.320 in fact have the perfect guest. We're going to be 0:04:39.360 --> 0:04:43.240 speaking to a favorite of the show. It's levmnand Columbia 0:04:43.440 --> 0:04:47.440 Law School professor. He's also the author of The Fed Unbound, 0:04:47.560 --> 0:04:50.760 which is a fantastic and quite a short book all 0:04:50.800 --> 0:04:53.960 about the Central Bank. So if you know, like Elon Musk, 0:04:54.000 --> 0:04:56.400 can't figure out what the FED does and feel that 0:04:56.480 --> 0:04:59.680 it's absolutely impossible to find out, then you should check 0:04:59.680 --> 0:05:04.599 out this book and also many, many, many other books. Okay, Lev, 0:05:04.839 --> 0:05:06.800 it's so nice to have you back, so great to 0:05:06.800 --> 0:05:09.400 be here. Why are we talking to you. Let's just 0:05:09.720 --> 0:05:12.560 lay the scene other than you're one of our favorite guests. 0:05:13.279 --> 0:05:16.080 I think something big is happening in the federal government 0:05:16.160 --> 0:05:20.960 right now, where the president is asserting unprecedented powers over 0:05:21.640 --> 0:05:25.200 parts of the government that for in some cases over 0:05:25.240 --> 0:05:30.760 a century, have operated with a certain amount of separation 0:05:31.200 --> 0:05:36.680 from presidential day to day direction, and that threatens to 0:05:37.360 --> 0:05:42.160 upend government policy across a range of dimensions. But in 0:05:42.240 --> 0:05:45.880 one area in particular, the consequences could be felt immediately, 0:05:46.400 --> 0:05:48.599 and that is with respect to the Federal Reserve. 0:05:48.720 --> 0:05:51.279 So I think you know, certainly, the firing of the 0:05:51.360 --> 0:05:55.320 two minority commissioners at the FTC almost immediately after we 0:05:55.400 --> 0:05:58.359 recorded that episode we're news. I don't think people on 0:05:58.400 --> 0:06:02.280 Wall Street like really you know, yeah, okay, something about 0:06:02.279 --> 0:06:05.960 mergers that's not really like most people aren't taking, you know, 0:06:06.120 --> 0:06:09.040 that's not high on their radar. What is the connection 0:06:09.560 --> 0:06:12.560 between the FTC or the action and something that could 0:06:12.600 --> 0:06:13.559 happen with the Federal Reserve. 0:06:13.600 --> 0:06:15.800 Yeah, let me tell you why that FTC firing was 0:06:15.800 --> 0:06:19.920 a particularly big deal. There's a Supreme Court case on 0:06:20.320 --> 0:06:24.000 the question of whether the president can fire commissioners on 0:06:24.040 --> 0:06:28.360 the FTC without cause the way Trump asserted the power 0:06:28.360 --> 0:06:31.520 to do the other day, and that is the bedrock 0:06:31.640 --> 0:06:34.520 precedent that the case is a federal reserve. It's called 0:06:34.600 --> 0:06:37.480 Humphreys Executor. It was decided by the Court in nineteen 0:06:37.560 --> 0:06:42.840 thirty five, and it rained in and largely reversed our 0:06:42.920 --> 0:06:46.800 cabinet to its facts. A famous decision from nineteen twenty 0:06:46.800 --> 0:06:50.640 six called Myers versus the United States that Roosevelt President 0:06:50.839 --> 0:06:55.000 Roosevelt FDR had relied on to try to fire a 0:06:55.040 --> 0:06:58.080 member of the FTC, and the Supreme Court in nineteen 0:06:58.080 --> 0:07:00.240 thirty five said, Nope, you can't do that. That case 0:07:00.279 --> 0:07:03.359 isn't going to stand for that anymore. And we've built 0:07:03.400 --> 0:07:06.560 up a whole system of government around this understanding. And 0:07:06.640 --> 0:07:11.720 here Trump is inviting the Supreme Court to overrule this bedrock. President. 