Jan 6, 2020

Peter Conti-Brown on "Restoring the Promise of Federal Reserve Governance"

Lack of accountability and transparency are just some of the issues with current Federal Reserve governance, and institutional reform is needed
David Beckworth Senior Research Fellow , Peter Conti-Brown

Peter Conti-Brown is an assistant professor at the Wharton School at the University of Pennsylvania and a nonresident fellow at the Brookings Institution. Peter is also a historian and a legal scholar specializing in the study of the Federal Reserve and is a returning guest to Macro Musings. He joins the show today to talk about his new paper, "Restoring the Promise of Federal Reserve Governance". Specifically, David and Peter discuss the institutional history of the Federal Reserve Board, the lack of transparency in the Fed appointment process, and why we should consider raising Fed governor salaries in the future.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

Beckworth: Our guest today is Peter Conti-Brown. Peter is an assistant professor at the Wharton School and a nonresident fellow at Brookings Institution. Peter is also a historian and legal scholar of all things Federal Reserve. Peter also happens to be a past guest of the show and therefore a proud owner of a nominal GDP coffee mug. And in his previous appearance we discussed his 2016 book, *The Power and Independence of the Fed*. So be sure to check out that episode if you haven't already and buy his book. Peter joins us today to discuss his new paper titled, *Restoring the Promise of Federal Reserve Governance*. Peter, welcome back to the show.

Conti-Brown: It's a pleasure to be here. I'm looking right now at my NGDP targeting mug.

Beckworth: Fantastic. Yeah, it's my goal to get that mug to every member of the FOMC. So every morning they drink, they look at it and they think nominal GDP targeting. So and it's a long struggle but we've got plans in place. Okay, so you're coming back on the show. You have a neat paper, deals with the governance of the Federal Reserve, particularly as it relates to the Board of Governors. I mean, you also talk about the presidents as well and the regional Federal Reserve banks, and I'll also mention to the listeners, you have a great paper coming out on the payment system, we're going to discuss in an upcoming episode as well, so pay attention to that listeners, he will be back on the show. He's going to give George Selgin a run for his money on the number of appearances to Macro Musings….

Conti-Brown: I don't think George ever runs and I don't think anyone ever gets George's money, but I will have to pick a fight with him, that’s for sure.

Beckworth: Alright, George, you've heard the challenge. Okay, so Peter, you have this paper, it's called *Restoring the Promise of Federal Reserve Governance*. And before we jump into it, I'm just curious, what motivated... You have this great book out that looks at the history of the Federal Reserve. Is this paper kind of a natural follow-up to the book? Or were you motivated by things that you've seen happen in recent years?

Motivation for Writing the Paper

Conti-Brown: It's both of them. My book has a lot of history and sometimes it's mistakenly called the History of the Federal Reserve. That's not it. I'm actually writing that book, a big fat political history of the Fed, which I hope will be another occasion for a Macro Musings podcast episodes in the future.

Beckworth: Absolutely.

Conti-Brown: But the first book really is about Fed independence and Fed governance. What it's supposed to be, how that's performed. What's missing there is a lot more data in the book. I have some about vacancy rates at the Board of Governors, but as I was going through the history, for the political history, I just kept on finding instance after instance of how first the Federal Reserve Board, then restyled the Board of Governors in 1935, just started drifting away from its legislative and institutional moorings in 1913 to 1935. And so this paper, which is coming out as a working paper with Mercatus and is under submission at an academic journal as well, is about trying to really document what is the Board of Governor's supposed to be. And then along specific parameters, how is it actually functioning?

Conti-Brown: So I look at things like salary. I look at FOMC participation per meeting, I look at vacancy rates, I look at some of the history around who sat in those seats. And that's motivated by something that I've cared about for about a decade, which is, the Fed is, I'd argue, the most powerful institution in government, more powerful even than the Supreme Court. But our primary interface with the Fed in the public is the Board of Governors. How is that accountability mechanism working? And in this paper I argue, you know what, not as well as it could be for reasons that have been going on in some cases for many decades and in some other cases quite recent.

So I look at things like salary. I look at FOMC participation per meeting, I look at vacancy rates, I look at some of the history around who sat in those seats. And that's motivated by something that I've cared about for about a decade, which is, the Fed is, I'd argue, the most powerful institution in government, more powerful even than the Supreme Court.

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Beckworth: Yeah, so you make some proposals in the paper we'll get to later, but proposals that kind of bring back that potential for good governance, good accountability and kind of living up to the original vision of the Federal Reserve along those lines. Now just to be clear, there have been some changes, right? Since the financial crisis.

Beckworth: And you outlined some of them like under Dodd-Frank, the FSOC, the Financial Stability Oversight Council was created. There's some new vice chair positions, new rules about the boards of the regional banks, but these really don't get to the heart of the matter that you're going to cover in this paper and we'll talk about it shortly. I'm just wondering just for a broader context before we get going, and you touched on this in your introduction. How does this relate, relative to other big central banks like the Bank of England or the ECB?

Conti-Brown: Right. European Central Bankers very often will say, I think mistakenly that the ECB is modeled in some way after the Federal Reserve System and that's just not correct. It's true that there is a genuinely federal structure in the ECB system, but at the Fed level there's not that. So the federal structure in the ECB is national central bank representation on the governing councils and then eventually executive council of the ECB. But that means that nation states that participate in the Eurozone get to have a seat at that table. There's no such thing as the nation state of the second Federal Reserve District of New York. That's not a sovereign entity.

Conti-Brown: And so the Bank of England's governance structure, I would regard as something of a gold standard, because it's just so clear and its structure is so obvious. I can present on a single slide, the total governance structure of the Bank of England and for even non-experts, within a couple of minutes they'll be able to grasp who the main players are, how they got there, and what the basis is for their participation. And it takes you such a long time to understand and it's even impossible to understand, for example, what the role is of the directors of the Federal Reserve Bank of Atlanta and that kind of opacity, just not having a good sense of, whose ideas are privileged in the making of our national monetary, regulatory and supervisory policy is deeply problematic from my perspective.

