Central Bank Undersight: Assessing The Fed’s Accountability To Congress

>> John Taylor: Let's get started. We are very happy to have Andrew Levin and Christina Skinner speak to us today about, I can't believe this title, Central Bank Undersight.

>> John Taylor: Assessing the Fed's Accountability to Congress. And I should say, I didn't know, doc, I'm not used to notes like this.

I'm gonna read it. This presentation solely reflects the views of the authors and should not be interpreted as reflecting the views of any other person or institution. Go for it.

>> Andrew Levin: Well, thank you very much to John Taylor for inviting us to share this work with you. It's actually now forthcoming in the Vanderbilt Law Review.

It's really been a privilege for me to work with Christina on this project. We met online, actually, through conversations with Charlie Kalimiris and Charlie Plasser and Jeff Lacker, a couple of whom are here online and ended up turning to a paper. Christina and I kind of flipped a coin, I guess, a couple weeks ago, and I got the lucky outcome cuz I just have to present the slides.

And then Christina will handle all the tough questions during the Q and A. So we're gonna try to expedite. The paper is 60 pages long. The plan is to get through the slides in about 20 minutes and then leave close to an hour, at least, for questions and discussion.

I know a couple of you will need to leave early, so hopefully we'll still have plenty of time to hear from you, John and Bob, before you have to slip out. So this is interesting. The paper is an interesting blend, of course, my perspective as a monetary economist sort of coming together with the perspective of a distinguished legal scholar.

That Christina, if you look at her CV, you'll see a dozen papers she's written about the Fed and other central banks and thinking about financial regulation and various other important issues. This paper is really focused on the Fed's monetary policy function, so it's important to keep that in mind.

Christina is coming back here in a few weeks for the Hoover Monetary Policy Conference, where there will be a panel on financial regulation, and you'll get to hear from Christina again on some of that. So we'll try to kind of focus, I think, today mostly on the monetary policy side.

So when I look back in my lifetime as a monetary economist in the 80s and 90s, there was this consensus that developed about the importance of keeping monetary policy insulated from political interference. And it's really not new. Even at that time, it was understood in England, you've got make sure the king can't get his fingers on the printing press.

Tom Sargent wrote about this. Other people long ago, but also a recognition that the central bank can only really maintain that kind of independence from political pressure if it's transparent and has accountability to the public. In a democracy, at least, that's the only way that could be sustained from the constitutional side.

You all know we have three branches of government. You learn it in elementary school. Executive, legislative, judicial, and in the constitution, it very specifically states that Congress has the power to regulate money, not the executive, not the judiciary, the Congress, the legislative power to regulate the value of money.

And Congress originally maintained that with metallic standards, but eventually delegated the monetary authority to the Fed, and particularly to the FOC to determine monetary policy. But I think a key constitutional thing that seems sort of obvious, although we can discuss it, is Congress can delegate a power to an agency, but it can't abdicate responsibility.

Or another way to say this is that we'd like the Federal Reserve to be protected from political interference, but it can't be a fourth branch of the government. That's just not legitimate. It can't be sustained over time. So that's a kind of key theme. John?

>> John: On your second bullet point, I would have added respect for limited mandate.

The mandate doesn't say what you shall pay attention to. It says what you shall not pay attention to, and limited tools. You may have a mandate for price stability, but you can't take money from people. So you have to not just be transparent. You can't say, we're gonna go take people's money to stop inflation, transparently.

That's not enough. You're not allowed to take people.

>> Andrew Levin: Yeah, so the interesting thing here, there's a parallel between the second bullet of the monetary economics and the second bullet of the constitutional law. Because public accountability is precisely that Congress has the power and it can delegate it, but how it delegates it matters.

So-

>> Speaker 6: The key power of the Congress is the power to give money to people. And the Federal Reserve can finance itself, so it doesn't have to go to the hill to get money. Every other governmental agency has to go beg Congress to give it money for next year.

So without the power to control the budget, what can Congress do?

>> Andrew Levin: Okay, those are great questions. That's what this paper is about, really, in some way.

>> Speaker 7: So Larry Meyer,

>> Andrew Levin: Sorry.

>> Speaker 7: Larry, maybe not.

>> Speaker 8: Good luck with your 20 minutes.

>> Andrew Levin: That's okay. I just wanted to flag a couple perspectives on this.

So one of them is that-

>> Larry Meyer: Andy, good to hear from you. And what you said until you got to your recommendations were good, but you and I grew up in a different world. You want the Fed to give sensitive information treated like national security information. That's what I'm afraid of.

 

>> Andrew Levin: Larry, can I just make.

>> Larry Meyer: There's no such thing-

>> Andrew Levin: Larry, just let me make, we haven't even talked about the questions you're raising. And I think you may have missed it, but the plan here is we'll give a short presentation, try to keep it to 20 minutes or less, and then there will be lots of time for all of you.

 

>> Larry Meyer: I was called on.

>> Andrew Levin: Okay, no worries. I just wanted to point out, because many people in this room have high admiration for Milton Friedman, including myself, that Milton Friedman thought a lot about these questions, and he wrote some really important things that I think we don't have fresh enough in our minds anymore.

This is a chapter in a book from 1962, should there be an independent monetary authority? Where he's discussing precisely the same issues at length. So it took a little bit of time to kind of figure out how we could get it onto one paragraph on a single slide cuz there was so much of it that could be quoted.

But basically what he says here, I'll just quote a couple of things. Is it really tolerable in a democracy to have so much power concentrated in a body that's free from any kind of direct, effective political control? And his answer in the chapter is essentially, no, that's not tolerable in a democracy.

So then where he ends up with is enactment of rules, which again, is, I think, very much connected to the themes of. That John Taylor has been talking about for many years, that provides oversight. So there's public control, public accountability of monetary policy that also simultaneously is protecting the central bank from political interference.

More recently, we got, 50 years later, more or less Ben Bernanke as he's finishing his second term as Fed chair. In his final press conference, one of the reporters from Politico asked him, so what advice would you give to the incoming Fed chair, Jack Yellen, about how to deal with Congress?

And again, I won't read the whole quote here, but the fundamental point that Ben Bernanke stated very plainly is that the Fed is not a fourth branch of government. The Congress is the Fed's boss, and it's up to the Fed to decide what the mandate is, what the scope of authority is.

And he says, we need to go and explain ourselves, and we need to explain why we're making certain choices, which, again, is very much connected. I'll say to John Taylor's work, you have a simple policy benchmark, and you follow it much of the time, but when you deviate from it, you've got to explain why.

And so these are things when we talk about public accountability that seem relatively non-controversial. If you have the 50 or 60 years of kind of historic agreement with it. Okay, it's a 60 page paper. We divide it into three parts. Part one is the delegation of the powers.

Much of that's familiar to many of you going through the history of the Fed and the mandate, but maybe not so much to some of the people who will read the Vanderbilt Law Journal. The second part is about congressional undersight. And then the final part, which is relatively short, is potential approaches for enhancing oversight.

So what we'll do in this summary right now is to come mostly focus on parts two and three. But just the bottom line here is that the Fed's changed a lot, especially in the last 20 years, especially since the global financial crisis. The scope of its authority, the size of its balance sheet, the complexity of its policies.

And our conclusion is that existing mechanisms of congressional oversight are really no longer very adequate. They're ineffectual or they're anachronistic. Something needs to be changed. And we try not to be too prescriptive, but we do look at approaches that are used, that the Congress uses for overseeing other independent agencies, and can consider the possibility that those approaches could be used to strengthen the oversight of the Fed.