0:07:12.200 --> 0:07:14.720 So, since we already went back in time to nineteen 0:07:14.760 --> 0:07:17.160 thirty five and nineteen twenty six, can we go even 0:07:17.360 --> 0:07:21.840 further and talk about why we have independent agencies at all? 0:07:21.920 --> 0:07:23.840 And you know, I guess the clue is in the 0:07:23.920 --> 0:07:28.800 name independent agencies. But they have some oversight clearly, So 0:07:29.120 --> 0:07:32.520 who is actually watching over these independent agencies and why 0:07:32.560 --> 0:07:33.320 do they exist? 0:07:33.680 --> 0:07:39.200 All the constitutional actors oversee the independent agencies. Independent agency 0:07:39.240 --> 0:07:42.239 is a technical term of art in law to refer 0:07:42.320 --> 0:07:46.320 to an agency whose heads cannot be removed by the 0:07:46.360 --> 0:07:50.640 president at pleasure. And so they include any officer of 0:07:50.680 --> 0:07:54.560 the government who is not a legislative officer, a member 0:07:54.560 --> 0:07:57.680 of Congress elected, or a judicial officer, an appointed Article 0:07:57.720 --> 0:08:01.800 three judge. All of those officers, some of them can 0:08:01.800 --> 0:08:03.600 be put into a category of they're part of an 0:08:03.640 --> 0:08:06.760 executive agency the head of that agency can be removed 0:08:06.800 --> 0:08:09.960 by the president president at pleasure, or an independent agency. 0:08:10.040 --> 0:08:12.720 The head of the agency cannot be removed by the 0:08:12.760 --> 0:08:16.800 president at pleasure. Now, in that second category independent agencies, 0:08:17.120 --> 0:08:20.520 they're accountable to the president to the courts to the 0:08:20.560 --> 0:08:23.400 Congress in all sorts of different ways. And so the 0:08:23.440 --> 0:08:27.240 President appoints the heads of independent agencies with the advice 0:08:27.240 --> 0:08:30.160 and consent of the Senate. The President can remove the 0:08:30.160 --> 0:08:34.680 heads of independent agencies, but generally only for cause. Sometimes 0:08:34.679 --> 0:08:38.480 those causes are specified like neglective duty or malfeasance in office. 0:08:38.480 --> 0:08:40.679 We could talk about that in the Federal Reserve Act. 0:08:40.720 --> 0:08:44.320 The statute just says cause, and a four cause removal 0:08:44.559 --> 0:08:47.120 involves notice and a hearing, and so it's not the 0:08:47.120 --> 0:08:50.520 same thing as an at pleasure removal, and it precludes 0:08:50.559 --> 0:08:54.760 the president from removing somebody for a policy disagreement. The 0:08:54.840 --> 0:08:59.679 independent agencies are accountable to Congress in that there are 0:08:59.720 --> 0:09:03.200 hearing that are held. Their officers have to go down 0:09:03.360 --> 0:09:06.760 just like J. Powell goes down and testify. They're subject 0:09:06.800 --> 0:09:10.959 to Congress's subpoena power for records. They're imprecated in all 0:09:11.040 --> 0:09:13.600 the workings of the government, and their actions, like the 0:09:13.720 --> 0:09:17.040 FTC's actions, are subject judicial review by Article three judges. 0:09:17.200 --> 0:09:19.600 So they're not independent in this sort of sense that 0:09:19.679 --> 0:09:23.120 sometimes asserted that they're like a fourth branch of government 0:09:23.240 --> 0:09:26.440 or they're outside of the government. No, they're just a 0:09:26.559 --> 0:09:30.800 type of government body that has a different relationship to 0:09:30.920 --> 0:09:34.600 the president from the Secretary of Defense or a White 0:09:34.600 --> 0:09:36.959 House Chief of Staff, which are positions where the President 0:09:37.080 --> 0:09:40.640 can fire or direct the actions of that officer. Now, 0:09:40.840 --> 0:09:43.600 these sorts of positions have been around going all the 0:09:43.600 --> 0:09:48.680 way back to the founding, and with respect to monetary policy, 0:09:48.760 --> 0:09:52.240 it was a question for the first Congress and the 0:09:52.280 --> 0:09:57.720 first Secretary of the Treasury how much direction monetary policy 0:09:57.760 --> 0:10:01.120 should be subject to day to day oversight or direction 0:10:01.200 --> 0:10:04.240 by the president. And so this sort of issue isn't 0:10:04.280 --> 0:10:07.360 a new issue for the United States. It's there right 0:10:07.360 --> 0:10:21.280 at the beginning. 