Beckworth: Yeah. I remember teaching money and banking when I was still in the university system and going over the structure of the Fed and for many students, that was the first time they'd seen this and kind of blew them out of their seats. It was like an entire new civics lessons that they've never seen before. They never have this in any kind of high school government or any kind of college government class. So it was really a kind of a mind blowing experience for many and it was just this entire lecture on how the Fed is set up and how it's run and your paper really sheds light on some of the developments that have happened. And now, your paper begins by going over some history that's pertinent to the points you make in your paper.

Beckworth: So why don't we start there, and walk us through I think the beginning, the Wilsonian Compromise, abolishing that compromise, board versus the banks and then the rise of the imperial chairman. And what does that tell us about the state of innovation at the Federal Reserve?

The Wilsonian Compromise and the History and State of Innovation at the Fed

Conti-Brown: I think that it does tell us something important that I need to concede because I have a vision of a board centric Federal Reserve System. But the reality is that institutions change, they evolve. The history matters though because the two times that we've had major legislative debates about the institutional design of the Fed, resulted in two very different systems. And I mentioned this, and I do this a lot in my work, really to the point of repeating myself, because some people forget that the Fed was essentially re-founded during the Franklin Roosevelt administration in 1935. Part of the legislative verse that historians called The Second New Deal, which included the passage of Social Security, included the passage of the Wagner Act, which created the National Labor Relations Board, a major tax bill, a public utility holdings act. I mean all of these big pieces of legislation that came in the same session, and the least controversial at the time was this Banking Act of 1935 which completely remade the central bank and created in a very real sense of central bank.

Conti-Brown: So the Wilsonian Compromise is this really interesting, very quirky thing that happened in 1913. You've heard when people talk about the Fed, they like to talk about that creature from Jekyll Island or whatever.

Beckworth: Right.

Conti-Brown: And a lot of this is true historically, some of it is just grossly exaggerated, very conspiratorial. But what I think is most interesting about the Fed's founding isn't what happened between 1907 when there's a major financial panic and 1912 when Republicans really were discussing what the nation’s central bank should be. But what happened after the election in 1912 when Woodrow Wilson became president. And there the major debates were whether or not we would have a private central banking system that was centered in New York modeled after the Bank of England, or we'd have a private central banking system that was more decentralized. What Woodrow Wilson came in and said very famously is "Well we can’t have either of those things. Centralization, decentralization, that can be a debate that we have, but there's got to be a public accountability, public facing oversight board that is more in line with politics, with the White House, with the Senate." And that's where the Federal Reserve Board came from.

And there the major debates were whether or not we would have a private central banking system that was centered in New York modeled after the Bank of England, or we'd have a private central banking system that was more decentralized. What Woodrow Wilson came in and said very famously is "Well we can’t have either of those things. Centralization, decentralization, that can be a debate that we have, but there's got to be a public accountability, public facing oversight board that is more in line with politics, with the White House, with the Senate." And that's where the Federal Reserve Board came from.

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Conti-Brown: And originally the Federal Reserve Board was chaired by the Secretary of the Treasury, the Comptroller of the Currency, the primary federal banking regulator was also on that board, and then there were between five and six, the numbers changed in the 1920s, other members, one of whom was called The Governor of the Federal Reserve Board, just one of those. And that system works pretty badly. There was no clear sense… who's in charge of a system like that? Is that the chair? The Secretary of the Treasury? Well, when Carter Glass was Secretary of the Treasury in the Woodrow Wilson administration, the answer's yes, he really took a lot of control over the Fed.

Conti-Brown: But other times Secretary of the Treasury ignored it, like Andrew Mellon. Or is it the governor of the Federal Reserve Board is in charge? Well, he sometimes tried, but I show in this paper, a couple of those governors resigned from their seat. This is very similar to the current Fed chair, so that they could go and become governors of their local Federal Reserve banks. So this is very similar to Jay Powell announcing tomorrow, "I hereby resign being Fed chair, because it's more attractive for me to become the president of the Boston Fed." And that happened twice. We can talk about what motivated that, but it's a really dysfunctional system. It was much more about personalities that dictated where control would be.

Conti-Brown: And in 1935 we just, we tossed that whole system aside. Marriner Eccles from whom, the Fed building is named today, became first the governor of the Federal Reserve Board and then he rewrote the Federal Reserve Act, to create this new institution called the Board of Governors.

Conti-Brown: So the heads of the reserve banks were no longer called Governor, which was a title reserved for central bankers. They were called presidents, which was a title for bankers, not central bankers. And then this new board, they were all going to be called governors. One of them would be the chair, Secretary of the Treasury is fired, comptroller is fired. And so we get this new thing that's…not only is it a public facing central bank, but the Board of Governors has substantially greater power and the Federal Open Market Committee, which was just created in Glass-Steagall and the two years before, gets totally redone, still 12 seats for the 12 reserve banks, but now seven of them are going to be the governors, five will be the Federal Reserve bank presidents.

Conti-Brown: So I mentioned that, this is in my book as well from several years ago, I did a white paper for Brookings a year before that. But I mention all this again because to underscore that 1935 is really the place that we should be looking at to understand what the system was, not 1913 and in speech after speech you hear Federal Reserve bank presidents, Jeffery Lacker's done this, Jay Powell has even given a speech like this, where they talk about the genius of the system in 1913, that system doesn't exist anymore. What it was replaced by in 1935 was a much more public facing, much more accountable, much more centralized system. Like it or hate it. That's the system. And the rest of the paper is describing how much that vision from 1935 has become eroded over time.

Beckworth: That's a fascinating history of the Federal Reserve and I think your big takeaway from all of that first section is the Fed does change even though you liked that board centric vision. As you mentioned, the Fed does change.

Conti-Brown: Sure.

Beckworth: And you go on to talk about how the role the chair changed as well. But I'm going to go back to the beginning. The original vision, because some interesting history and part of what you do in this paper is collect data.