Again, the Fed can't be a fourth branch of government has to have some kind of effective. Christina's phrase is energetic oversight. And so that's not a term economist would normally use. But now I'm starting to get used to the idea of it's not just if Congress is the Fed's boss.

The boss cannot say to the employee, just go do whatever you want, and whenever you feel like it, come and tell me what you're doing. And if you don't wanna tell me something, that's fine, too, okay? That would not be energetic oversight. Energetic oversight is clear job description, clear scope of authority, clear report requirements.

That's what we would consider to be accountability, and it's really not there to the extent needed. Okay, so what are the constraints on congressional access to information? One is very opaque, monetary policy reports, just as an example here, the simple benchmarks have come and gone. More than once in the monetary policy reports to Congress without an explanation of why they disappeared or come back.

When they're presented in a table, there's no explanation why the Fed is or isn't deviating from some of those benchmarks. There's no assessment of risks, there's no cost benefit analysis. So you heard this from me last year when I was talking about the work with Bill Nelson. The Fed's QE four costs taxpayers over a trillion dollars.

It's a lot of money. And the Fed never consulted with Congress before, during, afterwards about why it was doing it and what the risks were. And did it make sense? An employee who has a boss, tells the boss what they're doing and what the risks are and make sure the boss is comfortable with those risks.

 

>> John: Where's the $4 trillion come from?

>> Andrew Levin: Over a trillion.

>> John: Where did the trillion dollars come from?

>> Andrew Levin: Well, that's in our slides in a minute, so let me come back to it, okay. Second thing, which I think has become more clear in the last ten years, is, like some other agencies, the Fed will not provide all the information that members of Congress request.

And maybe this is where Larry Meyer is coming to. Even to the leaders of the oversight committees, the Fed feels free to say, sorry, we're not giving that information. It'd be a little bit unusual for an employee to say, that's their boss, sorry, I'm not giving it. I know you want that.

I'm not giving it to you.

>> John: What kind of information are they refusing?

>> Andrew Levin: For example, the process for appointing Federal Reserve bank presidents, that's been of significant interest to members of Congress. Some of the things that happened with ethics scandals in 2013, 1415, and again, more recently, decisions that were made about, say, we can go into more detail here.

But the main point is repeatedly the Fed has felt free to say to Congress, no, we're not giving you that information. The analogy we make in the paper, and we'll come back to in a few minutes, is this used to be a problem for military intelligence and also security intelligence.

Those agencies were created after World War II, mostly. And it took about 30, 40 years for Congress to finally figure out how to make sure that that sensitive information could be provided to key members of Congress without potentially having national security leaks. And so we actually think those rules may be very instructive for what Congress could do to strengthen oversight of the Fed.

So in particular, for the CIA or the NSA, have a locked room, can come into the room. You see the thing, right? You can't bring anyone else in, you can't record it, whatever. But the leader and the ranking member of these oversight committees would have that kind of access.

So again, that's not the case right now. So this is one of the constraints on congressional oversight. Another one that's important and Jeff Lacker has talked about this. Charlie Plasser, Mickey Levy is the extent to which dissents have dried up. They've just disappeared. There were no dissents on FOMC decisions in 2021.

There have been no dissents for the past two years in a row. And we think that actually makes it difficult for Congress to oversee the Fed's monetary policy when there's no visible debate.

>> John: I'm afraid that there can be too much transparency. So Kevin Warsh made this point, which I thought was a good one, so contrasting the FOMC and the Bank of England.

That if every meeting is always transparent and always known, then nobody ever dares to be wrong or say something that somebody might tweet out later on. And so you can't have a frank sharing of views if it's gonna be completely transparent and report it to Congress later on.

 

>> Andrew Levin: And again, we're getting a little bit into details here, but I would say that the Feds grapple with some of these questions over decades. So for example, the minutes are released after three weeks. The transcripts are released after five years. Okay, and so I think in that sense, there is a significant about transparency, but it's mostly relevant for historians and legal scholars who can see what the Fed was thinking five to ten years later.

We still don't really know yet why weren't there any dissents in 2021. Why weren't there any dissents at a time when outsiders were very concerned? There wasn't a single FOMC member who voted against the Fed's decisions, okay? And those transcripts will be published in 2027 or something, right?

So eventually, we'll get a better sense of what they were discussing. But from the minutes, it seems like there really wasn't very much questioning, even inside the room. The minutes are not attributed. So, okay, so just I'm gonna try to be quick here. The theory of independent agencies in the United States goes back a long way.

In the late 1880s, Congress set up the first independent agency, and they established a set of principles that still seem pretty reasonable to me. If you're gonna protect the commissioners from political interference, what needs to go with that? Well, staggered terms extending beyond the term of the president.

They can only be removed for cause. They can't be partisan, right? Those are the basic principles. And when the Fed was designed and when the FMC was designed, those were put in place. 14 year staggered terms, only removal by the president for cause. And the Federal Reserve bank presidents appointed by their own boards of directors.

The Federal Reserve Board has oversight. But in the law, it's just a kind of a veto power for their appointment, and the Federal Reserve Board can only remove them for cause. That's the theory, but the practice is very different. And I just want to skip forward here to some very telling charts we think are really telling here.

This is the pattern of FOMC dissents by Federal Reserve board members. And for each six-month period, we're counting the number of meetings at which there was at least a single dissent by a single Federal Reserve board member. Okay, that's the way the graph is constructed. And what you see is during the sixties and during the seventies and eighties, into the nineties, there were plenty of times that Federal Reserve board members dissented.

They viewed themselves as individually accountable, just like a Supreme Court justice. And the Fed chair was first among equals. But that's changed in the last 25, almost 30 years. The last dissent by a Federal Reserve board member was in 2005, okay? So more than or roughly 20 years ago.

Among the Fed bank presidents, here, we're just looking at post-2006. Under Chairman Bernanke, there were a lot of dissents by Federal Reserve bank presidents. And you know some of those people. I think Jeff Lacker is there. He and Charlie Plosser dissented at various meetings. Charlie Evans dissented. Jim Buller dissented.

These are all people we know, okay? Under Chair Yellen, there was still plenty of dissents. But if you look at the later few years, again, no dissents at all in calendar year 2021, and no dissents at all in the last two consecutive years of FOMC meetings, why? What's going on here?

And in the paper, we go through this in some detail. But let me just summarize here. One of the issues is that the Federal Reserve board members, remember two of them now are vice chairs. They have a four year term, and they rarely leave at the end of the four year term.

I'm sorry. They really stay beyond the end of the four year term. And the other Federal Reserve board members sometimes stay, sometimes don't. If they're from an academic position, they go back so they don't lose their tenure. And so if you look here, this is a graph shows the median tenure of Federal Reserve board members, excluding the chair.

And the central tenancy, which is the shaded area, that's dropping off the longest and the shortest. And in the last 20 years, the median tenure has been consistently around two to three years. And even the central tendency has generally been less than four years. So this doesn't look like what Congress intended with 14-year staggered terms.

This looks much more like cabinet agencies with assistant secretaries and deputy secretaries who are kinda coming and going. It also makes the Fed board look more partisan. It may not be partisan, but it looks a lot more partisan because the affiliation of someone really swings with each administration in the White House.

Meanwhile, the Fed chair has become, sorry.

>> Speaker 6: But because of the change in political party, doesn't that show that the Fed is very responsive to political events in society?

>> Andrew Levin: Okay, then this comes back to this question again of we started with these bullets of the Fed's supposed to be insulated from political pressure and interference, okay?

It's supposed to be an independent agency, and these patterns don't look like that anymore, okay?