0:10:24.080 --> 0:10:27.880 Is there any difference legally between the FTC and the 0:10:28.440 --> 0:10:31.680 Are they different? Let's say the court says, you know what, 0:10:32.559 --> 0:10:36.200 reversing Humphrey's executor, you can fire them. Is there any 0:10:36.240 --> 0:10:39.160 reason to think that that exact logic wouldn't apply to 0:10:39.240 --> 0:10:40.880 the makeup of the Fomacy Board. 0:10:40.880 --> 0:10:43.080 There's a great question. I think we should take it 0:10:43.120 --> 0:10:48.360 into cards. First. We should just start by understanding the similarities. OK. So, 0:10:48.880 --> 0:10:52.200 the Federal Reserve Board is a board of control for 0:10:52.280 --> 0:10:55.880 the banking sector, and it was established in nineteen thirteen 0:10:56.679 --> 0:11:00.000 on the model of something called the Interstate Commerce Commission, 0:11:00.320 --> 0:11:03.320 which was established by Congress in eighteen eighty seven and 0:11:03.440 --> 0:11:08.760 primarily oversaw the railroad sector. The Interstate Commerce Commission is 0:11:08.800 --> 0:11:14.280 a multi member body within the executive branch of the government, 0:11:14.320 --> 0:11:18.680 broadly construed, but its heads were not removable by the 0:11:18.720 --> 0:11:23.160 President at pleasure. They had to be removed only for cause. 0:11:23.280 --> 0:11:25.640 They were appointed by the President but could be removed 0:11:25.679 --> 0:11:29.120 only for cause. Congress created something similar in nineteen thirteen 0:11:29.240 --> 0:11:32.160 for money in banking. The next year, in nineteen fourteen, 0:11:32.160 --> 0:11:35.880 they created a Federal Trade Commission for antitrust enforcement, and 0:11:36.040 --> 0:11:39.960 multiple additional agencies that you guys might be familiar with followed, 0:11:40.080 --> 0:11:42.959 like the Securities in Exchange Commission in nineteen thirty three. 0:11:43.120 --> 0:11:47.280 Most notably so, the Fed has the same basic legal 0:11:47.400 --> 0:11:52.520 architecture as these other multi member commissions. It has seven governors, 0:11:52.760 --> 0:11:56.240 so it's a board of seven members, and those members 0:11:56.320 --> 0:11:59.439 are all tenured for a term of years. They have 0:11:59.640 --> 0:12:02.480 office security. The Secretary of the Treasury has no term 0:12:02.520 --> 0:12:05.560 of office. They are appointed for no particular term and 0:12:05.600 --> 0:12:08.640 can be removed at any time. The board members all 0:12:08.679 --> 0:12:11.320 have particular terms and can be removed only for costs. 0:12:11.320 --> 0:12:15.200 So these are the things that are in common. There 0:12:15.280 --> 0:12:19.840 is an effort underway, in particular and conservative legal circles 0:12:20.480 --> 0:12:23.880 and in part in the judicial branch, by those who 0:12:23.920 --> 0:12:30.640 are interested in overturning Humphrey's Executor to divine, discover, construct 0:12:31.120 --> 0:12:35.600 some type of FED exception, some way to distinguish the 0:12:35.640 --> 0:12:40.600 FED constitutionally from these other multi member commissions, such that 0:12:40.720 --> 0:12:44.320 were the Court to say Humphrey's Executor is overruled, it 0:12:44.360 --> 0:12:47.600 would not necessarily mean the President could fire j. Palell 0:12:47.600 --> 0:12:54.160 at pleasure. These efforts are pretty incohete, they're pretty intellectually unsatisfying, 0:12:54.400 --> 0:12:56.360 but it's worth sort of trying to tease them out 0:12:56.720 --> 0:12:59.880 because there is a real desire for the Court to 0:13:00.000 --> 0:13:03.880 to protect the FED independence. And in trying to understand 0:13:03.920 --> 0:13:05.720 what's going to happen next, we have to sort of 0:13:05.760 --> 0:13:09.120 evaluate how plausible it is that the Court would be 0:13:09.160 --> 0:13:12.720 able to embrace some type of rationale for why the 0:13:12.760 --> 0:13:17.160 FED is, do you know, the one independent agency that 0:13:17.600 --> 0:13:21.240 the president doesn't have the constitutional power to control? 