Peter Conti-Brown on the Legal and Regulatory Issues Facing the Fed and Financial Markets

Peter Conti-Brown is an associate professor of financial regulation and legal studies at the University of Pennsylvania and is a non-resident fellow at the Brookings Institution. Peter is also a returning guest to Macro Musings, and rejoins the podcast to talk about some of the big legal and regulatory issues facing the financial and monetary policy space today. Specifically, David and Peter discuss the debt ceiling crisis, Fed master accounts, the current state of cryptocurrency, the implications of the Federal Reserve Accountability Act, and the most significant court cases facing the central bank today.

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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 [email protected].

David Beckworth: Peter, welcome back to the show.

Peter Conti-Brown: Such a pleasure to be with you, David.

Beckworth: Well, Peter, I was checking, this is your fifth appearance, so you're quite a regular on here. And then more importantly, you were one of the first guests way back in 2016 when the show started. So you were one of the early supporters of the show. The show couldn't have happened without people like you willing to be guinea pigs, come on the podcast, see if it works. And not only that though, I like to think of myself as bringing out the best in my guest. And Peter, you are the only guest that I recall that has actually performed some music on the podcast. Now, to be fair, it was a bonus segment after the podcast and we'll provide a link to all those who missed it. But you did a rendition that Pink Floyd's “Wish You Were Here,” and I think you retitled “Wish We Weren't Here,” and the song was about collateral and lending with the Fed during the pandemic, so remember that song?

Conti-Brown: Oh, I do. Thank you for reminding me of it. I think you might've been one of the only three people who ever watched that clip, so I don't know if I'm happy or sad to hear that you're going to repost the link, but yep.

Beckworth: Yeah, we're all doing-

Conti-Brown: [inaudible] in the spring of 2020, weren't we? That was my way of-

Beckworth: Well hey, we were all locked in our rooms. Back then, Peter, we were doing two podcasts a week, we're back to one now, and so you helped us get through that time, that season. Okay, so Peter, more seriously though, I have you on here because you're both a Fed scholar, you're also a lawyer, a legal scholar, and you not only look at the Fed, but you look at regulatory issues and the financial space, banking, crypto, all those different facets, part of the work you do at the Brookings Institution and at your new center that you are a part of at the University of Pennsylvania, this center is called the Wharton Initiative on Financial Policy and Regulation. So tell us about this center and what are you doing with it?

The Wharton Initiative on Financial Policy and Regulation

Conti-Brown: Yeah, so the center, I founded the center with my colleague Itay Goldstein who is a financial economist. We co-direct it with the help of our phenomenal senior fellow and staff director Max Harris, who you may know. He wrote a great book on international monetary coordination in the 1930s and he joined us in July. We've been around for about a year and a half, and we seek to be the literal and spiritual center between New York and Washington, literally in Philadelphia, right there in the middle, but also because we want to be in dialogue across two broad groups, both of which I think will resonate with you, David, and your audience. The first is academics on both sides of the financial policy divides of financial economists like Itay, financial scholars of financial regulation like me, on the legal side and on the history side, political science, it's non-trivial to get these two groups of academics to talk to each other at a level of expertise that is still legible one to another.

Conti-Brown: So that's part of our mission is to bring these groups together. The other part is to render the insights, the knowledge created through the university and make them usable in public policy debates. So we're not partisan. We really are proud of the fact that we convene groups of people who not only disagree with each other, but sometimes outside of our little meetings don't even like each other that much so we got a lot of that and we commission white papers, we hold debates, we sponsor student events, we sponsor research. We're trying to just raise the attention placed within business schools on financial policy. And we've had just terrific support from foundations and donors, the university itself, we're just really trying to say the ways that we've thought about market ecosystems, financial market ecosystems, financial institutions and regulators, it just deserves a generational refresher and we think that this cross-pollinization within the academy and between the academy and public policy is exactly that kind of refresher. So we're trying to take some leadership in that process.

We're just really trying to say the ways that we've thought about market ecosystems, financial market ecosystems, financial institutions and regulators, it just deserves a generational refresher and we think that this cross-pollinization within the academy and between the academy and public policy is exactly that kind of refresher. So we're trying to take some leadership in that process.

Beckworth: And I can speak to the excellence of this program because I was invited to participate in a discussion of a paper by Christina Skinner on cross-border payments and you had a stellar group of discussants. I came to the online meeting and I was like, wow, Peter's got some big names here. I'm humbled to be a part of this illustrious group. And you also have sponsored some grad students. Kaleb Nygaard's a part of your program too, and he's a previous guest of the show and you probably know Kaleb from his own podcast on the Fed and central banking issues. So you're doing a lot of interesting and productive things there. And where can people find you and your institute?

Conti-Brown: So wifpr.wharton.upenn.edu. WIFPR is W-I-F-P-R, and we're also on Twitter. I post on LinkedIn and Twitter from time to time about our events. And you're right, we've got terrific grad students. Kaleb is an all-star. Ola Williams is another PhD student who's affiliated with us and several others. We are really trying to create a generational shift and think that WIFPR will be a part of it

Beckworth: Okay. And we'll provide a link in the show notes to help you find your way there. Let's move on to an event you were recently a part of and this was the discussion with Stephen Cecchetti and he's a famous monetary economist. He's worked at the BIS and is an academic and this was over the question of what should we do with crypto? Should we regulate it? And I think what prompted this discussion was a piece that he wrote in FT Alphaville titled, *Let Crypto Burn.* And basically he was saying, take your hands off, let Crypto destroy itself. I believe he argued that regulation would provide legitimacy and therefore responsibility for the regulators to get more involved in the space. It might attract funds from other parts of the financial system and we don't need regulation to have innovation. I believe those were some of his arguments. What was your view and where would you push back against his argument to let it burn?