>> Speaker 6: So you're trying to say you're trying to have it both ways. You're saying, you wanna have more responsiveness to democratic pressures, which supposedly are present in the Congress. And now you're sort of objecting.

 

>> Andrew Levin: No.

>> Christina Parajon Skinner: Can I jump in here for a second? Yeah.

>> Speaker 6: Have an effect.

>> Christina Parajon Skinner: So I think there's a key distinction between being responsive to the presidential administration and being responsive to Congress, right? So the way that the Congress has delegated its powers to the Fed.

Right. As Andy was saying before, the Fed is an agent of Congress and it should be responsive to Congress in a nonpartisan way. It's a completely different thing to say.

>> Speaker 6: It's politically unrealistic. To say that you should have responsiveness to Congress in a nonpartisan way does not make any sense if anybody knows a thing about Congress.

 

>> Christina Parajon Skinner: Well, it does make a lot of sense if you think about the way other independent agencies are required to provide information to Congress. But the key point here really is a point that John brought up earlier, which is one about mandates. Right, so the point here is that the Fed is responsible to Congress for how it uses its powers, right?

And it's a completely different thing to suggest that the Fed might be persuaded by the agenda of the executive branch. Because then that makes the Fed look a lot more like a cabinet agency or an executive branch agency. While Congress sort of afforded all these privileges and protections to the Fed precisely because it thought that it would be completely almost insulated from pressure from the presidency.

And that goes back to the part about where the constitutional lodestar is. It's an article one. It's all about Congress, not the president.

>> Speaker 6: The reality is that Congress uses the budget to control the executive agencies and the departments, and it doesn't have the ability to do that in this case.

So the Fed has a great deal of autonomy for that reason and not because of anything that's written in any piece of legislation somewhere. You might want to propose that Congress has to prove Fed's budget.

>> Andrew Levin: Yeah, well, let's come back to that at the end. I just want to make a couple more points here about the lack of dissent.

Cuz I think that, and by the way, Steve Davis and Nikki Levy have really important contributions on this. This question in the latest tour volume that just came out, right a few weeks ago. So this needs to be thought through more carefully, okay? I think Congress's original plan for the Fed was an independent commission with individual members who are individually accountable for their views and where the chair is the first among equals.

And what I think you're seeing now is it's not working that way anymore. So congressional oversight could be to say, well, that's fine, we like it that way. We're happy with how it's working now, now they're more political great, okay. The main point here is that under the constitution, Congress has the power to regulate money, okay?

And it can delegate that to the Fed, but it can't abdicate it. And so Congress has to be aware of this and decide if this is what they want.

>> John: The sense don't obviously, so you've been to many faculty meetings, and how does it work? We fight, we fight, we fight, we fight.

We beat it out of the value function, then we all vote yes or I'll vote no, whatever it is. But you don't have dissents, I don't. I dissent on Bob Hall's tenure case, and I write or written dissent, we don't do that. We gotta circle the wagons afterwards and fight it out next time.

So lack of official dissent doesn't mean that people aren't necessarily doing their things. My other question to you is-.

>> Andrew Levin: By the way, but John, if the Supreme Court started doing that and every decision was 90,

>> Speaker 6: did do that under John Marshall. That's exactly what John Marshall.

There was never a dissent during his tenure that went on for 20,25 years. It was really the tradition up until the civil war, you just don't have a dissent on the Supreme Court, so it doesn't.

>> Andrew Levin: Well, okay, again, Congress could decide, that's fine but I think they're.

 

>> John: Supreme Court descent, serve a purpose in that. You're the, you're setting down a record to go back to these issues over and over again. Interest rates up or down this month. We're not kind of like setting what do we think of the rights of slaves to be people or something of the sort that we're gonna come back to later?

 

>> Andrew Levin: I don't know, I think that when it comes to questions like 2021, where the Fed was unresponsive to elevated inflation. And where it continued a balance sheet program that turned out to be far more expensive, that those are questions that we would like to see public debate.

This was question, I think in the end about public accountability, you don't have public accountability. I guess in the end your department has accountability to the trustees of Stanford, where under the Constitution, the Federal Reserve is a public institution within the realm of the Constitution.

>> John: FOMC members, I looked it up, they are charged with being representatives of particular interest groups around the country, they are there to represent views not necessarily to be members of the faculty.

 

>> Christina Parajon Skinner: And it does seem important to legislatures to be able to disaggregate the reasons why certain decisions were made, especially when they're consequential decisions, right? So I think I mentioned this in the podcast that we just gave, but both times that I testified in the House of Lords in the past two years.

One of the questions that really nettled them was, do we have enough information to level sufficient scrutiny into the reasons why, the rationale that inflation was transitory was maintained over time. And do we need to be worried that there's group think around modeling or forecasting? And I think if you can't really disaggregate the individual opinions of FOMC or NPC members, for example, I mean, we're not talking about the NPC, but in that context.

Then I think it is more difficult for the public to debate the process around which certain decisions are made and also for legislatures to know whether they're doing their job well, if that's something they care about.

>> John: They give speeches all the time, they come out the Hoover.

 

>> Christina Parajon Skinner: That's true.

>> Speaker 12: I wanna speak because we've violated the norm we tried to establish. So the way I think of the dissents, they're a symptom of the larger issue, which is on the second to last bullet point. Which is that the Fed, the regional Fed and the bank presidents have become more subordinate to the board.

And I think that is a central issue, yeah, I don't know if you're gonna talk about that at all. But that does mean that the Fed bank presidents are not only less willing to dissent, they're less willing to articulate concerns about why you might wanna take a different monetary policy decision.

Or why you might have a different rationale for whatever decisions you do undertake, I think that not only-.

>> Larry Meyer: Excuse me, do you read speeches, do you read the speeches.

>> Christina Parajon Skinner: I read them.

>> Speaker 12: Hang on, hang on. I'm not done yet, you can speak in a minute.

I'm not done yet, although you did knock me off my train of thought. Thank you for that. Because the Fed bank presidents are more subordinate to the board, they are less willing to play two very important roles that I think we want them to play. One to articulate concerns about existing policy, which then Congress, which contributes to congressional oversight.

Because for most Congress people, monetary policy is a very complex issue, and they need assistance from experts to help them see through that. And Fed bank presidents, if they are playing this role, effectively can do that. Secondly, I think it also undermines the quality of decision making within the Federal Reserve system.

Monetary policy is very complex, even the arguments over what kind of rules we should have is very complex. We want a variety of views to surface, as I think about the way the Fed system has evolved, that's become harder and harder. There's less of a role for a St Louis Fed or a Minneapolis Fed than there used to be to articulating alternative thinking about monetary policy, that's a concern.

 

>> Andrew Levin: Okay, just let me give a quick response and we can hear from Larry Meyer. John Taylor and I were talking this morning about R-star, like the neutral real rate, okay? This week Mickey Levy has a Op-ed and or, sorry, last week. So last week in the Wall Street Journal precisely about this issue.

And Larry Summers has now come out publicly in questioning. There has been no speeches, to my knowledge, by any beneficial over the last couple years saying R-star might not be 1.5% anymore, it might be 2 or 2.5%. And that, that really calls for a significant, a reevaluation of how we're assessing the stands of monetary policy.

Because if the neutral rate is two, like in the Taylor rule, then the current policy may not be very restrictive. Now my point is this, it's not just a lack of no votes at the meetings. You see it in the minutes, words like some members disagreed that used to show up all the time are now vanished.

You go back and look at the transcripts that we have available, and then you look at the speeches. I think you see a lot more homogeneity. In fact, reporters have told me this, they notice there are certain mantra phrases that Fed officials are all repeating. That many Federal Reserve bank presidents are repeating the same phrase, where did they get it?