0:13:21.559 --> 0:13:25.840 Okay, so what are those arguments? Because I remember, for instance, 0:13:26.000 --> 0:13:30.040 the CFPP, I think, when there was like wrangling over 0:13:30.120 --> 0:13:33.640 its independence and someone mentioned that the CFPP is led 0:13:33.679 --> 0:13:37.880 by a single leader instead of a commission like the FTC. 0:13:38.160 --> 0:13:40.960 Would something like that come into play when you're arguing 0:13:41.000 --> 0:13:42.839 that the FED should be a special case. 0:13:43.280 --> 0:13:46.000 Yeah, so great question. This is a slight detour, but 0:13:46.040 --> 0:13:50.840 I think it's important. The demise of Humphrey's executor has 0:13:51.000 --> 0:13:56.600 been prognosticated for fifteen years now. It dates back to 0:13:56.720 --> 0:14:01.040 a Roberts Court decision in twenty ten with respect to 0:14:01.080 --> 0:14:06.800 an organization called the PCAOB, which oversees accountants and is 0:14:06.880 --> 0:14:11.040 part of the sec and that was struck down and 0:14:11.080 --> 0:14:16.160 the Court said the Humphrey's Executor exception to the President's 0:14:16.160 --> 0:14:19.280 power to oversee the executive branch, we will not extend 0:14:19.360 --> 0:14:24.160 it to this sort of novel organization that is two 0:14:24.240 --> 0:14:27.520 layers removed from the president because the PCAOB is under 0:14:27.600 --> 0:14:30.240 the Securities in Exchange Commission. And there's a lot of 0:14:30.280 --> 0:14:33.280 language in that opinion that made people think, WHOA, these 0:14:33.520 --> 0:14:37.520 justices don't really agree with Humphrey's Executor. They have a 0:14:37.560 --> 0:14:41.120 different view of the president. What's going to be next? 0:14:41.440 --> 0:14:44.040 And in twenty twenty you have the CFPB case that 0:14:44.080 --> 0:14:48.320 you're referencing sala law, in which the Court says Yep, 0:14:48.600 --> 0:14:52.560 the CFPB, which is a five year term, tenured, single 0:14:52.600 --> 0:14:55.840 headed agency. We're not going to extend Humphrey's executor to 0:14:55.880 --> 0:14:59.080 that either. And Justice Roberts wrote the opinion, and he said, 0:14:59.600 --> 0:15:03.160 this part has way too much power. The Humphreys executor 0:15:03.200 --> 0:15:06.800 sort of exception to presidential oversight, as he characterized, it 0:15:06.840 --> 0:15:10.080 doesn't cover the CFPV. This thing is new. Congress just 0:15:10.200 --> 0:15:14.600 created it and it's not rooted in history. And people thought, okay, 0:15:15.200 --> 0:15:19.680 so certain single headed agencies might not be allowed anymore. 0:15:20.200 --> 0:15:23.320 What's going to happen next Next year? Twenty twenty one, 0:15:23.840 --> 0:15:26.920 the Supreme Court, with Justice Alito writing for the court, 0:15:27.600 --> 0:15:31.520 decided a case called Collins versus Yellen, and struck down 0:15:31.600 --> 0:15:36.880 the independence of the Federal Housing Finance Administration FAHFA. And 0:15:37.400 --> 0:15:41.119 there the Court just said, oh, all single headed agencies, 0:15:41.160 --> 0:15:43.240 no matter what, no matter how much power they have, 0:15:43.720 --> 0:15:49.600 are unconstitutional. And this covers things like the Social Security Administration, 