Letting Crypto Burn

Conti-Brown: So I worried that our audience suffered a little bit from too much agreement because Steve and I agreed that so much of the crypto enthusiasm of 2020 and 2021 was a mix of euphoria, fraudulence, hucksterism, and the rest. And so all of that you expect anytime a little bit of heat is turned up on any kind of asset class or any kind of market, most of this burns off. And so there, if you want to let the frauds burn, you won't find any disagreement with me. I think that Steve is too certain in his conclusions that crypto everywhere, top to bottom, in every application is a fraud. I would adopt a little bit more epistemic humility to say there's a lot that's intriguing about the very idea… at least forget cryptocurrency for a moment and think instead just about decentralized database management. The world is run on databases, most of which or almost all of which are proprietary.

I think that Steve is too certain in his conclusions that crypto everywhere, top to bottom, in every application is a fraud. I would adopt a little bit more epistemic humility to say there's a lot that's intriguing about the very idea… at least forget cryptocurrency for a moment and think instead just about decentralized database management. The world is run on databases, most of which or almost all of which are proprietary.

Conti-Brown: There are good reasons for this, not only rent extraction and monopolization of these things for it to be so centralized, cybersecurity is the most obvious one. Control over your databases is another, but there's also genuine benefits to thinking through what might it be for us to render the organization of information a little bit more democratized and decentralized. Now the application to currency I think is incredibly intriguing. I know some of your previous guests have taken a very staunch pro-public, pro sovereign view of money and monetary theory, which I think is also wrong historically, legally and theoretically, money is much more of a public-private partnership. And so cryptocurrency and DLT, decentralized ledger technologies, blockchain, and the like, represents tilt toward the private side of that public-private partnership. I don't know where this ends. And so in that sense I'm not a crypto skeptic, I'm not a crypto enthusiast, I'm a crypto watcher.

Conti-Brown: But I think that's the biggest difference between us, that I think that there's something here and Steve thinks that the something that we see is all fraud, but what that does it mean for regulation? He and I agree that we should not have a new crypto SEC, a new institution that is devoted exclusively to this asset class. I think technology specific regulatory proposals are terrible and I would include SBFs proposal that has gained bipartisan enthusiasm depositing most of that authority in the CFTC. I don't like that one bit, but I do think that the regulatory space that it currently exists should be enforced and that it shouldn't be enforced to snuff out the crypto candle entirely. So when crypto behaves as securities or exchanges, there should be regulated as such. When you see a crypto “exchange” behaving much more like a bank offering insured deposits with guaranteed returns, which then they use as leverage and maturity transformation, then I would say that those people need to get a bank charter and be regulated as such.

Conti-Brown: But I think there's a lot of space within the crypto environment that is neither a security nor an exchange, nor a bank nor a money market mutual fund. And I think for that we should let those continue and see if green shoots come up. Now, less the crypto evangelists that see too much of me wearing their jersey in this sport, I would say I would think that 90% of crypto products that we see today should probably be burned off during this asset class recession. It's the 10% though that makes me pretty excited to see what's coming.

Beckworth: Well, Peter, let me throw at you something I recently discussed with the previous guest, Julie Hill, she's a law professor at the University of Alabama and she's written extensively on Fed master accounts and there's a lot of uncertainty, a lack of clarity of how these things are allocated, at least for FinTech who want to tap into the Fed's balance sheet. And the Fed recently did release guidelines, three tiers of institutions, and the lowest tier is the one where Fintechs, like stablecoins, might apply for a Fed master account. And one of the things that she highlights is that, look, even if you're not excited about it, at least provide some clarity.

Beckworth: Tell us how long, what the process is, why it's unlikely you will get it and we just don't see that yet. And recently Senator Toomey has been pushing on this, now he's out of office, but he did get through this omnibus bill at the end of the year last year, a requirement that the Fed has to provide a database revealing who has Fed master accounts, who's applied for them. How would you see this process going forward in terms of Fed master accounts, stablecoins, and let's just say it's a world where stablecoins who want to tap into the Fed balance sheet have a master account and they're run more like money market funds than say traditional banks. They don't want to lever up, they just want to have that safe backstop. Where would you see the Fed going in that situation?

Stablecoins and Fed Master Accounts

Conti-Brown: Yeah, you put a lot on the table here. So let me break it into three different issues. So the first is kind of the Hill-Toomey question of what the Fed's process should be. The second is who would I like to see participate in the Fed master account ecosystem? And third, what do I think the Fed will actually do? So Julie Hill is the preeminent expert on master accounts and their legal and regulatory status. So I learned something from every page of her writing on these subjects. We disagree on a few things. I think the Fed has substantially less discretion in denying and granting these. I think that by statute, the discretion is given to the state or national chartering authority and to the FDIC once approved for both the charter and deposit insurance, I think a master account should follow in course.

Conti-Brown: That's a bit of a provocative statement. At least one judge in the 10th circuit to review the question agrees with me, but two didn't. And so it's an ambiguous question to be sure. So that's why I think the Toomey proposal that Julie endorses is so good. Let us at least know what is going on here. I think any argument for Fed independence, which is normally the lever we pull when we're arguing in favor of opacity in these organizations, is silly, and that's the best compliment I can pay it. This has nothing to do with Fed independence. This is a regulatory and supervisory authority. I think the Kansas City Fed misbehaved to an extraordinary degree in blocking information disclosures about these questions. This is not the Fed's constitutional authority, not even monetary policy is that, the Fed doesn't have unique constitutional status. But even in the space where we are most sensitive about political interference with the Fed, which is on monetary policy, we're not anywhere near it.

Let us at least know what is going on here. I think any argument for Fed independence, which is normally the lever we pull when we're arguing in favor of opacity in these organizations, is silly, and that's the best compliment I can pay it. This has nothing to do with Fed independence. This is a regulatory and supervisory authority.