Well, the office of Public Affairs at the Federal Reserve Board sent it around and said, hey, this is what the Fed chair said at his testimony. It'd be really helpful if each of you could repeat that but that's a subordinate it, that's a subordinate role. That's not an independent official, okay.

 

>> John: What you're saying in speeches and in lots of other ways, you're seeing a coalescence of views. And everybody's out just to repeat the stock phrases rather than to actually debate things. And then you get groupthink and big mistakes.

>> Andrew Levin: So Larry Meyer wanted to speak, so we should turn the mic to him.

 

>> Larry Meyer: Telling me, you read speeches, I know where everybody is, I know the range of opinions, we write about it every week. Of course, we name the dots, so it's hard work, and look, Congress is totally incapable. They have no interest in it, okay? They have no expertise, it's just silly.

Who wants to listen to those testimonies and listen to those guys throwing on, so R star of course people have talked about R star. The channel has been talked about R star, other committee members, we write about it all the time. Yes, this is an important issue, okay?

And well understood, Congress doesn't understand it, they never would. Now, you've got the speeches, you've got the outside people who criticize the Fed. I communicate with them constantly through my writings, they read it. I'm tougher on them than Congress is way tougher. So I know where they are, and defense is an interesting issue.

But thank that Reserve bank presidents aren't appointed by the president. That's how you get independence, to have those people, thank God.

>> Christina Parajon Skinner: On that point.

>> John Taylor: Once you guys finish

>> Andrew Levin: Sorry, we'll try to get through the rest of this quickly. So there's a lot of fascinating questions here, just on this question about subordinates.

There is some careful material in the paper about it, which I would encourage you to read. It would be great if the Federal Reserve itself would comment on this, okay. The Federal Reserve Fed Chair Powell, could give a public speech and explain his views about what the role of the Federal Reserve bank presidents is.

Are they subordinates or not? Because part of what happens with groupthink is a culture. And when new people come in, they're sort of understanding of, don't speak too much your first few meetings, just listen. You don't wanna undermine the chair, especially not in a presidential election year. And so you get a culture that develops.

And I think the remarkable change here, give Benvenki some credit. He was asked about this in the press conference, he said, I really value dissents. He said, it's part of a healthy community committee deliberation that people are willing to speak out and vote no. And Charlie Placer has a brilliant Wall Street Journal op ed, it's now ten years old.

But when he was leaving the Fed, he said, here's the value of dissent, the value of public dissent, not just hidden behind closed doors. So, okay, so why don't we move quickly through the rest of this? I think we got all these charts here.

>> John: Does FOMC member have to be a full time job?

Seemed like it would be a lot easier to stick around for 14 years if it's.

>> Andrew Levin: Why don't we save that one for the general discussion? So we're gonna follow Steve's advice here, okay. So as we were going through this, and some of this was new to me, and I think maybe a little bit of it was new even to Christina.

Probably new in the law journals, as far as we could tell, is that the extent to which the Federal Reserve has a lot of exemptions that don't apply to any other independent agency. It's not just that it's not in the appropriations process, and it's notable that OCC, SEC and FDIC are all in the appropriations process.

So it's possible an independent agency and still go through that. The Feds issues liabilities, the public that are not subject to the federal debt ceiling.

>> John: Wait, it's not correct because it buys treasuries in order to issue.

>> Andrew Levin: No, if it issues, say, reverse repos to fund mortgage backed securities, for example, that's not part of the debt,

 

>> John: buys an asset, So there's no net debt, the Fed doesn't do anything.

>> Andrew Levin: Okay, right now we'll show it in another slide. The Fed's running operating losses. Okay, it's covering those operating losses by issuing interest bearing liabilities. So you're right that under normal times, what Congress probably envisioned is that you didn't need to have them under the debt ceiling.

But now that's changed. Okay, so the Fed sets its own accounting rules. It's the only Federally created entity that's not under generally accepted accounting principles. All other Federal agencies, including all these ones listed here, follow rules that are set by FASAB, which is an independent agency itself. There's no performance reviews by JO.

The Fed's the only major agency that doesn't have a fully independent inspector general, okay? And I think when we said anachronistic a few minutes ago, the point is a lot of these exemptions seemed reasonable in the 1970s. And now there's good reasons for Congress to rethink some of those things and to ask questions, and to reconsider those possibilities.

Here's one reason why, okay? In 2007, the Fed's balance sheet was small, and almost all of its liabilities were paper currency. So, well, we don't need GAO audits, we don't need performance audits, we don't need a fully independent IG. Sure, but now the Fed's balance sheet is 10 times larger, and a lot of it is interest bearing liabilities, and its operations are much, much more complex.

This is the path of projection, this is where the trillion dollar number comes from. It's an update of the work that Bill Nelson and Brian Liu and I did, which we shared with you last year. I think a simple point is things have gotten worse since the last time I talked to you, a year ago.

And they might get worse again if it turns out, because we're seeing now the core service prices are continuing to run hot. That the Fed may need to be higher for longer, which is a phrase that disappeared a few months ago. And now people are starting to wonder again.

And as the level of short rates goes up, the cost to taxpayers of the Fed's decisions in 2020/2021 become more expensive. Cuz just like Silicon Valley Bank and others, okay, they bought a lot of long term securities and paid for them with short term liabilities.

>> John: The right way to think about this is that they shortened the maturity structure of government debt, thereby exposing the treasury to a more rapid increase in interest costs.

 

>> Andrew Levin: Yeah.

>> John: And there's a separation of powers, who is in charge of the maturity structure of government debt? Meaning the trade off between slightly higher yields and protection against interest rate rises. And the Bureau of Public Debt and the Fed are.

>> Andrew Levin: Yeah, okay. And again, Congress is the boss, Congress is the boss.

So Congress could say, okay, we're specifically giving this authority to the Fed, but we want the Fed to report to us on it carefully. And the point here is, this Trillion dollars, more than a trillion dollars, there was no congressional consultations, period. There was never a hint of this in the monetary policy reports to Congress over this entire period.

There hasn't even been since then, There's no ex post evaluation of any of this either. Okay, This is called the magic asset, That's the term that bill Nelson coined. And this is where, again, part of what the Fed's doing right now is covering its own expenses by issuing debt to the public.

Hopefully, that will end, but it could depend on how things go. If you look at the Fed's website, One of their FAQs is, is the Fed ever audited? And they say, yes, the Fed's audit, of course we're audited. But the truth is that they're audited in a very, very narrow sense by a private institution that's just checking for fraud and material misstatements.

Very different than what GAO does, GAO audits every other government agency. Looking more broadly, do the program serve the taxpayers well? Is there scope for improvements in efficiency? Where are the risks? I would say the track record of these private accounting firms is mixed at best. GAO has the nickname the taxpayer's best friend, and they do comprehensive reviews of lots of other independent agencies.

They have a track record, no agency is perfect. But GAO the comptroller general, is viewed as very, very nonpartisan.

>> John: What would you have to do?

>> Andrew Levin: All right, let me just, this last slide here, then we think we're done, okay? So as John said, it's a pretty short part of the paper at the very end.

And so I'll just be brief here to say we looked at some other independent agencies and we said, well, gee, if Congress wanted to strengthen its oversight of the Fed, here's a few places it could start. For example, Congress could require the Fed to put simple benchmarks into every monetary policy report with an explanation if it deviates from the benchmarks, that seems to me pretty unobjectual.

Congress could require the Fed to report on risks, essentially stress tests for monetary policy. Congress could set up a system like it does with the national intelligence agencies, which comes back again to what Larry Myers said. I'm hoping, Larry, that you would agree that it's appropriate for Congress to have oversight of the CIA and the NSA.