0:15:49.760 --> 0:15:53.880 which since its inception has been headed by an individual 0:15:53.960 --> 0:15:57.040 tenured for a six year term. And the idea is 0:15:57.240 --> 0:16:01.560 SSA administration is nonpartisan and every president shouldn't come in 0:16:01.600 --> 0:16:04.280 and just put in their own person. But after Collins 0:16:04.360 --> 0:16:09.200 versus yelling. President Biden fired the Social Security Administrator, and 0:16:09.520 --> 0:16:12.600 you got to a point where people were wondering, what 0:16:12.680 --> 0:16:16.120 about the multi member commissions themselves that Humphrey's executor was about. 0:16:16.480 --> 0:16:20.600 Will it no longer be sustained for them either? So 0:16:20.680 --> 0:16:24.880 what are the possible exceptions that would allow the logic 0:16:24.880 --> 0:16:27.440 of Humphrey's executors to maybe applied to the FED even 0:16:27.480 --> 0:16:31.920 if it no longer applies to the FTC. The one 0:16:32.000 --> 0:16:36.560 that the Trump administration is running with so far is 0:16:36.640 --> 0:16:44.240 that monetary policy is somehow not sovereign executive power and 0:16:44.360 --> 0:16:48.040 can be distinguished from the other stuff the FED does, 0:16:48.440 --> 0:16:51.360 and that stuff is regulation of financial institutions. So Trump 0:16:51.400 --> 0:16:56.440 put out an executive order last month, Executive Order fourteen 0:16:56.640 --> 0:17:02.280 two fifteen, which asserted executive power over all the independent 0:17:02.320 --> 0:17:06.320 agencies and included specific carve out language for the FED 0:17:06.480 --> 0:17:09.679 that said, this order doesn't apply to the FED with 0:17:09.760 --> 0:17:13.280 respect to its monetary policy, only with respect to its 0:17:13.320 --> 0:17:16.840 regulation and supervision of financial institutions. Okay, so this is 0:17:16.880 --> 0:17:19.040 sort of the Trump theory. There's some other options we 0:17:19.040 --> 0:17:21.520 can get to, but I think let's maybe sit through 0:17:21.600 --> 0:17:24.160 Trump theory. Does this make any sense? There? Are some 0:17:24.280 --> 0:17:27.639 huge problems with this theory. It just sort of suggests 0:17:27.680 --> 0:17:30.359 that they haven't spent a lot of time thinking about 0:17:30.359 --> 0:17:33.200 how the FED conducts monetary policy and what the relationship 0:17:33.240 --> 0:17:36.800 is between monetary policy and the regulation of banks, because 0:17:36.800 --> 0:17:40.639 it's really all one and the same thing. So the 0:17:40.720 --> 0:17:45.000 court would be hard pressed to say, for example, just 0:17:45.040 --> 0:17:49.240 as an initial matter, you know, j Powell can't be 0:17:49.280 --> 0:17:52.000 removed by the President with respect to what he's doing 0:17:52.040 --> 0:17:54.600 on monetary policy, but with respect to what he's doing 0:17:54.600 --> 0:17:56.720 on bank regulation, the President could fire him for a 0:17:56.720 --> 0:18:00.199 policy disagreement. That would just sort of fall apart pretty easily. Right, 0:18:00.200 --> 0:18:02.720 what type of independence has really left? The President could 0:18:02.760 --> 0:18:04.320 just say I fired him because I don't like what 0:18:04.320 --> 0:18:07.280 he was doing on bank regulation, And the real reason 0:18:07.359 --> 0:18:09.879 could be that he didn't like what Jay Powell was 0:18:09.880 --> 0:18:12.359 doing on interest rates. But how would we know because 0:18:12.400 --> 0:18:14.120 he doesn't need to give a reason except to say 0:18:14.160 --> 0:18:17.320 that it's bank regulation. So there's like already a problem. 0:18:17.520 --> 0:18:23.240 But the deeper problem is Moynetree policy implementation is bank regulation. 