Conti-Brown: Not only are we nowhere near it, but the Congress has spoken very clearly about how it wants this ecosystem to be regulated in many respects. And I feel like the reserve banks are not paying adequate attention to their political masters in disclosing this. So that's the first question. I think that the Fed's guidelines are good, they're not specific enough and we need to get much more specific. And if we can't do it, then we just need to take this away from the reserve banks and give it to the Board of Governors on a classic kind of administrative procedure act, sort of regulatory process that can be litigated and clarified in the usual way. The second is what do I personally think on a policy perspective should happen? I don't like the idea of non-bank Fintechs having master account status. I think that if it smells too much like a regulatory arbitrage. If you want to be a bank, then be a bank.

Conti-Brown: If you want to be a special kind of bank, then that's okay too, but you need a bank charter to do this. And so I think that should be, basically, a non-starter. Now, some states will give you a bank charter like Wyoming, and I think there we need to have a little bit more conversation about this. And this is a controversial subject. What does it mean to be a bank? Does that mean you have to issue deposits in order to be a bank or is there something else? This has been litigated. In fact, when the Obama and then the Trump OCC sought to have a special FinTech charter, I'm more sympathetic with those kind of experimental structures, but I think that this is a line that can be blurred too much. And so I don't love the idea, if you are doing bank-like activities and then you also get the master account. That's basically a green light to say go and be as bank-like as you want to be, but without paying for all of the associated compliance and regulation.

Conti-Brown: So part three is what do I think the Fed will do? Well, the Fed is an extraordinarily adept and able political institution. I think the former Senator Toomey's pressure on the Fed joined by Senator Warren in one respect related to this is turning the heat up on the Fed. The guidelines themselves are a kind of political maneuvering to recognize that the reserve banks have not been behaving with adequate transparency. So I think the evolution is moving towards greater transparency, but simultaneously, I expect the Fed will continue to clamp down on the idea of too many Fintechs gaining access to master accounts. We just saw the denial of the biggest one from Wyoming, the Custodia bank and I think that will continue.

I think the evolution is moving towards greater transparency, but simultaneously, I expect the Fed will continue to clamp down on the idea of too many Fintechs gaining access to master accounts. We just saw the denial of the biggest one from Wyoming, the Custodia bank and I think that will continue.

Beckworth: Well, since you've brought up Senator Toomey and Senator Warren, Senator Toomey, along with her, pushed a bill that would require the original banks to provide freedom of information access like any other government institution. That didn't pass. Senator Toomey also proposed a bill by himself now called the Federal Reserve Accountability Act, and this also died with last year's Congress but it was very interesting, Peter, because it would make regional Fed bank presidents presidential appointees just like the Board of Governors. It would also make the general council from the Board of Governors a presidential appointment and then it would narrow the regional Fed banks down to five from its existing number of 12. And again, this is something that was proposed. It died last year with the past Congress, but do you think it sends a warning shot across the bowel of the Fed, as you were suggesting, it's turning up the heat even if it's not a bill this year. Is this something that the Fed would take seriously and say, oh wow, the Republicans, they're on a certain war path, a certain direction. How do you think they are receiving proposals like this?

The Federal Reserve Accountability Act and its Implications

Conti-Brown: What a fun question. So as you know, I've been on this beat since our very first Macro Musings podcast seven years ago, and I'm pleased, I don't want to overclaim, but I first floated the idea that the general counsel should be a presidential appointment in the Wall Street Journal, gosh, five or six years ago. And so I don't know if Senator Toomey read it back then and then tucked it under his hat until the right moment but I think it's a phenomenal idea. I'm less enamored with the idea of making the reserve bank presidents presidential appointments, although I'm very open to it. I definitely think that we should render the boards of directors for each of the reserve banks advisory only and then make the reserve bank presidents appointed as division heads or the so-called barons at the Board of Governors, which is by the Board of Governors themselves and then removable by them, hireable and fireable at will by the Board of Governors, still with their seats on the FOMC.

Conti-Brown: I think that regional diversity is good to have, but the governance structure that we have in place at the reserve banks is incoherent. Whatever benefits it served in 1913, which were few then, have no longer served us well. So I would love to see that. And so I say two and a half cheers for Senator Toomey's final proposal. I like almost all of it. The Fed is unquestionably paying razor sharp attention. I have no doubt about this. And we are seeing just how much attention the Fed pays when it updates its personnel regulations responsively to Congress. I'm thinking of two in particular. The first is the thing that in part got Senator Warren to pay so much attention to Fed governance most recently, and that's the ethics trading scandal. That was the subject of our last discussion. And the Fed to its credit wrote what I would regard as the finest trading policy for the government anywhere including the judiciary, the President, and Congress itself.

Conti-Brown: That wasn't legislated. That was the work of the Fed Board of Governors, Fed general counsel. And I think it is absolutely perfect or nearly perfect. The second is something that I've also thought was gobsmacking in its inappropriateness and that is President Kashkari’s engagement in Minnesota state politics sponsoring, in the name of the Federal Reserve Bank of Minneapolis, a constitutional amendment that guarantees the right to education that sounds off to me in kind of school choice, school voucher sort of stuff, but whose politics would become strange and hard to predict, totally inappropriate for a Fed president to do. And indeed the Fed has changed its policies which prohibits this very kind of thing, although it's a little bit open-ended. I give those two examples because I’d like to tell you that the Fed is paying extremely close attention. It can't obviously change the Federal Reserve Act.

Conti-Brown: And that's why Senator Toomey's bill would indeed change the act. But I think it's going to be continuously sensitive to this. I think the stone walling we saw from the Kansas City Fed in response to a sitting Senator's inquiry about this master account question will not happen again. And I think the Powell Fed has owned it. And I think that if it does happen again, then I think all of us Democrats, Republicans alike, should beat a drum and change the statute because it'll show that the Fed can't keep its house in order because that, indeed, was a very disordered set of behaviors.

I think the Powell Fed has owned it. And I think that if it does happen again, then I think all of us Democrats, Republicans alike, should beat a drum and change the statute because it'll show that the Fed can't keep its house in order because that, indeed, was a very disordered set of behaviors.