The History of Federal Reserve Salaries and Their Importance

Conti-Brown: Sure.

Beckworth: And as you mentioned earlier, you have a lot of interesting charts. So I encourage listeners just to get a hold of this paper. Really fascinating breakdown of salaries. So one of the things you mentioned early on and you continue to build the story throughout the paper is the compensation of the regional bank presidents as well as the board governors. And early on they're paid a very similar amounts, now you mentioned the Board salary 1914 was $15,000, in today's terms would be $387,000 is that right?

Conti-Brown: That's right.

Beckworth: Yeah. So first thing, and this is really a minor point, but wow, that's quite a bit more than they're getting paid today. Maybe this is a major point. And the second thing, I was going down the list here. So you listed all the regional bank presidents and some of them got paid quite a bit more. Now unsurprisingly the New York Fed got $30,000 and if I just kind of… that's double what the board governor got. So if we took that and put that in today's terms, that'd be $774,000, quite a bit. But if I go down and look at Atlanta and Kansas City and [the] Atlanta president got $9,000, the Kansas City president got $7,500. Is there any reason why there's such a large divergent? I know New York City's important, but for example, Richmond had $10,000, Chicago, St Louis had $20,000 is it just the size of the cities that determined this difference among the regional bank president's salaries?

Conti-Brown: No, that's not irrelevant. But what is so interesting is just how much this was subject to individual negotiation, contractual negotiation.

Beckworth: Oh, really?

Conti-Brown: Except for the Federal Reserve Board, which is set by statute. So it's not a contract negotiation. All the rest of these and throughout in the next charts that I have where I traced the entire history of their compensation, all of that is subject to negotiation. And for the reserve banks, they're not subject to Federal laws about compensating bureaucrats. They are separately organized and subject to different laws. Interestingly enough, just today, the second circuit, the Court of Appeals for the second circuit reached a major decision. I don't know if you saw this, that says that the Federal Reserve banks for purposes of some statutes at least are in fact part of the Federal government. That's very provocative and that could have constitutional ramifications down the line. Maybe we should have another conversation about that another time.

Conti-Brown: But now and throughout its history, the Federal Reserve banks were private organizations and they negotiated with their incoming CEOs to determine what that compensation package would be. Now that's subject to approval from the Board of Governors, but they have a lot more freedom there.

Beckworth: So maybe part of the story and explaining these big divergences you have in your first table. One would be the opportunity cost. So to work at the New York Fed, I mean there's great opportunities down the street so you've got to pay them more, there's a premium there. But on top of that, maybe the people who did the negotiating, the presidents, just were simply better negotiators. They could demand more, they're better wheeler-dealers than the ones in Atlanta and Kansas City?

Conti-Brown: Maybe, that could be, I mean there's some idiosyncratic differences. You start to see those change over time of course.

Beckworth: Right.

Conti-Brown: And you see some big jumps and you even see some cuts from, when a new reserve bank president comes in. But I think that when you're looking at cost of living differences and outside the financial centers looking at say Atlanta versus Richmond, then I think you're seeing a lot more idiosyncratic changes that might reflect different negotiating power and negotiating positions or how badly the board wanted a certain candidate to be there, things like that. And this isn't my speculating. I found some historical documents where we see some of the negotiating that occurred where boards were particularly eager to hire somebody and so they enhance the compensation available.

Beckworth: Yeah. So the other big take away from that table and your discussion surrounding it is that starting off, beginning of the race, if you want to use that analogy, the governors were getting paid about the same amount as the average regional bank president, but then it quickly diverges after that. Is that right?

Conti-Brown: That's right.

Beckworth: Yeah. So, that's a big deal. And that's, as you mentioned earlier, explained some of the developments that take place. So one of the individuals you talk about in your paper is Roy Young of the Board of Governors in 1930. He quit the job as a governor and became the Philadelphia Fed President because it'd be a salary raise for him. He was very explicit about it in a letter that he wrote to the president.

Conti-Brown: That's right. That's right. Very clear. Now there's some suggestion from others that this was him being coy that this was part of Herbert Hoover's effort to kind of push him out and get somebody else in for this key post. But all of the discussion that I found on that was all well after the fact and we have in the resignation letter in all of the newspaper coverage is just focused like a laser beam on how already by 1930 we'd seen a wide divergence between these two positions just in terms of their compensation.

Beckworth: Yeah. It's amazing. And we'll get to the current standing today, which is still very amazing. The fact that Jay Powell definitely gets far less than some of the regional bank presidents. But I guess the big takeaway from the first part of your paper, which is kind of a historical review of the Federal Reserve, is that the Fed has undergone a lot of revision, a lot of changes over time. Is that the key takeaway we should have in mind?

Conti-Brown: I think that's one of the two key takeaways.

Beckworth: Okay.

Conti-Brown: The second key takeaway is, indeed just how important 1935 is and kind of reestablishing the idea that as important as it was in 1913 to have a publicly accountable oversight Board over the central banking system, that commitment was dramatically expanded in 1935 so we do have drift, we have changes, life moves on, but that the original legislative vision of the Federal Reserve System is to have at the top, the Board of Governors. The reserve banks are below that and the reserve bank presidents do not like hearing that, but that's the system. The Board of Governors is to supervise the reserve banks and even their participation in monetary policy decisions was supposed to be in the minority that the governors would always hold a majority on that committee.

As important as it was in 1913 to have a publicly accountable oversight Board over the central banking system, that commitment was dramatically expanded in 1935 so we do have drift, we have changes, life moves on, but that the original legislative vision of the Federal Reserve System is to have at the top, the Board of Governors. The reserve banks are below that and the reserve bank presidents do not like hearing that, but that's the system.