0:18:24.000 --> 0:18:29.800 Like in January when the FED met, in the aftermath 0:18:29.840 --> 0:18:36.200 of that meeting, the Board of Governors amended Regulation D 0:18:37.280 --> 0:18:42.520 through a rule making published in the Federal Register lowering 0:18:42.960 --> 0:18:47.760 the interests paid on reserve balances to banks with reserve 0:18:47.800 --> 0:18:51.240 accounts at the Federal Reserve Banks. It is a straight 0:18:51.440 --> 0:18:56.840 exercise of regulatory power, just like when the SEC writes 0:18:56.880 --> 0:19:00.159 a rule for what type of disclosure a company has 0:19:00.280 --> 0:19:04.920 to do if it's a publicly traded company. And they 0:19:04.960 --> 0:19:07.320 just don't seem to realize this. They think that it's 0:19:07.400 --> 0:19:09.600 like FOMC just meets and they talk and then they 0:19:09.640 --> 0:19:12.760 announce a decision, and that's monetary policy. It's not regulatory, 0:19:12.880 --> 0:19:16.840 it's not a judicatory But actually no monetary policy implementation 0:19:17.000 --> 0:19:37.160 is all exercise of government power over the banking system. 0:19:37.320 --> 0:19:39.080 You know what I do find interesting, Like I think 0:19:39.119 --> 0:19:41.800 of this concept of the importance of an independent FED 0:19:41.880 --> 0:19:44.879 that can pursue both its mandates as this sort of 0:19:45.080 --> 0:19:48.000 fairly modern idea in economics. But it is interesting that 0:19:48.080 --> 0:19:51.639 apparently the Congress is actually like way ahead of like 0:19:51.720 --> 0:19:55.320 eCOM theory in this setup. In this way, it's kind 0:19:55.320 --> 0:19:58.359 of fascinating that they sort of intuited this. What I 0:19:58.400 --> 0:20:00.800 want to go to is if there is this Trump 0:20:00.880 --> 0:20:05.439 world or conservative world desire to find a way in 0:20:05.520 --> 0:20:10.080 which Humphrey's executor can be overturned, but yet somehow not 0:20:10.280 --> 0:20:13.720 implicate the structure of the FED. Why should anytone care 0:20:13.840 --> 0:20:18.280 Because in the end, all laws are just enforced by humans. 0:20:18.640 --> 0:20:21.360 And if the general thinking is we're going to read 0:20:21.440 --> 0:20:24.480 something into this law that, even though we can't logically 0:20:24.520 --> 0:20:27.520 defend it on paper, we all want it to have 0:20:27.600 --> 0:20:30.800 this outcome where all of these independent agencies are formerly 0:20:30.920 --> 0:20:33.640 just part of the executive branch except this one. If 0:20:33.680 --> 0:20:36.919 that's the outcome everyone wants, then isn't that the outcome 0:20:36.960 --> 0:20:37.320 we'll get. 0:20:37.480 --> 0:20:42.320 That's a great question. The narrow sort of answer, you know, 0:20:42.520 --> 0:20:47.840 just a law professor's concern is that creating illogical exceptions 0:20:47.880 --> 0:20:51.760 to doctrine is bad for law. Law as a social 0:20:52.040 --> 0:20:55.800 coordinating mechanism. It tears at the fabric of law. Every 0:20:55.840 --> 0:20:59.240 time someone violates our understanding of what the law is, 0:20:59.280 --> 0:21:01.440 it's tearing at the fabric of law. So these removals 0:21:01.480 --> 0:21:04.680 that Trump has engaged in because there's precedent on point 0:21:04.760 --> 0:21:07.360 saying you can't do them, this is tearing at law. 0:21:07.400 --> 0:21:11.160 This is reducing the effectiveness of law as a coordinating mechanism, 0:21:11.200 --> 0:21:13.280 which is something we should value because it helps us 0:21:13.480 --> 0:21:17.080 organize our lives in an effective way with minimal social conflict. 0:21:17.240 --> 0:21:19.240 So there's sort of just like a narrow concern with 0:21:19.600 --> 0:21:23.840 contorting Distorting doctrine and law reduces respect for law and 0:21:23.920 --> 0:21:28.880 its effectiveness. The more persuasive I think, answer to market participants, 0:21:28.920 --> 0:21:31.800 you know, we're not like invested in this in sort 0:21:31.800 --> 0:21:36.520 of you know what's going to happen to the stock market? 