Beckworth: That is interesting, and I'm glad you brought up the Minneapolis Fed case where they got involved in education because I recently saw on Twitter, and this is going to stoke the coals Peter, but I recently saw on Twitter where they have a community development entity like a center, but it's a part of the Minneapolis Fed. And a person from there actually went to the state government to testify on a part of reform for non-compete clauses. And it just struck me as, did they not learn anything the first time around? Now it could be the case, I don't know the details that this person went on their own, but the fact it was tweeted by a Minneapolis Fed entity just struck me as really bizarre. And did they learn a lesson from the last time they went down this path?

Conti-Brown: Yeah, I'm horrified by this. And look, as a citizen, I'm kind of excited by the idea of liberating employees from-

Beckworth: Well, no, I agree completely with the idea, yes.

Conti-Brown: But as a Fed scholar and as a Fed watcher and in many spaces, a Fed defender, I'm appalled by this. No sitting Fed official has any business testifying, absent subpoena. They should not be a part of the political process, they should not be a part of the lobbying process, they should not be a part of changing state laws. Now even as I say that, I am just a couple months away from submitting to my publisher, a political history of the Fed where I argue the Fed has always done this. I mean, they've been involved in politics from the very beginning. Central bankers are some of the best politicians our nation has ever seen. I mean, Marriner Eccles ran for US Senate from his spot as a governor at the Fed and was constantly giving speeches critical of Truman's war policy in Korea.

Conti-Brown: Paul Volcker weighed in on labor regulations, environmental regulations, banking. Alan Greenspan made himself notorious, hated by Democrats at the end of his term, by weighing in so favorably on the privatization of social security, lots of examples here, right? But that doesn't mean that this is good. What I don't like here is the quid pro quo that we have come to on central banking is that we create some sort of insulation from partisan politics. That's the idea. That's the quid and the quo is for some sense of focus… and we can argue about the contours, we have really good arguments, you've had them on this show, about is it appropriate for the Fed to be thinking about climate policy, for example. That's about the contours of the focus. But here we're talking about bald partisanship and political lobbying and wrangling.

Conti-Brown: No, but what the Minnesota Minneapolis Fed would say is that, “no, listen, Peter, you're speaking out of two sides of your mouth. You say it's always happening, but we're now in trouble because we do it transparently,” and they benefit a little bit because they've done it out in the open where many other central bankers have done it in the shadows. I just think that we need to be clearer about what central bankers do in interacting with politics and then have clearer discussions about the boundaries of appropriateness. So perhaps kudos to the Minneapolis Fed for being transparent, but now it's triggered a good discussion for us to say never do that again. That's not appropriate.

Beckworth: Okay, well, let's move from the Fed to some court rulings. And this is one of the reasons I wanted to do the show with you today. I wanted to talk about some important court rulings related to Supreme Court, some appeals court rulings. And let's go back to July 2020, even before the current case, there was a ruling that the directors are removable by will, which was a development, wasn't part of the original design, and then a Fifth Circuit court of appeals found the CFPB agency, its funding was unconstitutional. And I think now it's being appealed to the Supreme Court but what is your sense of this case? Is it significant for other agencies as well as the CFPB? And where do you think it's going to take the agency itself?

The CFPB Court Case and its Significance

Conti-Brown: Yeah, there's simply no doubt that the composition of the Supreme Court and its rightward shift means that the very autonomy of agencies to act, with the political insulation we've been discussing, is under threat. And that comes from a variety of different kinds of legal doctrines, most constitutional, some statutory, which basically says that Congress can't delegate too much to administrative agencies on the one hand. And number two, Congress can't structure these agencies to be too insulated from presidential control or congressional control. Those are two separate issues. There's another case that we might discuss later that… West Virginia vs. EPA, which talks about the Major Questions Doctrine, but all of these are part of the similar thrust that have several champions in the sitting US Supreme Court and probably command at least a 6-3 and or at least a 5-4 and perhaps a 6-3 majority.

Conti-Brown: So for the CFPB, let's take it more concretely. I opposed and I still continue to oppose, on as a matter of constitutional law, the conclusion that Congress can't create single agency heads that are protected from termination at will by the president. It was litigated, I wrote an amicus brief with some co-authors on that case. We lost and we moved on. You saw immediately after the result, President Biden fired President Trump's CFPB director and appointed his own. I still think that this is not good law, it's not good policy, but we live to fight another day and I think it ended up not mattering as much. I don't feel that way about in the last conclusion about the CFPB funding case. I think that's very serious. The Fifth Circuit got it very wrong. And this is a gigantic threat to Fed Independence. The district itself addresses the question of whether this applies to the Fed and it's basically gobbledygook.

Conti-Brown: It makes no sense. If the CFPB cannot be insulated from congressional appropriations or, as they argue, a kind of pressure from the market like the OCC or FDIC and its funding, well then the Fed is identically situated. The Fed funds itself from the proceeds essentially of its open market operations, including in periods of loss like it's doing today, just books that loss on its balance sheet. I know it's something that you've talked about before and it doesn't do its monetary policy with an eye towards funding itself. Funding is a byproduct of its other functions, and that's exactly what the CFPB is doing. It doesn't fund itself, but in that sense, neither really does the Fed. The Fed does its thing, and then there's a pot of money and accounting that is created as a byproduct of doing its thing, and that is the stuff that it uses for its budget.

Conti-Brown: And the CFPB is the beneficiary of that same process. So if the CFPB's budgetary autonomy falls, then the Fed’s should fall immediately thereafter and that would be catastrophic. That would be the end of Fed independence because then anyone in the House of Representatives or the US Senate could hold the Fed hostage for any purpose or no purpose every single year. And so if you like the idea of creating monetary policy from the floor of the House of Representatives, then this is a very good decision, but if you, like me, see more nuance to it and think that there's something good that comes from these technocrats that I often call politicians, then you would want that insulation, because to be clear, political they may be, I don't think that central bankers are partisan hacks. I think they're doing something extraordinarily important but is very different from electoral politics. There are important political implications for what they do, but they're separate from it. And that separateness requires insulation, almost as a tautology and the insulation is made of money and so if we lose that in the Supreme Court for the CFPB, we lose it for the Fed. I think it would be disastrous for both agencies.