 

>> Larry Meyer: We're incapable.

>> Andrew Levin: Okay, then, by the way, Winston Churchill said-

>> Larry Meyer: You want the politics we have today.

>> Andrew Levin: Well, okay, we don't have to have a democracy either.

>> Larry Meyer: No, but we may not.

>> Christina Parajon Skinner: We can read, Larry.

>> Andrew Levin: Okay, anyway, so last point, which I think I would hope would be unobjectionable honestly is to make the Fed's inspector general fully independent with comprehensive authority to investigate everything the Fed does, including the monetary policy.

But I wish, I'm sorry, Larry, just hold on for a second, just last two sentences. And we should also probably let other people weigh in to, I wish that Fed Chair Powell would come out and say, we would welcome this. That's what Ben Bernanke did in 2010, he went to Congress, he said, we know there's a lot of questions about our emergency facilities.

This is what Ben Bernanke said, as Fed chair, he said we would welcome Congress to initiate a full, comprehensive GAO overview of all of our emergency facilities. The Fed itself should be welcoming more public accountability. The Fed wants to preserve its independence from political interference. Then the Fed should be involved in these discussions about how can we strengthen the congressional oversight without interfering with the politics.

So I'll stop there Christina, did you wanna make any last?

>> Christina Parajon Skinner: Well, I suppose it's not a concluding comment, but just to go back to what you were asking before about what we would have them do, and I think this is the note you ended on. I mean, I think there's a spectrum of accountability, right?

And the Fed is on one end of the spectrum. Other central banks like the bank of England, the IMF, they have processes for external evaluation and review. So I think what we're urging here is actually pretty timid, it's pretty low hanging fruit, right? Welcome some kind of external assessment and review and see what lessons you can learn.

It's almost like corporate governance 101, why wouldn't you do this? There's nothing to fear, most likely. And, we're in a moment in time where there is essentially a legitimacy crisis for most of the administrative state. And if the Fed is interested in staving that off, then these are some very basic things that it could do to prove to the public that it's operating within the structure of the basic rule of law.

These very basic constitutional principles that we don't always think about in terms of the central bank, because we have this history of thinking about the central bank as special, and maybe it is special, but it's not that special.

>> Speaker 13: Let me ask a specific-

>> Speaker 14: Yeah, the problem you get is if you have Congress playing a major role, it's not Congress, it's a committee of Congress.

And the people who will gravitate onto that committee will be people who have certain axes to grind. We have a senator from Massachusetts who would certainly be on that committee. And so it could, I think, one of the reasons why the Fed is very reluctant to have a committee of Congress swarming all over.

I mean, think of all the other departments and agencies of the government. They all are being managed by some subcommittee or some committee, and it usually has on that committee people. The agriculture committee has great control over the agriculture department. The Labor Department is filled up with the committee on Education, labor is filled up with people with passions about that.

So you get certain people with certain kinds of passions and certain kinds of constituencies, which, especially when you're talking about an agency that has very broad responsibilities for the operation of the financial system as a whole. I mean, you're running risks by giving that authority.

>> Christina Parajon Skinner: But that's the system that we have.

 

>> Speaker 14: Same level as the Fed.

>> Speaker 12: There's these anti democratic oversight arguments running through-

>> Speaker 14: Yeah, but it all sounds wonderful, but you,-

>> Speaker 12: I'm not saying it's wonderful. I mean, some of the comments are like, let's give up on democratic oversight. And I don't know why those arguments don't apply to the EPA, the Department of Transportation and a whole host of other regulatory agencies that just get rid of Congress.

 

>> Christina Parajon Skinner: I mean, you're right, I write about, in other papers, right? I've written about the Fed expanding its mandates and pushing, beyond and beyond and beyond. And this is pervasive throughout the administrative state. When I was talking about, for example, climate change, right? One of the most common retorts that I would have to, my paper is, well, Congress is ineffectual, right.

And we need to have the experts take care of it. And I think that's the very thinking that has led to the extensive expansion of the administrative state with dwindling accountability to the public. And it's just not really sustainable in a society bound by the rule of law.

And so maybe there are problems with Congress. And people say Congress is gridlocked, right? And that's perhaps a separate problem. But in my experience, and to my mind, right. I mean, if we're quoting Winston Churchill here, right, democracy is like a messy form of government, but it's better than all the rest, I mean, it essentially works out.

I mean, if you think about some of the really far reaching things that the Fed has contemplated in the past couple of years, right, when it was sort of at the apex of its politicization Climate change or central bank digital currency. It was this intense pushback from congressional committees who maybe did have an axe to grind.

But ultimately it brought the Fed back to the center, right. We've sort of reached peak discussion about climate change, and the Fed is really sort of lukewarm about CBDC. And so that, yeah, that modicum of accountability, I think, has been effective, right. But we just don't see it in the monetary policy space that much.

 

>> Speaker 14: So you're saying that the monetary policy would be much better if we had a lot more congressional interference? You're saying we'd have a lot more dissent. I think we might have a lot more dissent because you'd have different members of the board having connections with specific interest groups if Congress really had some leverage on the board.

But Congress is not gonna have any leverage on that board unless they control the, the board's budget. The one power that Congress has that's very powerful is the power of the budget. Without that power, you can make all the other changes you're talking about, and it's gonna have a very minimal impact.

If you put the budget of the Federal Reserve into the hands of a committee of Congress, then you have a different story.

>> Andrew Levin: Can I make a comment? So I think, I wish the GAO had looked at the balance sheet policies five to ten years ago. And I think one of the things that they would have flagged is that if the Federal Reserve risked all of its future profits, okay, then it was gonna have to fund itself by issuing debt to the public.

That that's probably not constitutional, and we're very close to that now. Okay as it is, the Fed's gonna have this magic asset now for about ten years. And if it turns out that the Fed needs to do higher for longer, that could get it to 15 or 20 years.

And at some point the Supreme Court will be called to rule to sort of say, is that legitimate? It's not an independent agency that's raising money, say, through fees like SEC does, okay, or FDIC. They have the insurance fees. Is it legitimate for the Federal Reserve to fund itself by issuing debt to the public?

And so, again, in a constitutional structure, what the Fed did in QE four potentially could threaten its independence forever.

>> Speaker 14: You win that lawsuit, you can file that lawsuit, probably.

>> Andrew Levin: No, I'm not saying that lawsuit should be done. I'm just saying that these are the kinds of questions that external reviews raise that are healthy questions to ask, like how much risk are you willing to take?

Are you willing to gamble your house? Are you willing to be homeless if this doesn't work out? Those are the kinds of questions that should be asked. And I think it's not up to the congressional committee. We really need the IG and the JO to have much stronger ability to evaluate and assess.

 

>> Speaker 15: A good example is monetary policy. Where we started, the Fed slept for a year and did nothing, and inflation surged. It had a 2% target hit, 9%. You would have thought there would be an internal investigation. What happened? There wasn't. You would have thought congressional committees said, hey, we told you guys price to play.

What's going on with this 9%? There hasn't been, they could have. Even under current system mass, do you see structures that would have led to at least, what the hell's going on here kind of investigation? And where in your structure would that have happened?

>> Christina Parajon Skinner: Yeah, I think that's a paradigmatic example of what we're talking about here, which is, why is everyone afraid to ask these questions.

Or even have a post mortem review of how decision making went wrong. And so I think that's a big part of what's motivated this paper, right. So I don't think we're naively suggesting that Gao has all the answers and they could have directed a better monetary policy. But it's doing an after action review and saying why did you sleep for a year?