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Beckworth: Very interesting. Okay. So we have the pivotal changes in the 1930s, 1935 in particular as well as this kind of lesson that changes do occur over time and there's been this drift. So that then brings us to the second part of your paper, which deals with some of the issues we see today. And in this section you collected a lot of interesting information on salaries and also present some case studies and then talk about the participation of Governors in the FOMC. So a lot of interesting graphs, data. And you mentioned in the paper that a lot of this or some of it at least you had to get through the Freedom of Information Act. So I'm just curious to hear some of your stories about getting this data. How easy was it to collect and put it all together?

Data Collection Background

Conti-Brown: So I got to say that I have a real love-hate relationship with the Fed’s, Freedom of Information Act office. The hate is just that I get denied so much, just as I'm working on a separate history with Sean Vanatta of bank supervision and I can't get anything out of the Fed that has anything approaching confidential supervisory information that's very frustrating no matter how old.

Beckworth: And this is the bank regulation side?

Conti-Brown: Yeah, that's the regulation side. More particularly the supervision side.

Beckworth: Okay.

Conti-Brown: But that said, for this I was just so pleasantly surprised. Ironically, I had no trouble finding the salary data for the reserve banks, which are these private institutions. And that's because the annual report of the Fed, which the Fed makes available from the very first year, had all that data. So it was very easy for me to just go look through each one of those annual reports and just pull it out. But it's ironic because the statute, the Federal Reserve Act itself identifies the dollar amount that the governors are paid, but it doesn't have anything like an inflation adjustment or anything like that. So I had no idea how and when the governors got paid more, between 1913 and what you can look up online in 2019. So there was just this whole history and I looked everywhere to try and find it.

Conti-Brown: I found out that in the year 2000 they attached the governor's chairs and vice chairs to other executive offices for their compensation schedules. But that was only in the year 2000 and so before that, I had no idea. So I put in a FOIA request, which for me was a Hail Mary. "Can you just give me all the data?" And they found every single year except for like nine years or something where I have a dotted line that kind of connects the years that I don't have.

Conti-Brown: And so this is the first time I was... Probably a pretty obscure thing for some people, but not for your listeners. This paper is the first time that anyone has ever compiled salary data for FOMC members throughout its history and with great results. I mean it's extremely striking to see just how divergent those salaries became over time.

This paper is the first time that anyone has ever compiled salary data for FOMC members throughout its history and with great results. I mean it's extremely striking to see just how divergent those salaries became over time.

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Beckworth: Yeah. Have you presented these findings anywhere, to any Fed officials or anyone?

Conti-Brown: No.

Beckworth: Yeah, so it's going to be a very interesting paper to see the reception when Congress starts looking at the paper when Fed officials themselves start looking at the paper. So I encourage listeners to get ahold of it. It's a Mercatus working paper. And as Peter mentioned, we'll publish it in a journal after that, but it's available online and take a look and look at his amazing charts showing these big divergences in gross salaries.

Beckworth: Okay. So let's talk about some of the issues you bring up. So that's the data, but let's talk about the supervision of the banks themselves and you go into some detail, the different issues that arise, one of them is the process of getting new presidents. So walk us through that. And what are the challenges involved in it?

The Fed Presidents Process

Conti-Brown: The way the statute is written is not a testament to elegance. It's a pretty complex process. What we do know from the legal structure is that the reserve banks are managed by a Board of Directors, like any corporation. Those directors are in three classes, class A, class B, class C, class A are bankers selected by banks who are shareholders of the Federal Reserve banks. Class B are non-bankers selected by those banks, although they can be former bankers to be clear. And then class C are directors who are non-bankers who are appointed by the Board of Governors in Washington DC.

Conti-Brown: Until 2010 all of the directors voted together to choose a president that would then be sent to the Board of Governors for them to exercise a veto. So they had to formally approve it, but the idea is that the Board of Directors chooses candidates and then if the Board of Governors has a complaint about that selection, they can veto it and send it back to the reserve bank to do itself.

Conti-Brown: Now, after 2010 as I may have said already, the class A Directors, the bankers appointed by bankers, they no longer vote on the presidential selection process. That's the legal structure. What actually happens is wrapped in mystery. We have so little sense of it. Sometimes in history, I can tell you that that process I just described absolutely did not happen. Now it would be the Fed chair who would call people up and say, "Hey, I want you to be the president of this Federal Reserve bank." And the person would say, "Okay." And then it would go through ratification through the various committees.

Conti-Brown: Other times the Board of Directors would play a kind of a wicked game of saying we're definitely going to go in this direction and go here and defy the Board of Governors to reject these candidates. Something the governors were loath to do, and I only know those things because we had some contemporaneous reporting in newspapers about these processes. By and large, the overwhelming majority of presidential appointments, we simply have no idea where the candidates came from, who chose them, who selected them, who participated. The only thing we know is we'll see that there'll be a search committee appointed, but even after 2010 the elimination of the bankers on the board, we don't actually know whether or not they're participating in the selection process. We know they're not legally allowed to vote, but does that mean that the class A director of the New York Fed, can't go up to his Federal Reserve Bank presidents and say, "Hey, you guys should really look into Joe or Jane as a main candidate." And that idea isn't taken seriously. We have no idea. There's just no sense of it.

Conti-Brown: And Bloomberg broke a really fascinating story. This was Chris Condon, the reporter there who's a terrific Fed reporter looked into the recent Philadelphia appointment of Pat Harker. Pat is a terrific central banker, credit to the system, but he was the chair of the search committee to appoint Charles Plosser's successor, he was not selected as the person who was going to be the next Philadelphia Fed president. The person that that board selected was approved by the Board of Governors. And then a day later withdrew. And very quickly Pat Harker was... He was president of the University of Delaware at the time. He was appointed to be the president of the Philadelphia Fed. For one of the most important positions in the federal government, it's astonishing to me that that's the system that we have for appointment. We just have no public input. It's really remarkable.

For one of the most important positions in the federal government, it's astonishing to me that that's the system that we have for appointment. We just have no public input. It's really remarkable.