If you like the idea of creating monetary policy from the floor of the House of Representatives, then this is a very good decision, but if you, like me, see more nuance to it and think that there's something good that comes from these technocrats that I often call politicians, then you would want that insulation, because to be clear, political they may be, I don't think that central bankers are partisan hacks. I think they're doing something extraordinarily important but is very different from electoral politics. There are important political implications for what they do, but they're separate from it.

Beckworth: No, I agree completely with you. The reason we have independent central banks is because we learned the hard way that if you don't, you have periods of high inflation, monetary instability, so we delegate this authority precisely because we know we can't trust it ourselves through the body of Congress. Congress needs some discipline imposed and delegates it to the Fed. Now what's interesting, Peter, is that you're the second person who has suggested to me that if this funding issue is maintained, that CFPB is being funded unconstitutionally, then the Fed should be as well viewed that way and that's a pretty sobering, pretty stark conclusion, but legally it would follow. But do you think, given the Fed's history, its institutional norms, the way Washington DC works, do you think we could actually end up at a place like that? Because that's a huge, huge step from where we are today. Even if a CFPB does lose its funding independence, is it really possible politically we end up with the Fed doing the same?

Conti-Brown: It is possible for sure. Is it probable? I'm not so sure. Going back to at least 1926, the federal judiciary, though never the Supreme Court, has crafted novel judicial doctrines to insulate the Fed from litigation. It's one of the reasons, but not the only reason, that we see so little litigation involving the Federal Reserve where we see it all the time with the EPA or the SEC. And so monetary policy has never been subject to meaningful litigation, including in areas where I think we might have some interesting cases like around 13(3) or other kinds of legally dubious occasions in the Fed's history. As a matter of pure technical legal doctrine, the order of the Supreme Court affirming the Fifth Circuit, should it come, would not cause the lights to turn out at the Federal Reserve, absent congressional appropriation. What it would do is you'd have some sort of probably far right wing, but maybe far left wing group suing to enforce the doctrine, announcing that case against the Fed, and then we'd have more litigation. So it wouldn't follow as a matter of course that a decision about the CFPB would apply to the Fed, but the Fifth Circuit's attempt to distinguish the Fed from the CFPB is incoherent. And I think that's why the line we must draw is to recognize that Congress has a lot of constitutional room to create all kinds of bespoke institutional structures to the regulatory matter at hand.

Conti-Brown: So it's okay that the Congress looks and says, we're worried about anti-competitive behavior, let's create the Federal Trade Commission. Let's have a little bit different than this other thing we're worried about that we're going to call securities regulation. And we're worried separately about consumer financial protection. We're going to create our own bespoke institution because guess what, Congress only ever creates bespoke laws. Every single law is a creature of its political time. I've written on this with my colleague Brian Feinstein, where we describe, in the history of financial legislation, there's no such thing as a cookie cutter response to any kind of problem. And it's called, *The Contingent Origins of Financial Legislation.* So I'll send that to you if you're interested, but there we argue, these legal doctrines that try to force Congress into saying, you can choose one of three different things anytime you see a problem, that itself is a usurpation by the judiciary of Congress's appropriate scope.

Beckworth: Yeah, send it along and we'll provide a link to it in the show notes. Let's move to the West Virginia versus EPA case that was decided last summer, 2022. In a six to three ruling, the court ruled that the regulation of existing power plants under the Major Questions Doctrine and within that Congress, did not grant the EPA authority to regulate emissions from existing plants based on generation shifting mechanisms which would have invalidated the Clean Power Plan. So what does that mean? And again, what does it mean potentially for agencies like the Federal Reserve?

West Virginia v. EPA and Fed Implications

Conti-Brown: So hard to say. When I was in law school 15 years ago, we studied the Major Questions Doctrine as a purely academic subject, and the idea was like, this is just not something that's serious. I can't even remember. I mean some acute listener will be able to correct the record here. I don't even remember it went by that name at the time. It was this idea similar to the Nondelegation Doctrine, that Congress's ability to delegate to agencies was essentially wide open and any argument to the contrary had died with the end of the laissez fair order that preceded the New Deal, and we're not in that world anymore. We are decidedly not in that world. We have turned a major corner and in the name of all kinds of big concepts, there was a concurring opinion by Justice Gorsuch and Alito in the West Virginia case where they said, this is the Major Questions Doctrine, major bulwark against inequity and justice, unfairness, separation of powers concerns, all of this stuff.

Conti-Brown: Basically, they see it as one of the most important things to ensure that the experiment of liberty thrives in the United States and I just see it so differently. I see it as a weapon to judicialize politics unduly. The Major Questions Doctrine, when you've got a really hard problem with multiple elements that evolves quickly and Congress appropriately says, here is the set of problems we're trying to solve, here are the parameters within which you can solve it, we want to hire experts who are politically accountable to the president with some senatorial participation in their confirmation to solve these problems. That's good politics, that's good policy and of course that's going to change and shift over time as different presidents are accountable to different electorates. What the Major Questions Doctrine does is cast in amber, it constitutionalizes one version of that dispute, and by doing so, it just means that the Supreme Court is weighing in on one side of the political divide.

Conti-Brown: So that's what I don't like about it. What does it mean for the Fed… is combating climate change through the regulation of CO2 emissions a broader or narrower policy space than providing macroeconomic stability? It seems to me narrower, right? Macroeconomic stability is huge. And even in the very debates that we're having right now, what is happening in the macro economy during this inflation? Is it temporary? Did team transitory finally win out? Was it all along a giant supply shock and with such a robust economy that the lack of demand accommodation, monetary accommodation, ended up being immaterial? These are all broad issues that implicate virtually every part of our economy, and the Fed has its eyes and hands on and in all of it. So that makes me think that the Justice Gorsuch type theory of a mandate to the Fed means that we have to have a totally different kind of central bank. I don't know that the conservative justices have that sort of view in mind. Certainly, the Fed has been long insulated from exactly these kinds of whips and worlds of judicial politics, but it's hard for me to see on principle what makes the Fed so very different from these other agencies within this in the scope of its delegated functions. So again, if I'm a Fed lawyer or a central banker, I'm watching this with kind of a sinking feeling in my stomach.