And why did you maintain this rationale?

>> Speaker 16: I think that's, I would just second that idea that it's a good idea to have these after actions. The military does it all the time, for example, and can be very critical of itself and how it responded, tries to improve it.

Let me go. I know, but way before you get to the current engorged balance sheet. The same issue of what was legal came up in the financial crisis when they were greatly stretching, maybe exceeding their section 13(3) authority. And so the question is, how elastic is this? And what eventually something's gonna happen to say, are they going have they gone too far?

They will be far, number one. Number two, do we have to wait until there are obvious, immense financial implications and economic implications for the general public. That it associates with what the Fed's doing, other than they were a year late for starting to raise rates for inflation? So what's your view on that?

And I apologize for coming late, I got stuck. I couldn't leave my office.

>> Christina Parajon Skinner: Yeah, well, I agree that that's the outside risk. And I think that's one of the reasons why we're suggesting that we should set up more layers of public accountability now. Because the accretion of power during emergency this is a tale as old as time.

It's always a one-way ratchet, and it's the same thing about the Fed's power too. And so the question that you're presenting is, will that be when will that break and when will there be more grave consequences for the public? And that's really hard to answer. And it's impossible to put any guardrails up if we currently have none.

 

>> Speaker 16: Let me give you a couple of examples from my personal experience. When I was CA chair, when we had savings and loans and third world debt of the money center banks, before they all merged and created bigger banks. John was there at the time, so he may want to say something about this.

But we thought our very decentralized system of bank regulation, different regulators with partially overlapping, partially distinct jurisdictions, was very inefficient, would cause problems. So we were proposing to have one regulator. The Fed went nuts and declared that they couldn't possibly conduct monetary policy without their ability to supervise large banks have that work in the financial crisis.

Okay, so that's what I mean, that those kinds of experiences lead me to be sympathetic to after action reviews. The Fed did conduct, don't forget an immense, by their standards review of whether their conduct was appropriate. An era of very low interest rates, of course, which led them to think the natural rate was lower and blah, blah, blah, blah, blah, right, equilibrium, real interest rate, our star was lower.

They could maybe run hot for a little while, or average 2%, etc. And that I think was part of the reason they were late. They've been imbued with their own thinking about that. They talked themselves into that.

>> Andrew Levin: One thing I wanted to say is that Hoover is the only place practically on the planet that's doing after action accountability of the Fed.

And I think John Taylor and John Cochran and others around this table should be proud of that. Steve Davis, Mickey Lemme, some of the others have been raising these questions. I just want to point out here that the last monetary policy conference, Randy Quarles was asked about this and he did comment.

And I think it was constructive because what he said was that a big part of the reason the Fed stayed on hold during most of 2021 was because. They were waiting for Fed chair Powell to wait for his reappointment. And that wasn't announced until, I want to say, kind of early November of 2021.

And that was the date literally to the day that the Fed announced that it was gonna go ahead and start tapering. Now you connect that to some of the governance issues that we flagged here, okay? Having a four year chair, a four year term for the Fed chair, is really different than most other central banks around the world.

They have a term of the ECB, president of the bank of England, governor of the bank of Canada, right. That's significantly longer than the term of the president.

>> Speaker 15: Is that good or bad? I think of the ECB as way too independent because she's off on climate change.

 

>> Andrew Levin: I don't wanna try to justify everything that every, I'm just saying here that in terms of basic governance principles, going back to the 1887 kind of principles that Congress established for independent agencies. One of them was, it should be a multi member commission where the chair is just the first among equals and where they have long staggered terms.

And the way the Fed's working now is not like that. And so Randy Quarles has given you your after action report. He's given it to you. It only took him a few sentences to say it. Kind of what fundamentally went wrong in 2021.

>> Speaker 14: Between your problem and your solution.

Your problem is there's not dissent on the Fed. There's a problem that the chair has a lot of authority and that the chair is paying a lot of attention to what the president thinks. And your solution is to give Congress a lot more control over the Fed. So I don't see how that's a solution to the problem you identified.

 

>> Christina Parajon Skinner: Well, I don't think-

>> Speaker 17: Can I talk real quick?

>> Christina Parajon Skinner: Sure.

>> Speaker 17: So I'm in the military, so there's a similar oversight problem. I would disagree that's not the problem. The problem is who owns the risk for the decisions. And the constitutional authority lies with Congress. So right now, Fed is making risk decisions on behalf of Congress with no supporting oversight.

In my world, it would be like a brigade commander doing things that impacts the entire division, but not having the field of vision that the division commander has. And so what we've got to have is the person who's in that position, that has that authority has to own the risk.

So if they look at the Fed's recommendations and say, I agree with your assessment, so be it. But if they say, hey, your target, your actions say were going to get to 2% of inflation, but were not. I own that problem. And you have to explain to me why we didn't get what you told me we were gonna get, and then they have to report back to them and say, I think that's fundamentally the problem is the Fed is owning the risk that should belong to Congress, if that makes sense.

 

>> Larry Meyer: Is this the general discussion and can I say a few words?

>> John Taylor: Yes.

>> Larry Meyer: Okay, a lot of the paper is very interesting and I enjoyed it. So I'm just gonna talk about the specific recommendations. Policy benchmarks, of course the Fed does that and every other monetary policy report.

A lot about rules. Explain why they don't follow them if you want. That's not a bad idea. Alternative scenarios. They do this and you could certainly ask for more information about it. Congress wouldn't know about it. Access to sensitive information. You gotta be kidding me. Are you serious?

In boxes at Mar-a-Lago? Come on. Professional watchdog is interesting process. Not decisions, not second guessing the rate decisions, but process they can certainly ask questions about. Great idea. Fully independent IG. I don't really know how the igs are appointed. Who appoints the independent IGs?

>> Andrew Levin: It's appointed by the president, confirmed by the Senate.

Why don't you react?

>> Larry Meyer: Okay, my point, my point. Everything is political. Everything is political. And today we have a nonfunction of political process. To think you want to give these top politicians more control over the Fed. God help us.

>> Andrew Levin: I beg your pardon, Larry? Look, look, federal judges are appointed by the president of the United States and confirmed by the Senate.

And that's how I think.

>> Christina Parajon Skinner: But also, more to the crux of the issue is that there is no agency that can exist outside of the control of Congress. Because we use this sort of metaphor. There can't be a fourth branch of government, right, the Federal Reserve. There's no other way to do it, whether you think Congress is effectual or not.

The Fed can't exist outside of the authority and control of Congress because,

>> Larry Meyer: Yes it could.

>> Christina Parajon Skinner: well, you would, you would literally have to amend the constitution to do that.

>> Larry Meyer: Look, congressional oversight is either impossible or too political. We live in a different world today than the one I grew up in.

So we have to ask, what can we do in terms of external reviews? It's a great idea. Who's gonna do it?

>> Andrew Levin: Okay, so, Larry, can I just respond to your question now? Okay, so the good thing here is monetary policy is different in some ways, but these deeper problems are not totally new.

And so part of the reason GAO was created and originally was created in the 1920s, but really strengthened in the 1970s and why the system of inspector generals were created was Congress itself realized that there's too much gridlock and there's too much things in the congressional staff come and go, right?

They realized that they can't really provide effective oversight of anything. Pentagon, interior, EPA, all these problems they recognized, okay? And so the whole point of creating the congressional watchdogs is so that you have a group. Now look at this previous slide here. Okay. December 1, 2023, GAO report warns Artemis 3 landing may be delayed.

Okay, now there's a group at GAO, just let me finish, Larry. There's a group at GAO who have expertise in the things that NASA does. And they write reports and they say, well, this might be a waste of money or you're not being realistic here and you're planning.

