To many, the Federal Reserve is a super-secretive organization, unaccountable to the public and endowed with extraordinary power to influence the world economy. To me, it was simply my workplace until last August. And just like any workplace, it has its own distinct rhythms and culture that manifest themselves in a variety of ways. This is why I was excited to pick up Daniele DiMartino Booth’s new book Fed Up, which details her experience working at the Federal Reserve Bank of Dallas from 2006 to 2015. I was curious to see if Ms. DiMartino Booth’s assessment of the Fed’s culture, and the impact of this culture on decision making, aligned with my views and perceptions formed while working for five years at the Federal Reserve Bank of New York. Upon reading the book’s dedication, I quickly realized that I would not be getting a nuanced account of life inside the Fed:
“I dedicate this book to every hardworking American who wakes up in the morning asking themselves what went wrong.”
What follows is 266 pages of hyperbole and bombast that is sure to please the most ardent Ron Paul supporter but leave the average reader no more informed of how the Fed operates than when they began. At the core of what went wrong, according to Ms. DiMartino Booth, is an over-reliance on PhD economists and their fidelity to theoretical models that “bear little resemblance to real life.” It is this lack of real-world experience, according to the author, that prevented the Fed from identifying the accumulation of risk in the housing market and the potential for problems in the housing market to spill over and infect the entire financial system. It is also what drove the Fed to adopt unprecedented measures in the aftermath of the financial crisis which were intended to stimulate the economy, measures the author believes could have a “devastating impact on people’s lives.”
It is clear that Ms. DiMartino Booth, who holds an MBA in Finance and International Business, resents how she was treated by her former economist colleagues in the Dallas Fed’s research department. I submit the following quotes as evidence:
“Within days I realized that it wasn’t my outfits they disdained. I didn’t have a PhD. As far as they were concerned, I had nothing interesting or valuable to say.”
“Few had even the slightest interest in financial markets. Nor in talking to me. Because of my lack of academic accomplishments, I didn’t qualify to breathe their air. It was a shock to be treated with such obvious condescension.”
“For three years I had endured the economists’ snide remarks, their snobbery, their intellectual arrogance.”
Much of Fed Up feels like an attempt by the author to get revenge on these former co-workers, and she pulls no punches in doing so. Exhibit B:
“Central Bankers have invited politicians to abdicate their leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: “groupstink.””
“However, once inside, I confronted an uncomfortable question: Why were so many of its highly-educated and well-paid economists oblivious as the worst financial crisis since the great depression was about to break over their heads.”
“The Fed’s battalion of economists – from the top down – believe that their training in the world’s top universities and their unique schooling in analysis gives them wisdom and insight, when in fact their training often blinds them to reality.”
Unfortunately, the personal nature of Ms. DiMartino Booth’s criticism overshadows the more substantive arguments she makes. This is too bad, because much of her commentary on the role of economists within the Fed rang true with me. Most of my time at the New York Fed was spent supervising large financial institutions, where I had limited interaction with the army of economists employed in the research department. When I did encounter these folks, it was clear they had very limited interest in the work I did, or in bank supervision more generally. Most staff economists had little reason to care about supervision. As the author points out, they are evaluated based upon their ability to publish in prestigious academic journals, journals which are primarily focused on monetary policy. I did laugh at the author’s description of the research floor at the Dallas Fed: “the floor was library quiet and smelled sterile, like a hospital.” A description that aptly applies to the New York Fed’s research department.
Fed economists certainly deserve criticism for failing to identify a housing bubble and the potential for a decline in home prices to infect the health of the financial system. This failure has been written about extensively, and acknowledged by Fed senior leadership. In his memoir, The Courage to Act, Ben Bernanke noted that: “We failed to take sufficient account of the effects of falling house prices (and the resulting mortgage delinquencies) on the stability of the financial system.” But Fed economists weren’t the only ones who missed this link. Most Wall Street firms failed to understand how a decline in housing prices could impair the health of their institutions and the broader economy. And these firms were primarily staffed and run by MBA’s – not economists.
The Federal Reserve is a sprawling organization, with twelve district banks that are loosely affiliated with each other and serving essentially the same functions. Of course, the function that gets the most attention, within and outside the Fed, is monetary policy. But the Fed’s other roles are no less important to the daily operations of the financial system. These include: circulating currency, clearing checks, operating various payment systems, serving as the Treasury’s fiscal agent, and bank supervision. Executing on these functions does not require a PhD in economics, and I believe Ms. DiMartino Booth missed an opportunity to examine how the Fed’s traditional focus on monetary policy may be negatively impacting their performance in other areas. Why is it, for instance, that the U.S. payments system is significantly slower than what’s in place in most other developed countries? Why were hackers able to steal $81 million from the Bangladesh central bank’s account at the New York Fed? And how did Fed bank examiners fail to flag the excessive use of leverage by regulated financial institutions leading up to the crisis in 2008?