Certainly, the Fed has been long insulated from exactly these kinds of whips and worlds of judicial politics, but it's hard for me to see on principle what makes the Fed so very different from these other agencies within this in the scope of its delegated functions. So again, if I'm a Fed lawyer or a central banker, I'm watching this with kind of a sinking feeling in my stomach.

Beckworth: So I asked Randy Quarles about this when he was on the show last year, and he thought it was an important case like you did, as you just mentioned. And he thinks that this case in conjunction with the court ruling on the SEC's courts that levy fines and make cases, internal SEC courts, he thinks it's very important for the Fed's regulatory role, more so the monetary policy, so do you think that's a fair reading?

Conti-Brown: I think it's more applicable, but that's only because it's more obvious who would have the authority and the ability to sue, challenge Fed action. These are doctrines, legal term is justiciability. So these are things like standing and mootness and ripeness, but the West Virginia case is a good one. It was not obvious that there should have even been a West Virginia v. EPA because the EPA had declared it's not enforcing the very policy that the Supreme Court invalidated. And so I think that it was enough motivation to sweep away those threshold questions. Then we get to the merits. And there I think the Fed's creativity in creating all kinds of facilities, whether in emergency or non-emergency, structuring relationships with the primary dealers, its changes in things like its very monetary policy regime all seemed to me to have quite a lot of political content and a lot of decisions about sorting values that would make it sensitive to these kinds of judicial second guesses. So I don't think the divide between regulation and monetary policy is quite so forbidding.

Beckworth: So even 13(3) facilities you just mentioned earlier, which may be illegal, their use that they did during the pandemic, those areas may come up for review or questions at some point in the future.

Conti-Brown: And to be clear, my legal critique of 13(3) is a little bit different, subtly, but importantly different. I don't think that the Fed acted illegally. I think what the Fed didn't do in claiming though we can't do this because it's illegal, that's false. So it had all kinds of options in front of it. It didn't choose something, it blamed the law. And I think that was wrong. Now it's hard to sue the Fed to say, you have the discretion to do this other thing. I'm going to sue you to make you do it. And then they would just say, well, we think it's illegal to do it, but even if we're wrong, the statute doesn't require us to do it. And so there's no lawsuit that… Conti-Brown v. the Federal Reserve would never occur because I would lose that case. But I do think that the Fed's actions here require a huge amount of creativity, a lot of legal justification, real questions about what's appropriate or not, questions about swap lines and repo facilities and structure of terms, all of which are so specific that they could be subject to all kinds of maneuvers, including legal ones.

Beckworth: This is why I think the Fed needs to be even more careful in what it does today if it creates the appearance of it being politicized because these openings that could present themselves in the future, if we have the conservative Supreme Court and they're influenced by conservative discussions. To be concrete, like going into climate change, it needs to be very careful and guarded how it approaches that lest it be seen as being an agency that's being put to use for progressive goals or in equality discussions, things like that. I worry that this is setting the Fed up or some potential criticism down the road. And for the same reason, I've had discussions with some of our friends about workarounds of the debt ceiling crisis, for example, mint the coin. Some of our friends say, well, the US Mint can legally mint it and the Treasury can go and deposit it. And you know what? The Fed is the fiscal agent. It has to accept this coin. But again, that politicizes the Fed, it breaks down norms, it ruins the institutional image of the Fed, I think. So I think the Fed needs to tread very carefully moving forward because of this possibility.

Conti-Brown: I think I agree with some of that, but not all of it. Here's where I would agree. I think the Fed needs to absolutely count the costs as it moves through the political system. So again, my big argument in this forthcoming Fed history is that the Fed is just a very gifted political institution led by very gifted political actors. And I think Jay Powell is one of the best politician central bankers that we have seen. And I mean that as a compliment. And so I think it's very appropriate for them to count the costs here. I don't love the idea that the Fed must therefore back off within its mandates from anything that smells of progressive politics because the conservatives will yell at them if they don't. And I don't like that because that's a political act itself to say we can't have anything to do with climate change. That's a political act and that's a conservative political act.

Conti-Brown: And they would appropriately be criticized here for saying within our mandate even where climate change is relevant and applicable, we won't do it because we're afraid of its politics. I think it should be criticized for that. That's why I would give the Fed extremely high marks for how it's approaching climate change so far. It's not doing either of the things that we're talking about. It's not saying we want to engage in decarbonization and so we're going to force banks to fund those projects. It's not doing green bonds, it's not doing all kinds of things that someone on an aggressive side of anti-climate change might want a central bank to do. But at the same time, it's not see no evil, hear no evil, speak no evil. It's engaged in thinking about the implications of climate change for financial stability, and it must do this. It must be thinking this through. And so I give the Fed high marks and I'll say in candor I know some of the senior folks as you do at the Fed, and the way that I've heard them articulate, in public, their thinking here I think is very sensible. I'd single out Mark Van Der Weide in the General Counsel as a preeminent lawyer and policymaker in central banking circles. And I like the way he's approaching these kinds of things with a good mix of caution and action.

I think Jay Powell is one of the best politician central bankers that we have seen. And I mean that as a compliment. And so I think it's very appropriate for them to count the costs here. I don't love the idea that the Fed must therefore back off within its mandates from anything that smells of progressive politics because the conservatives will yell at them if they don't. And I don't like that because that's a political act itself to say we can't have anything to do with climate change.