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Beckworth: There are a number of interesting stories. You mentioned Tim Geithner. So Tim Geithner would be an example maybe of pressure from the top. He was touted by Larry Summers, Robert Rubin and Alan Greenspan. So that's someone from the top, but he's not very common as you said, the more common experience is the board, mixing its secret sauce up, and out pops a name. And one of the examples you give in the paper, I want you to talk about here is Neel Kashkari. Now Neel Kashkari, I actually like him, I like his views on monetary policy, but he definitely had very little in common with the state of Minnesota and in any kind of connection to that position and yet he became president. So tell us about that story.

Conti-Brown: So I'll agree with you right off the bat that if I were a Senator and he were appointed by a president to be on the Board of Governors or to hold another economic policy position, I would be extremely likely to vote enthusiastically to confirm him to whatever position. I think Kashkari is an eminently qualified person. But the circumstances of his appointments show how badly removed the reserve bank president processes from the politics of the day.

Conti-Brown: So Kashkari, he's a former Goldman banker. He was tapped by then Secretary of the Treasury, Hank Paulson to join Paulson's Treasury, which he did. He then led the office of TARP, at the beginning was one of its key architects. And for many Republicans, of course, most Republicans today, affiliation association with TARP is just anathema. That's a political death sentence.

Conti-Brown: So he's not popular with Republicans, but he is a Republican or at least was and indeed ran for Governor of California as a Republican, was defeated in that election. And then at a time when we had a Republican Senate and a Democratic president, Barack Obama, he became one of the most important economic policymakers in the nation. Because the Board of Directors in the Minneapolis Federal Reserve Bank needed a new president.

Conti-Brown: And so here's somebody whose politics would make him an orphan. He's not a Democrat, so he's not likely to get an appointment of that prominence from the Obama administration. He's the kind of Republican that Republicans of the time and continued today would not own or embrace. And yet here he became one of the most important public officials I'd argue in the nation. And some people would say, "Wait, you just said that you love the guy. You think he's terrific. He adds all this diversity of views and all this." And I agree with all of that. So shouldn't the ends justify the means? And my answer to that is, is absolutely not.

Conti-Brown: The fact that the public has no participation, no ability to influence, no accountability for who does get to shape those key appointments, I think is extremely troubling. People who want to complain about congressional gridlock or our polarized politics or all the rest, I would invoke Winston Churchill there, yes this democracy is a mess. It's just about the worst system you could imagine except for everything else that has been tried. And I think that appointment's by through these opaque processes are not better. And we have a comparison point here and that's to look at the quality of the appointments of the Board of Governors during the same time and the governors at the Fed, including those appointed by Republicans and Democrats, Donald Trump, Barack Obama going back are of a very high quality. So that democratic process, little D democratic process is still alive and well and we should do a lot more to make sure that we're protecting it.

The fact that the public has no participation, no ability to influence, no accountability for who does get to shape those key appointments, I think is extremely troubling.

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Beckworth: Another president, which I don't think you've covered in your paper, I may be wrong about this, is John Williams, the New York Fed. And as I recall, that was a very controversial pick as well. Now he was president previously at the San Francisco Fed, but he wasn't on anyone's radar. And how he ended up at the New York Fed still seems a bit of a mystery to some folks and I've just remembered because he's probably the most recent one. A lot of noise was created surrounding his appointment.

Conti-Brown: I made some of that noise. I have a piece in Brookings, I can't remember what I called it. I think it's *Two Cheers for John Williams* or something like that. This is a great example. So I think of John Williams as I consider myself a dyed in the wool Fed watcher, I think he's a terrific macroeconomist. I think it's a credit to the nation that his voice and his views and his experience are devoted to the public service in this way. Speaking of opportunity costs, he could make many multiples of his salary in the private sector given his skill set and he doesn't. That's all great. So let me be very clear. As with Neel Kashkari I'm pro John Williams.

Beckworth: Yep.

Conti-Brown: But we already had the benefit of his views within the Federal Reserve System as the president of the San Francisco Fed. And you asked earlier what motivated this paper, one of the things was that the graph that we'll probably talk about later about FOMC participation came from that piece that I wrote for Brookings about, what is the importance of the New York Fed president in those meetings?

Conti-Brown: And we can talk about that later. But I think the biggest problem with the John Williams appointment was twofold. Number one, this is coming at a time when people are really clamoring for a more representative central bank, more diversity at the top. And so John Williams like me is a white guy and we just see an awful lot of white guys in these rooms. And so I think it's a very legitimate concern about a failure of diversity. I think another factor that has to do with the practice of monetary policy and regulatory policy and supervision is the fact that what makes the New York Fed different from the San Francisco Fed is not that John Williams’ deep expertise as a macroeconomist is relevant. Both figures are in every single FOMC meeting, participating if not voting in every meeting. What's different is how much the New York Fed president has to have an ear close to the markets and has to be a very effective participant in large bank supervision.

Conti-Brown: And the background and evidence from John Williams is that he wasn't strong in either of those. And this has real consequences. Look, the repo markets and the fact that... I don't know that you've discussed at length on this program before are a real issue. And I'm curious as to whether someone with deeper markets experience or a deeper markets team or a better relationship with markets teams that had been through 2008 for example, if we might've seen different moves, more stability in this very market facing or technical aspect of central bank practice. I'm not sure of that. I don't know that that's true. Maybe that would have happened to anybody. The point is that for this kind of a job, we want to have a little bit more or maybe even a lot more transparency so we can evaluate candidates based on their own qualifications for it and it's not clear to me that we got that in the Williams appointment.

The point is that for this kind of a job, we want to have a little bit more or maybe even a lot more transparency so we can evaluate candidates based on their own qualifications for it and it's not clear to me that we got that in the Williams appointment.

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Beckworth: Yes. I guess my take on this would be that I suspect no matter who had been appointed, they would have faced this market turmoil because it's about the Fed's operating system, bigger I think questions, but I think why this is so important as you allude to, is this is the most important regional Federal Reserve bank. He's the vice chair of the FOMC. He's at the center of the Federal Reserve System when it comes to implementing monetary policy. So if any of the Federal Reserve bank should be more transparent in how they select a president, it should be the New York Fed. And we didn't see that.