And that report goes to an oversight committee in Congress and they may or may not call a hearing. NASA can be free to disagree with the GAO report and say, no, no, we're going to get it on time. Or they say, yeah, we agree with that, we actually are going to delay it.

I cannot see any good objection by the Fed to having Gao do comprehensive reviews of everything the federal reserve does. They're not going to micromanage to say, you shouldn't have done that on December 3. But GAO looks at the big picture here in a very constructive way. GAO needs to have probably 20 or 30 staff and they need to have some consultants, some of whom may be sitting around this table or on the Zoom, right.

But GAO Could do this. They can do rocket science, they can do monetary policy oversight.

>> Speaker 18: I think the issue that most people have to trade off, number one, right now, I would agree that Gao generally has mostly been not super technical, but it's able to do these kinds of things.

But I think the concern is that somehow over time, it would wind up being overtly political with, under pressure. And we know from the long history of studies of inflation outcomes with independent central banks versus central banks are part of finance ministries, mostly in parliamentary systems, which were therefore beholden to the legislature.

Doesn't look great. Going back to Stan Fisher's work, I don't know if there's any recent work. I haven't seen it. If that still holds, although most of them have had some much more independence than they did a long time ago. So, I mean, that's the balancing act. I think that GAO, rather than a committee of Congress, is an experiment, but it's an experiment with risks it might be worth taking.

I guess that's where I would come down. The risk is that it gets politicized too. Larry's kind of hinting that we live in such a hyper political world that nothing will remain and nothing can remain a virgin in that regard.

>> Andrew Levin: I mean, the head of GAO has a 15 year term, and it's in the law that they have to.

It's not just the president of United States with confirmed by the Senate in the law, the comptroller general, because it was constructed to be non-partisan. Okay, requires like the ranking member and the leaders, right? They did this very carefully in the 1970s because they understood that it was really important.

When you're overseeing the Pentagon, or you're overseeing the EPA, and you want to, like CBO, it's really important for it to be understand.

>> Speaker 18: Andy, I'm sure.

>> Larry Meyer: You want them to second guess the FED on rate decisions.

>> Andrew Levin: Sorry, you were going to say something. Did you wanna add them?

 

>> Speaker 18: I was gonna say that I take the point that at the moment, but look at all the things that have been changed by majority rule now in the Senate, etc. So you can imagine a very narrow majority in the Senate, very majority in the House, and a president with particular proclivity, whether she, I mean, their history is replete with members of both parties favoring low interest rates, depending on what part of the country they came from, for example.

But I think the issue then becomes they can change that law. So that's all I'm saying, is that I would view it as an experiment. And you have to admit it could go wrong. That's all I'm saying.

>> Speaker 12: Can I just jump in here? I guess you raise an interesting point, but my impression, and I'd be happy to be corrected, is that the GAO is, and the independent IGs have largely resisted, with some effect, being overly politicized.

 

>> Andrew Levin: That's mostly correct.

>> Speaker 12: And there are other areas of policy that's highly politicized, not just monetary policy. Clearly, that's the most politicized area. So the track record for the GAOs and the independent IGs in this respect seems to be a good one, and would make one hopeful that it could also play constructive function in this context.

 

>> Andrew Levin: By the way, Congress can change laws. They can change Federal Reserve Act. And so I'm actually more worried in the situation you're describing that if the FED is viewed as too much of a monster. It's a Frankenstein monster. It's a fourth branch of government, that it's no longer really accountable to the public anymore.

That that sets up situation where a president with narrow approval by both Houses and Congress, just changes the Federal Reserve Act and makes the head of the FED, a cabinet official. And so, how do we protect against that? This comes back to the beginning of the talk, how do we protect against that?

And I think the answer is, you gotta have some mechanisms for public accountability to help Congress to oversee the FED.

>> Speaker 20: I wanna raise a slightly different problem. Hoover is ground zero for monetary policy. Since 1971, I've been here, every single important person in the whole world has come through Hoover.

Seriously, that matters for economic monetary policy. Either they've been a resident fellow or they've been a visiting fellow, or they've gone to a monetary policy conference, okay? And I've seen them all. And what do I see stepping back? Okay, I see six schools of monetary policy, I'll name them.

And then I want to tell you why it's a problem. Okay, there was Milton Friedman Muddy supply, growth. Dad, no, there's still a bunch of people who believe in that. Steve Hankey, John Green, what? I can name a few others. Well, there's a Taylor rule, okay? Not John Taylor, who caught the winning touchdown in the 84 Super Bowl, that's John Taylor.

Okay, he's gone the Fitbull Rule. The John Cochran rule. He says, come on, it's all a bunch of deficits, okay? And Jim Sasser's gone. We got to get the death and sit down, okay? Then there's the Larry Summers rule. What's that? Okay, a little bit of monetary policy, a little bit of fiscal policy, and a little bit of other adjustments to get the 2% rule to work the way I want it to work, okay?

Then there's the Supply Side Shock School. And then finally, there's some of Sumner, who says, you're all wrong. It's all demand and it's all NCDP long term. Okay, now what's the problem? Well, let's get all the Congress people who are gonna take control, and you know what? The train is going down the track and it got six choices.

And so, wow, three people like this rule three, like that rule three, like that rule three, like that rule three, like that rule. And so the congress is gonna oversight it and they're gonna blame the Fed. Well, you didn't follow the Taylor rule. No, it's the wrong rule, okay?

And you can go through this and debate what rule should the Fed follow? And the answer is if you think members of Congress can sort this out and agree, except they'll change it from term to term to term to term. Let's put Austin Goolsbee is head of the Fed.

What do you think you're gonna get? Let's put John Taylor as head of the Fed. Let's put Larry Summers as head of the Fed. Let's put Pot Scott Sumner. The point is that monetary policy is so arcane and so difficult, I doubt you could give 30 members of Congress to understand what the hell they're talking about, even with all this advice.

And here advice would be let 100 flowers blossom. Let 100 schools have contend. So I just don't see how you're gonna get past an educational problem before the Congress can possibly do a job of calling the Fed to account and telling it what it should do, what it shouldn't do, unless the Fed reports on all six schools of monetary policy.

And there's a 7th, by the way, that I was gonna ask about, but there's not enough time. Cryptocurrency, do you know the market value of cryptocurrency today at the current price of bitcoin is over 3 trillion? And if Andreessen's right, it's gonna exceed the value of BOJ and the Fed's total liabilities.

Okay, you think they can figure that out? Okay, anyway, that's just my general observation about the state of the world.

>> John Taylor: Any responce?

>> Andrew Levin: I just wanted to say that Peter Fisher has a brilliant paper. It's a pretty short paper, and he's here online, he can comment about it, he was a fascinating proposal, but one element of it was that Congress could require the Fed at the beginning of each calendar year to explain what policy rule it was gonna follow.

What framework it was gonna use for that year. And it could be nominal to GP could be-

>> Speaker 20: But what is the time.

>> Andrew Levin: No, but the point here is that in terms of public accountability and transparency, I think Peter Fisher's proposal made good sense. And what I, I think, again, Congress doesn't have expertise in NASA.

They don't know when Artemis should be launched. They don't have expertise on the kind of military issues that you were referring to. Right, there's on the EPA, all these sort of things, right? That's why you need the watchdogs to kind of help look and say, maybe we should be paying more attention to normal GP targeting, or maybe, it's outlived its usefulness.

I don't think Congress can decide that, but the law could require the Federal Reserve to explain.