0:21:36.600 --> 0:21:36.800 Right. 0:21:37.920 --> 0:21:45.080 I think that every time the court seeds more authority 0:21:45.119 --> 0:21:51.840 to the President, they call into question their ability and 0:21:51.960 --> 0:21:55.800 willingness in the future to draw the line. And so 0:21:56.040 --> 0:22:00.159 if they write an opinion in the FTC case over 0:22:00.240 --> 0:22:03.679 ruling Humphrey's Executor that says the FED is an exception 0:22:03.720 --> 0:22:06.240 and this ruling doesn't apply to the FED, that will, 0:22:06.440 --> 0:22:11.280 of course, in this moment, on its face, protect FED independence. 0:22:11.760 --> 0:22:14.280 But now that we've moved the line twenty ten, twenty 0:22:14.359 --> 0:22:17.640 twenty twenty one, and then again more and more towards 0:22:17.720 --> 0:22:23.240 the president, we invite the President to test this new exception. 0:22:23.560 --> 0:22:25.639 And there's a number of ways the President might do it. 0:22:26.119 --> 0:22:29.040 And in a year from now or two years from now, 0:22:29.600 --> 0:22:34.040 the only organization left is the FED and the Fed's 0:22:34.080 --> 0:22:37.040 ability to stand on its own may be limited, and 0:22:37.160 --> 0:22:40.120 as people become aware of that and see the pressure 0:22:40.160 --> 0:22:42.760 that the President will exert on the FED as the 0:22:42.800 --> 0:22:46.560 only remain in an exception, the independence will dissipate and 0:22:46.920 --> 0:22:49.520 markets will react, and the Fed's ability to make credible 0:22:49.560 --> 0:22:53.160 commitments to maintain price stability over time could be impaired. 0:22:53.240 --> 0:22:55.760 Right now, by the way, Tracy, I just want to 0:22:55.760 --> 0:22:57.920 give a quick shout out to Matt Stoller, who wrote 0:22:57.920 --> 0:22:59.960 a great blog post a couple of weeks ago about 0:23:00.080 --> 0:23:02.840 this sort of thing, and he cited a footnote from 0:23:02.880 --> 0:23:06.240 Alito in a dissent on the CFPB in which Alito 0:23:06.400 --> 0:23:09.720 himself said the FED quote should be regarded as a 0:23:09.720 --> 0:23:13.480 special arrangement sanctioned by history. Yes, a unique institution with 0:23:13.520 --> 0:23:16.840 a unique historical background, to which Stohler said, this is 0:23:16.880 --> 0:23:20.000 the legal logic of a souvenir T shirt that says 0:23:20.280 --> 0:23:21.080 I'm the mommy. 0:23:21.280 --> 0:23:23.199 That's why. Yes. 0:23:23.280 --> 0:23:25.040 So I just want to give a shout out to Matt, 0:23:25.119 --> 0:23:27.320 because this is what really this piece was actually sort 0:23:27.320 --> 0:23:29.320 of what put a bunch of this sort of in 0:23:29.359 --> 0:23:29.720 my head. 0:23:29.960 --> 0:23:35.080 Amazing, amazing. So I have a question how well defined 0:23:35.600 --> 0:23:40.440 or codified is the at cause portion of this because 0:23:40.480 --> 0:23:43.800 I'm thinking like, Okay, we could do all this, we 0:23:43.960 --> 0:23:47.160 go through the Supreme Court, but could Trump just come 0:23:47.240 --> 0:23:50.640 up with a new reason that counts as at cause 0:23:50.760 --> 0:23:53.080 and that might be an easier way to exert. 0:23:52.800 --> 0:23:56.479 Inflation was too high? Yeah. Yes, So that's one of 0:23:56.520 --> 0:23:59.560 the concerns that I have. If you preserve this exception 0:23:59.840 --> 0:24:03.119 just for the FED, you're inviting a challenge. Now, the 0:24:03.160 --> 0:24:07.200 FED is the only four cause protected agency, and the 0:24:07.240 --> 0:24:11.600 President has almost never removed anyone for cause. The last 0:24:11.640 --> 0:24:14.879 time was over one hundred years ago. You and so 0:24:14.920 --> 0:24:17.480