Conti-Brown: We didn't, we saw some efforts at it. And I think that, a couple of directors of the New York Fed who led the search committee, Glenn Hutchins was one, I'm forgetting the other one. They really tried to do more outreach and I think they should be congratulated for that, but it's just too little.

Conti-Brown: What I think would be good, I don't talk about this in the paper, but I would be a big proponent of a shortlist is we see this for CEOs, for major companies, we see lead shortlist people who are being considered for these positions. We see this for university presidents. We certainly see it in a political context. Remember the reality TV show that proceeded Jay Powell’s appointment as Fed chair and people can complain about this and say, "Oh, you do a shortlist and there's no way you're going to get high quality people to participate." That's an assertion that I don't think has much evidence behind it.

Conti-Brown: We see high quality people who participate in high stakes negotiations about these prominent positions all the time and in all parts of society, private sector, public sector, civil sector. And so the idea that we should have, just the white smoke coming out of the Vatican when the New York Fed president or the Philadelphia Fed president, whatever, has been selected… that doesn't sound like democratic institutions to me, that sounds like secret societies.

Beckworth: Right. That's a great analogy there with the Vatican. Okay. There's a bunch in this section that you cover, a number of issues and we don't have a lot of time, but I do want to touch on, what I think it was some of the bigger ones, but let's talk about the salaries. Tell us what's happened to salaries over this time.

The Impact of Federal Reserve President Salaries

Conti-Brown: Well, in a word, they've just eroded at the top. That happened quickly. And then as listeners can see in the paper, it just opened up to a wide chasm. What's interesting though is that individual negotiation and contractual process that we were discussing earlier did a remarkable job in the reserve banks of matching inflation. So that the average reserve bank president is getting something quite similar to what an inflation adjusted 1913 salary would be. That's really telling to me. And that tells us something about the fact that the flexibility of the reserve banks have to compensate their presidents relative to alternatives.

Conti-Brown: Now, inflation does not account for inequality. Some economists like to use other measures, price purchasing parity or percentage of GDP or whatever. And so this is really truly just inflation adjusted. I think there's a credible argument to say that the reserve bank presidents are also under-compensated, especially in San Francisco or New York, but the governors by any standard of central banking and the work that they do relative to history are exceedingly under-compensated. And I think that's a challenge. That makes it really hard to get high quality people who aren't independently wealthy to participate for a long term on the Board of Governors because it's just so costly to do so.

I think there's a credible argument to say that the reserve bank presidents are also under-compensated, especially in San Francisco or New York, but the governors by any standard of central banking and the work that they do relative to history are exceedingly under-compensated. And I think that's a challenge. That makes it really hard to get high quality people who aren't independently wealthy to participate for a long term on the Board of Governors because it's just so costly to do so.

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Beckworth: Yeah. And this speaks to one of your other points, the politics and the challenge of Fed vacancies at the Board. But before we get to that, I want to just make this concrete, give us some numbers. So for example, what's Jay Powell’s salary relative to say a regional bank president? Just to make this concrete for our listeners.

Conti-Brown: So, we're looking at Jay Powell makes about $200,000 a year where the average salary for the reserve banks are closer to $400,000 a year.

Beckworth: And I imagine that the New York Fed, it's even higher, of course it costs more to live in New York City, but there's huge divergence.

Conti-Brown: Yes, there's a huge divergence, and I want to be clear that the compensation we're talking about is salary. There's good reason to think that the reserve banks are in fact compensated even more in non-salary compensation, living expenses, travel. I mean, just to take an idiosyncratic thing that I just learned about, if you want to fly business class and you work for the Board of Governors, your flight’s got to be longer than 10 hours. So essentially, Middle East or Asia, but it's much shorter in other reserve banks, they don't have a system wide policy.

Beckworth: That's interesting.

Conti-Brown: So even just something like that, right? That these non-salary items would open up that gap even further. Now, some of our listeners might say, "Alright, don't cry for me, Argentina.” When you hear that Jay Powell makes $200,000 and I'm saying that's too little. But that's exactly what I'm saying. I'm saying that the Governors and the Fed sure makes too little. And for those who think that that should not be a problem because the median income in the United States is around $60,000 or something. Just recognize what that does to our pool of candidates to participate in the public sector at the Fed in this way. It's a different argument than saying, “well, members of Congress make too little or others make too little.” It's different because one of the key jobs that the Governors have is to supervise the system. And so what we need is people who are not only willing to come, and as I said earlier, there's good evidence that the quality of candidates for the governors are high.

Conti-Brown: We need people to stay. You need people who will come and who will stay for longer terms than two or three years, so that they can gain the expertise, so that they can supervise the staff, the reserve banks and others, and really be the kinds of insulated, independent central bankers that Congress designed them to be, that the public should want them to be. And that's why I think salary is such an important place for us to focus and why there, I think the amount of money that we're talking about is trivial for the public fisc.

We need people to stay. You need people who will come and who will stay for longer terms than two or three years, so that they can gain the expertise, so that they can supervise the staff, the reserve banks and others, and really be the kinds of insulated, independent central bankers that Congress designed them to be, that the public should want them to be.

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Beckworth: Any economist worth his salt will understand the idea of opportunity cost and what these Governors could be making somewhere else.

Conti-Brown: Absolutely.

Beckworth: $200,000 relative to what they could be earning in Wall Street is chump change. Now on this figure... We don't have a lot of time, but on this figure it's striking and again, I encourage our listeners to take a look. The divergence really takes off in the eighties and nineties I mean there's a little bit before that, but man, you see paths really diverge about that time. And that leads me now to your first chart, which looks at the FOMC participation rate by governors, which has just declined dramatically and the decline occurs about the same time starting in Reagan and somewhat at Carter, but there's just this sharp decline by Board members at the FOMC. So speak to that problem as well.