Beckworth: Let's move from the Fed to the debt ceiling since I just brought that up because there's some legal issues there. And I want to bring to your attention an article by Jeff Stein from the Washington Post, and he has an article where he acknowledges upfront that what he's about to discuss is probably a gimmick in terms of working a solution around the debt ceiling and the title is, *Mint a Coin? Buy Back Bonds? Seven Gimmicks for Dodging the Debt Limit.* And I don't want to go through all of them, but one of them I do want to bring up with you because it is a legal question, and this is the question of the 14th amendment and what it means for the good standing of the credit of the United States.

Beckworth: So let me just read an excerpt from his article here, and he says, "In the aftermath of the Civil War, Congress approved the 14th amendment that stipulates section four, the federal government's public debts must be repaid. Some scholars have argued that this provision would enable the president to ignore the debt limit. Congress’s actions during the debt ceiling standoff of 2011 under this interpretation violated the Constitution according to a 2013 academic paper by Jacob Charles, a law professor at Pepperdine School of Law. A conclusion of this nature would be the basis for the president to ignore the debt limit when congressional actions create unconstitutional doubt about the validity of public debt, he wrote." So I'll stop there. What do you think about that argument?

The 14th Amendment and the Debt Limit

Conti-Brown: Yeah, so I'll start with the caveat that I'm no constitutional lawyer and as a bad historian and as a scholar of financial regulation, I'm a bit over my skis for commenting on constitutional law. But I come not from a place of pure amateurishness, in part because I just don't think that constitutional law top to bottom has a lot of what I would recognize as law. So much of constitutional law is, to quote one commentary and one part of the constitution, an invitation to struggle, an invitation to the President of Congress, an invitation to citizens. The section four of the 14th Amendment, which is the reference that Stein's making has the words insurrection and rebellion and former slaves throughout. It's so clearly anchored in its moment. Does that mean that in its first sentence that the debt limit is itself unconstitutional? The first clause, the validity of the public debt of the United States authorized by law, including debts incurred for payment of pensions and bounties for services and suppressing insurrection and rebellion shall not be questioned… I don't even know what that means.

Conti-Brown: What does that mean to sue someone who questions the validity of the public debt? Is a debt ceiling to say, we're allowed to take up all of this debt until the debt ceiling. Is that a question of debt? The problem is that some of these debts are on a vector, so they increase on their own. They don't ever stop. So if you get to the debt limit, you still have to pay employees, right? So in some sense, the debt limit was passed long ago. If we take the net present value of all the commitments to employees, et cetera, then that we've reached the debt limit many years ago. So the other problem with it is, so Congress is the one to question validity of the debt by creating the debt ceiling law in the 1930s. So I like the idea, I like it better than mint the coin frankly, that section four renders the debt ceiling unconstitutional.

Conti-Brown: I think in practice that seems obviously true. If you say we are only going to pay debts until this point, and this point is not clearly defined as with these vectors that I'm mentioning, it's not clearly defined, there's no date certain where any holder of US debt will know that their debt is not valid, then I think, yeah, that doesn't seem consistent with the 14th Amendment, section four. And so I like it. What does that mean? That means that we then litigate this and President Biden stands up and says, “alright, Speaker McCarthy, you're unconstitutionally questioning the public debt. I won't do it.” I don't see how this goes. So I hope that as in other occasions, this is so much posturing ahead of some grand bargain, I think this is the way the politics works. But can I tell you that I would just vote so enthusiastically for any politician that runs on a platform of abolishing the debt ceiling.

Conti-Brown: I would just be so excited by that. And the next time a party sweeps the Congress and the White House, let's put this as priority number one, get rid of the stupid thing and then have our fights about politics and fiscal policy and all the rest as we always do but without bringing, to a brink, the dollar. Every currency in human history has eventually cracked so dollar dominance is not guaranteed to last forever, even though there's no obvious threat to it in the alternatives currently present. But I'll tell you what, these debt ceiling shenanigans seem to be the most obvious threat to dollar dominance that I could imagine.

I would just vote so enthusiastically for any politician that runs on a platform of abolishing the debt ceiling. I would just be so excited by that. And the next time a party sweeps the Congress and the White House, let's put this as priority number one, get rid of the stupid thing and then have our fights about politics and fiscal policy and all the rest as we always do but without bringing, to a brink, the dollar.

Beckworth: Yeah, for sure. And I agree with you. I think the best permanent solution is to abolish the debt ceiling altogether while still maintaining an effort to get long-term government spending on a sustainable path. But those are two separate things, and I think you just need to abolish the debt ceiling first and foremost. Okay, in the time we have left, Peter, I want to circle back to the Fed because you mentioned you have a new book coming out. What was the name of the book? The Political History of the Fed?

Conti-Brown: Yeah, it's called, The Federal Reserve in American History.

Beckworth: And it deals with the Fed and how it's interacted, politically?

Conti-Brown: Yeah, it's a book of history. It's with Norton-Liveright, so it's a trade press. I'm aiming not only for the listeners of Macro Musings, but also for anyone who's wanted to have a readable book. I've learned so much over the years from Allan Meltzer, I would recommend Allan Meltzer’s book to very few people because they're not incredibly readable. So I'm aiming for a readable, accessible, but still technical, still accurate history of the Fed that focuses less on theories of money and focuses more on the way that the Fed has interacted with and has received interactions from political actors. So I'm telling the story of the way our debates about money, finance, and banking have interacted with our debates about society, economy, war and peace, civil rights, and things like this. I think readers will come in for a few surprises.

Conti-Brown: I think Arthur Burns got some things that people think maybe he got wrong. I think Paul Volcker was far more political than his legacy would suggest. I think Alan Greenspan was one of the most political actors in the 20th century as an official in Washington. So it really is looking through to understand what it means to be a central banker as equal parts technocrat and politician, without taking anything away from the fact that I do believe that central bankers are not acting in response to electoral politics or partisan politics, but that doesn't mean they're not acting within a political system and subject to political constraints.