>> Speaker 20: I don't have trouble with Congress debating all those six different schools of thought, let them all bloom and blossom. But to expect to get a 2% inflation rate out of that as a basis of looking over monetary policy, maybe you will, maybe you won't.

And you're certainly not gonna get with some rules.

>> John Taylor: Questions from the screen.

>> Peter Fisher: Well, thank you, Andy. I don't, that paper that Andy's referring to, I just was trying to put the onus on the Fed to explain itself better, coz I'm sort of trying to be optimistic about democracy.

But I just like to say that I wanna thank you both for the paper. Since I've been called out, I think it's emphasis on lots of different practical things that could be done to improve the Fed's governance. They're just marvelous. I think much of the conversation the last hours oscillated between a little too much constitutional emphasis.

I'm gonna say that Congress should have broad latitude. I believe it was McCulloch V Maryland that whole armies could be raised without requiring an oath of office. That is, we give Congress a lot of latitude on means. But a lot of the tone of the conversation shocks me, because implicit in it has been, everything's fine, let's not change any of the Fed's governance.

And I would have thought this assembled group of intellects would be closer to the idea that we could improve the Fed's governance. And if this group can't come up with a few ideas to improve the Fed governance and coalesce around them, then we're really in trouble. So I'm just gonna stop there, thank you.

 

>> John Taylor: Well said, Peter.

>> Speaker 22: So a very interesting discussion. I just wanted to bring out that many countries across advanced economies. They followed very similar script in the context of COVID many had, in the wake of the GFC, where they kept policy rates very low, they expanded their balance sheets.

And I think a lot of that reflected a common economic philosophy, a common assessment of risks that they were very worried about, a low r star deflation risks, especially in the early aftermath of the pandemic. And so although there are differences in governance across countries that you've mentioned.

Are there cases where you'd say that, look, this difference in governance and this advanced economy produced better outcomes. So do you see examples where there were materially different outcomes based on different governance? And if so, is it kind of much more of a common problem?

>> Christina Parajon Skinner: I mean, that's a great question.

And I think there, you're right, there weren't seriously different approaches and outcomes. Part of that is because most of the world follows the Fed, and the Fed should aspire to be a leader in the quality and integrity of its governance structure. But I do see a difference. And Andy, I want you to jump in after me.

But I do see a difference in approach again, after the fact, right? I think we refer to this before, but the bank of England has embarked on a pretty comprehensive after action review, including inviting. Is it Ben Bernanke's over there now, right? Going through them, trying to assess whether there's too much group thing around their forecasting and modeling precisely for this very reason.

And you don't see any similar approach really being taken by the Fed? And I would think that the Fed would wanna be a thought leader in this kind of procedural issue.

>> Andrew Levin: Yeah, I mean, John Taylor and I were talking about this this morning. I remember at least two occasions, and probably more, where John Taylor was at Hoover, talking about the extent to which other central banks were too focused on keeping the US dollar exchange rate stable.

And not moving their interest rates independently enough. And I think that was a major factor in 2021 was as long as the Fed was staying on hold. And which, again, maybe according to Randy Quarles, for really idiosyncratic reasons, it wasn't in fact, some deep economic ideological thing. It was simply, we're waiting for our leader to find out if he's gonna be reappointed or not.

And then all these other central banks that are caring about their exchange rate against the US dollar are basically paralyzed for that ten or eleven or twelve month period.

>> John Taylor: Yeah, you have your list, restoring grational oversight things a slide before this specific reporting requirement. Would you pick one or two of those, maybe you don't wanna do that.

Maybe it has to be the whole thing. Which of this, this is your restoring congressional oversight. Restoring means a big change. Which would you do?

>> Christina Parajon Skinner: Yeah, well, if I were queen for a day and I could pick two, I would focus on the reporting requirements, going back to policy benchmarks with an explanation for the benchmark.

And I really like the idea, which all credit goes to Andy for this, of stress testing monetary policy. Because I think, again, it challenges assumptions and ideas and allows robust public debate. So for me, the reporting requirements would be the first thing to go and. But maybe, Andy, you feel more strongly about gal.

I'm not sure.

>> Andrew Levin: No, I think that, again, they seem unobjectionable. And so I still wish the Federal Reserve itself would get involved in this question of how can we strengthen our public accountability in order to protect our insulation from political interference. And the Fed would look at this list and the Fed would answer your question, Tom, maybe you'll be able to answer it or ask them.

In May, a couple of Fed officials may be here and ask them and say, what do they say?

>> Tom: Some too.

>> Andrew Levin: Yeah, well, unfortunately, my experience has been that the Fed's preferred strategy is just to stay quiet and hope things go away. And many times that's actually worked fine.

So that's kind of the typical approach they follow. Beg your pardon?

>> Speaker 24: Why would you stir up the bees?

>> Andrew Levin: Again, I think, and maybe the right answer is the one that Michael asked, which is that in the end, we do live in a society where Congress and change the law.

And so to mitigate the risk of abrupt changes in the law, that could be really counterproductive over time and to start having partisan swings in the law, okay? Means it's critical part of the Federal Reserve's responsibility is to try to help ensure that things change over time, smoothly and in constructive ways, rather than trying to resist all change.

 

>> Speaker 18: I think it's worth recalling that it wasn't that long ago that there were strong calls for shifting the target to 4%. And fortunately, that was resisted. I wrote something about that just based on public finance principles, why, that was screwy. But any event, it seems to me that we have had episodes where it would have been desirable to hear the Fed say how risky that would be.

For example, it was resisted, but that doesn't mean in the future. The political process won't cave to those kinds of demands. So that's all, it's just, it's important, I agree. I think that if the Fed's capable of doing a system-wide review of how we should conduct monetary policy in an era of low interest rates, expecting them to continue forever or for the many, many years.

It ought to be able to do this internally, absolutely.

>> John Taylor: So, Mickey has a question.

>> Mickey: Yes, a naive question, Andy, how can you work within the Fed to create an internal impetus toward stress testing itself, toward doing internal investigations? So, of course, in 2021, the Fed blew it, everybody knows it blew it.

But in six months, they're gonna start their new strategic review, what can we encourage the Fed to kick its own tires? Since we've had this hour long discussion about how politicized it might be with GAO, I would only add on Congress, the cost of the bloated balance sheet.

The CBO could be mandated to estimate the cost., that's different than the GAO. But if we all agree that, yeah, you want better oversight, but it's all politicized, how could you create this impetus within the Fed to want to stress-test itself? And I know that's maybe a very naive question, but that maybe be fruitful if we could break through on that.

 

>> Andrew Levin: Okay, so I'll give a really quick response, I think we're just about out of time. One of the things I've thought about a lot over the years is principal agent problems. And so in this case, the principal is the public, and Congress is the agent of the public, that's sort of one way to think about it, at least.

But then Congress is responsible for monetary policy, they delegate it to the Fed. So now we have another principal agent problem, which is the Congress of the principal, and the Federal Reserve is the agent. Okay, we know that there's conflicts of interest in what an agent wants to do and what kind of information they wanna provide to the principal.

And so I think asking the Fed itself to voluntarily tell us where are the risks, what could go wrong? They might be willing to do it, but in many cases, they're gonna be hesitant. And so this is why I think that a good employee-employer relationship, basically you have a job description, you have reporting requirements, and you say you wanna work here, that's what you got to tell us.

Okay, and you can't sign checks over a certain amount without getting clearance from supervisor. And so, I would have thought that a trillion dollars was enough that the Federal Reserve would have felt that it was imperative to check with Congress before they put that amount at risk. Well, they didn't.

So maybe now is the time for Congress to say, okay, we need to think a little bit more about this.

>> John Taylor: Thank you, you guys are great.