The FOMC Participation Rate Problem

Conti-Brown: So this is going to be something that I think is going to strike some people as the most novel part of the paper and others as the most controversial. What I did, and this did not take a little time, is I looked through and I counted each time an FOMC participant is mentioned in every transcript of every FOMC meeting from 1980 until the last transcripts, which are available, which are from 2013. And I looked at that and I separated them out. I only looked at the non-chair. The chairs just dominate these conversations. Not only are they speaking all the time because they're managing the discussion, but they're also referred to an awful lot.

Conti-Brown: So I took the chairs out. I only look at governors, voting presidents and non-voting presidents. And the key insight here is to say, "All right, well the FOMC nominally consists of 12 members plus seven alternates, the seven alternates are reserve bank presidents who are rotated out of the vote.

Conti-Brown: But that I think is a legally accurate but not functionally correct way to describe those meetings because those non-voting members talk so much. And if the meeting is a good proxy for impact on the way that monetary policy discussions unfold, then knowing how much these different members in different categories are participating matters a lot. Now note, well that I'm adjusting for vacancies because I'm only looking at the percentage of times that each category speaks in a meeting. So it's independent of whether or not there are vacancies at the time because the denominator shrinks when there are vacancies. So it's not enough to say, "Oh, of course the governor's declined because there are more vacancies." One former FOMC member told me that and I said, "No, I controlled for all of that."

Conti-Brown: And so what we see as listeners can see on the graph itself is... I also have bands for statistical significance to show you how important this, is a secular decline that starts roughly in the late 1980s and it's just falling, falling, falling such that the governors participate less than either the voting or non-voting presidents, substantially less, and indeed the opposite is true for the non-voting presidents.

Conti-Brown: Minimal participation in 1980 when I start, when those meetings are dominated the governors and now they participate more than any other category. The non-voting presidents spoke up more than either the voting presidents or the governors. So in terms of the meeting itself, it's now the reserve bank show. It's not the governor's show and that's not the way that the 1935 structure was designed.

So in terms of the meeting itself, it's now the reserve bank show. It's not the governor's show and that's not the way that the 1935 structure was designed.

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Beckworth: And that was really surprising and that leads to one of your proposals we'll get to in just a minute. But the decline in the participation by the governors is really striking and it's a nice segue into a final point I want to discuss that you highlight as a concern and that is groupthink. Now, your discussion of groupthink goes a little different direction than I had in mind. So let me share with you what I had in mind. I heard this number and I can't remember the exact number, but this argument at least that governors have consistently voted more often than not with the chair. But there was a time in the past where they didn't, they were more free for whatever reasons to vote against the chair and didn't feel as much pressure. But for the last, two or three decades, they've voted almost in line with the chair, which would, if you take that observation and look at your secular decline, it further reinforces the importance of this trend because not only are they not participating as much, but when they do, they're just echoing the Fed chair effectively.

Beckworth: And my question is, why do we see that and is that not a concern? I know you brought the groupthink concern up in terms of the regional bank presidents, but when I look around today, I see the Neel Kashkari of the world, Jim Bullard. I mean Jim Bullard is kind of like my hero right now because he's one of the few people pushing back on this review that's going on. Kind of the sense we get is the review is going down the path of average inflation targeting and he's the only one out there saying, "Hey, let's look at something else. Nominal GDP level targeting." So yes, obviously I'm biased, but he's the only one-

Conti-Brown: Do you have a view on nominal GDP targeting, David?

Beckworth: Surprise, surprise. But he's someone who's actually, saying, "Hey, let's look at something different." And you think of Neel Kashkari’s predecessor, he also was very outspoken. So I guess my thought about groupthink is, man, you see a whole lot of that with the governors voting in line for chair now maybe I'm mistaken in that and you can correct me, but that's the concern I see. Is that misplaced?

Is Fed Governor Groupthink a Legitimate Concern?

Conti-Brown: I don't think it's misplaced. I think you're exaggerating the importance of these exceedingly rare events of dissents at all. The vast majority of reserve bank presidents, the vast majority of the time also vote in lockstep with the Fed chair. And the rise of dissents that we have seen from reserve bank presidents is also a relatively recent phenomenal. And they've been folks who are not your heroes, at least intellectually. They've been folks who were very eager to have much tighter monetary policy at the height of crisis. Those are the dissenters so they're your Plossers, your Lackers, your Fischers...

Beckworth: Get your yin with your yang. I understand. Yeah.

Conti-Brown: So the key is not just to look at the folks that you mentioned, the Kashkari, the Kocherlakota or the Bullard, but also look to see what Lael Brainard is saying about monetary policy. Look closely at the vice chairman… Stan Fischer's speeches for example, when he was vice chairman, really had some provocative ideas that he would try out. He never voted against Janet Yellen of course, but his voice really mattered. And so I think when we take a look from that perspective, then those kinds of differences matter a lot. So I'm a big fan of, of intellectual diversity.

So the key is not just to look at the folks that you mentioned, the Kashkari, the Kocherlakota or the Bullard, but also look to see what Lael Brainard is saying about monetary policy. Look closely at the vice chairman… Stan Fischer's speeches for example, when he was vice chairman, really had some provocative ideas that he would try out. He never voted against Janet Yellen of course, but his voice really mattered. And so I think when we take a look from that perspective, then those kinds of differences matter a lot. So I'm a big fan of, of intellectual diversity.

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Conti-Brown: I agree with those who say that we should not be moving in lock step, that the idea of a governor dissent from an FOMC decision should not be something that we're viscerally afraid of. I think that's a good idea. We should see more of that. But what I'd like to see more of is just making sure that we're selecting from a pool of candidates that really does reflect a really wide range of views about these key issues. So that, and I would agree with you David, and I agree with president Bullard, if we're going to do this whole review and really look at the monetary policy regime and kick these tires and investigate the Phillips Curve and look at things… the idea that we’re only going to be satisfied with asymmetric versus symmetric inflation targeting, it seems like a profoundly missed opportunity.

Conti-Brown: And how do you get that difference? Well, you get the difference because you have different people who are willing to talk about different kinds of ideas more seriously. That is not exclusively a governor versus president phenomenon. So I don't want to exaggerate the claim here.