Beckworth: So given this command of the history of the Fed, its interaction with the broader community, it's politics, what do you see being the legacy and the long lasting history from the Jay Powell Fed? What does he leave behind? What has he changed? Where has he sent to Fed differently than it would've otherwise gone?

The Jay Powell Legacy

Conti-Brown: Jay Powell is very different from his four immediate predecessors in the sense that he was on no one's shortlist a decade before his appointment, and certainly not the idea that he'd be appointed by a Democrat promoted by a Republican and retained by another Democrat. So in some sense, Jay Powell is sort of the accidental central banker. In Nick Timiraos’s book, which for which Powell was a major source, he even mentioned that his dream was to be Treasury secretary, not Fed chair. That said, he has fit into the role with extraordinary ease. I think he's the finest version of this politician-technocrat conception in the sense that he takes extraordinarily seriously the limits of politics within the Fed that I think is very important, while also stretching his limbs within that political space. So the great image that he has himself said is that he wore out the carpets on Capitol Hill to try and make connections, and that positioned the Fed in really extraordinary ways during the pandemic.

Conti-Brown: I've been quite skeptical of the Powell tightening so aggressively in response to the inflation, persuaded as I was by the basic arguments that these dysfunctions on the supply side of our economic scarring from 2020, the Russian invasion of Ukraine, et cetera accounted for more. But I said early on, and I think I said this publicly, that if the Powell Fed's actions correlate with a soft landing, it will be the single most impressive period in central banking history because the inflation was too fast, too high, the monetary tightening was so fast and so aggressive. And if all of this is done without causing a recession, I'm not aware of anything that meets its match, certainly much more impressive than Paul Volcker, which wrecked the economy causing a recession that was the worst since the Great Depression and essentially rendering the entire Rust Belt of the United States into a permanent depression-like state. So I think that if, subject on the idea that this disinflation is not associated with a major recession, then I think Jay Powell will go down as having had a phenomenal run during a period of two major crises, handling a hostile president, and managing to navigate a series of internal Fed crises remarkably well.

I think that if, subject on the idea that this disinflation is not associated with a major recession, then I think Jay Powell will go down as having had a phenomenal run during a period of two major crises, handling a hostile president, and managing to navigate a series of internal Fed crises remarkably well.

Beckworth: Yeah, I would echo that the Powell Fed has been very nimble. I know the biggest critique is he fell behind the curve on inflation, but as you said, if we can get through this with a soft landing, I think we'll soon forget that. I think what we'll remember is that he could somehow turn policy, stop on a dime, and bring inflation down, even if some of it was not his doing and land the economy softly. And I would also note this, something similar to a much lesser degree occurred in 2018, 2019. They were tightening, tightening, tightening. They saw things begin to weaken, and then in 2019 they turned around pretty quickly. So I completely echo your thoughts there. I also would suggest that maybe FAIT might have a long life, might be the beginning of level targeting, maybe this is just me being aspirational here and hoping for things that I want, like nominal GDP level targeting at some point in the future.

Beckworth: But I do think something like FAIT, which is a form of makeup policy, which, it's kind of a watered down form of price level targeting… to go from a regular inflation target to that required some deft political skills. To navigate that through Congress, to get everyone… just at the Fed, everyone at the Fed and the FOMC to agree, I mean, that's a big change in your framework, and I don't think just any chair could have done that. So I wonder, and I suspect that this may be another big part of his legacy, and I think we will probably return to a world of low interest rates on the other side of this inflation bubble. Olivier Blanchard recently came out with a piece where he argued that too, and if he's right, and I think he probably is, then frameworks like FAIT will be important. And the fact that the Fed was the first central bank to go there and it required a chair like Powell, I think will say something when his history is written.

Conti-Brown: Yeah, I agree. I also think that that stands, and I'm speaking on behalf of my tribes now, I think if it succeeds, I think that this idea that the Fed chair is the nation's chief economist is clearly false and importantly false because the work of central banking is not the narrow work of a theoretical or empirical macro economist. I think the skills that Jay Powell brought were not inconsequential. To put that more positively, he comes through the world of law, of politics, of markets, of investing and I think these skills made him a person for the moment. Bernanke was too, and Janet Yellen had similar kinds of experiences. I wouldn't discredit them because they were economics professors before their public service. But I would say that having a PhD in economics is neither necessary nor sufficient for you to be an able central banker.

Conti-Brown: And so we'll see what comes. I think that the fate of FAIT looks a lot better if disinflation occurs with either no or a mild recession. And I don't agree with people like Larry Summers and Blanchard and, actually, I'll say Summers… I don't remember if Blanchard fits this category, who are severely critical of the Fed’s inaction in the spring, summer, fall of 2021. Here's why: even though it is clear that by the fourth major fiscal stimulus that occurred, two under Trump, two under Biden, that it looked like that was a classic textbook case on a New Keynesian model of an inflation bubble. To do so aggressively in that moment when we're still in the midst of Omicron and questions about Chinese supply chains and questions about growing hostilities in Eastern Europe, I think would've been incredibly reckless based on what we had at the time.

Conti-Brown: And so I don't think the Fed was behind the curve, it was necessarily cautious. There's some criticism because we were still in a period of rather intense monetary accommodation through large scale asset purchases into May 2021. I think maybe that criticism sticks there, but not for keeping interest rates at the zero lower bound at that stage. I think it would've been very premature given all that we knew at the time and all that we had been through in 2009, despite the fact that, no doubt, the fiscal stimulus packages by the fourth iteration were quite sizable. So I just give very high marks to the Powell Fed, including when they didn't listen to my advice on Twitter, which was sounding alarms at how aggressively they were raising interest rates. And so we'll see how this ends. But so far it's looking pretty good.

Beckworth: Well, on that high note, our time has ended. Our guest today has been Peter Conti-Brown. Peter, thank you again for coming on the show.

Conti-Brown: Oh, it's such a pleasure, David. I look forward to my sixth appearance.

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