Beckworth: Fair point.

We looked up every single reserve bank president from 1980 onward to see how many of them had had the reserve bank experience versus the governors and we see, and I present this data in the paper, yeah, the reserve bank presidents are likelier to have been former Fed insiders.

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Conti-Brown: But it matters here for another part of the data that I present and that's that the reserve bank presidents, ironically, perhaps if your expectation is that the reserve bank presidents are going to be the source of diversity, are much more likely to be Fed insiders than the governors. They're much more likely to be people who've been affiliated. That's another thing I did and an RA helped me with this, which is we looked up every single reserve bank president from 1980 onward to see how many of them had had the reserve bank experience versus the governors and we see, and I present this data in the paper, yeah, the reserve bank presidents are likelier to have been former Fed insiders.

Conti-Brown: This is an insight that Aaron Klein, my colleague at Brookings had had earlier and then I just looked in more comprehensively and his insight was correct. Reserve bank presidents are likelier to have been Fed insiders. And that's the kind of thing that I think should make us a little bit uncomfortable because one of the most important factors in ideological or intellectual diversity is, "Have you been doing the same thing for the longest time and might have some inertia institutionally behind your views." And that's I think a thing that we should be looking at.

And that's the kind of thing that I think should make us a little bit uncomfortable because one of the most important factors in ideological or intellectual diversity is, "Have you been doing the same thing for the longest time and might have some inertia institutionally behind your views." And that's I think a thing that we should be looking at.

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Beckworth: Yeah, those are great points and again, very interesting findings. So I encourage listeners to take a look at the paper and all the hard work that Peter has put into it. Let's move to your proposals for reform. Only have a little bit of time left. So if you can run through how you would make the Fed a better organization that can live up to its potential.

Proposals for Institutional Fed Reform

Conti-Brown: Right. I think that I'm always reluctant to say, "Alright, we just got to change the statute." As you open the lid on the Federal Reserve Act, who knows what you're going to get on the other side. So let me talk to you about two of the proposals. I do have some legislative proposals, but let me tell you about a couple that I have that don't require any kind of changes to the statute. So the first is a cultural one. And here I think that we need to do a lot more in pressuring the political parties, Republicans and Democrats, especially in the Senate, but also in the White House to call a truce in the Fed vacancy crisis. I think we should urge president Trump to nominate qualified candidates. He has mostly done this brilliantly and we need to urge Democrats to confirm those qualified candidates.

I think that we need to do a lot more in pressuring the political parties, Republicans and Democrats, especially in the Senate, but also in the White House to call a truce in the Fed vacancy crisis. I think we should urge president Trump to nominate qualified candidates. He has mostly done this brilliantly and we need to urge Democrats to confirm those qualified candidates.

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Conti-Brown: Now I'm a Democrat. I want to be clear about this, but this is not a partisan argument. I would urge the Democrats when they are next in the White House to put forward qualified candidates and then the Republicans to get behind them. We had a long tradition of this, but now we face at complete collapse of that structure and it's basically comes down to an old game theoretic truism that the Senate Republicans and Democrats are engaged in a very costly game of tit for tat and so my answer to them is "Just knock it off." President Trump put forward some nominations. I think David Beckworth for example, would be a terrific Fed governor.

Beckworth: Well, I'm flattered.

Conti-Brown: Regardless of who you choose, let's get those nominations, make sure they're qualified, not outside of the intellectual mainstream. And then Senate Democrats, as much as you may hate President Trump, if the candidate is qualified, let's fill those vacant seats. That's a cultural change. I think in the paper talks about how recent the tit for tat is that's something that we should do.

Conti-Brown: FOMC participation is a regulatory change. This is something that the FOMC itself could change tomorrow. My idea is I just don't see the value in having a 19 person committee actively debating, arguing, making sure their views are heard. The FOMC is not a 19 person committee, it's a 12 person committee. My thought is if you don't have the vote you can come, I guess. But you're an observer. A lot of other central banks have observer status usually for people from government. But a more intimate discussion, a more intimate and smaller group I think would really be a favorable and you could get that with regulation. And then finally, I'll stop here because I know we're running out of time so I'll just be very brief here.

FOMC participation is a regulatory change. This is something that the FOMC itself could change tomorrow. My idea is I just don't see the value in having a 19 person committee actively debating, arguing, making sure their views are heard. The FOMC is not a 19 person committee, it's a 12 person committee. My thought is if you don't have the vote you can come, I guess. But you're an observer.

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Conti-Brown: I would love to see dramatically more transparency around the reserve bank presidential appointment process. It could take a number of different forms, I’ve talked about a little bit already.

Conti-Brown: And then finally, here's the only legislative proposal or proposals that I'd have. Well, I make several but only mention one and that is let's give the governors a very big raise. And I know that the optics of this aren't great, but I think that we want to see governors who can afford to not be independently wealthy and who also have the relevant experience in academia or in markets or in public advocacy or wherever else it might be, such that it's not a devastating pay cut to come and be a public servant at the Fed. And so at the very least, all I would ask for… inflation protection for their salaries so that we can maybe for at least starting from now prospectively, we don't have to see that yawning chasm open up between  inflation adjusted salaries and where the present is. So, a lot of others, but I'll leave it there.

Let's give the governors a very big raise. And I know that the optics of this aren't great, but I think that we want to see governors who can afford to not be independently wealthy and who also have the relevant experience in academia or in markets or in public advocacy or wherever else it might be, such that it's not a devastating pay cut to come and be a public servant at the Fed.

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Beckworth: Yeah, these are reasonable suggestions and ones that I hope people take to heart and, and consider. But with that, our time is up. Peter Conti-Brown is the author of a new paper, *Restoring the Promise of Federal Reserve Governance*. Check it out. Peter, thank you for coming on the show again.

Conti-Brown: It's always such a pleasure, David. Thanks for having me.

Photo credit: OFF/AFP via Getty Images

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