It is not fair to blame Fed economists for these failures. But it is fair to wonder if these failures could have been avoided if only the Fed’ senior leadership represented a more diverse set of academic and professional backgrounds. Presumably, this would have led to a greater focus on the Fed’s other core functions besides monetary policy.
In 2015, while I was still at the NY Fed, many of us were left scratching our heads when it was announced that Michael Strine would assume the role of first vice president, making him second in command at the NY Fed. The role had traditionally been held by an economist, but Mr. Strine received his PhD in political science, and prior to joining the Fed, he served as chief operating officer at the University of Virginia. However, when you consider the importance of the Fed’s other functions – especially at the New York Fed where they have even more responsibility than your typical district bank – it makes sense to have someone with an operations background in charge of running the place.
By having senior leaders with a variety of skills and backgrounds, it helps ensure that the Fed’s other core functions don’t get neglected. It also brings intellectual diversity to the all-important monetary policy decision making process. Unfortunately, the Fed’s senior ranks remain predominantly occupied by PhD economists. I believe the Fed should make more of a concerted effort to have senior leaders from a variety of different backgrounds.
Monetary Policy Criticism
Ms. DiMartino Booth keeps up the attack in the second half of the book, this time setting her sights on the Fed’s loose money response to the financial crisis. Once more, economists are too blame: “The federal reserve’s radical monetary policy – imposed by academics with no experience in the business world – has proved a disaster on an unprecedented scale. Global systemic risk has been exponentially amplified by the Feds actions.”
Standing up to these villainous academics is the dashing maverick, Richard Fisher, president of the Dallas Fed, and Ms. DiMartino’s boss, several times removed. In Fed Up, Mr. Fisher plays the street smart antagonist to the out-of-touch elitists Ben Bernanke and Janet Yellen. She notes:
“Fisher’s comments often provided a better look at where the economy was going than other speakers, at least in hindsight. But his charm and lack of a PhD meant that many on the FOMC and board staff did not take him seriously.”
Ms. DiMartino Booth is as effusive in her praise for Mr. Fisher as she is disdainful in her scorn for Mr. Bernanke and Ms. Yellen:
“Unlike the majority of those seated around the massive oval table, he’d been in the trenches as a manager of a hedge fund (Wall Street) and as a diplomat involved in negotiating the terms of NAFTA (government), and had been retained by the world’s biggest players for strategic advice (private enterprise.)”
At times, her descriptions of Fisher are downright cheesy:
“Before bed, Fisher prayed, as he did before all FOMC meetings, just as he had since his days of taking exams at Harvard: “If I am worthy, then show me the way.” He slept soundly.”
The author’s criticism of monetary policy post-crisis primarily takes the form of character attacks and suffers from a lack of intellectual substance. Ms. DiMartino Booth seems to believe that since Fed economists failed to foresee the financial crisis, it must therefore follow that their response to the crisis was destined to be a failure as well. Her main complaint – shared by Mr. Fisher – is that near zero interest rates and quantitative easing had no impact on economic growth, created a bubble in the equity market that benefited the wealthy, and harmed the majority of Americans who had their wealth in savings accounts that were earning next to nothing. There is some truth to these arguments, but readers trying to understand the impact of post-crisis monetary policy would be better served by going to other, more substantive, texts.
It is easy to point to the Fed’s actions and say they only made the problem worse. What the author fails to do, is convince the reader that her preferred course of action would have made things better. Indeed, there is ample evidence that had the Fed raised interest rates post-crisis, which is what Mr. Fisher advocated for on multiple occasions, the economy would have performed significantly worse. In 2011, the European Central Bank raised interest rates twice, a disastrous decision that plunged the continent back into a recession – something the author fails to mention. In fact, despite the author’s disdain for the Fed’s monetary policy, the U.S. experienced the most robust economic recovery coming out of the crisis of all developed countries. Ms. DiMartino Booth’s doom and gloom predictions have yet to materialize. After a certain point, the only explanation is that she was wrong.
The history and structure of the Federal Reserve lends itself to suspicion and conspiracy theories. For too long, a lack of transparency at the institution only served to fuel these theories. In recent years, the Fed has made great efforts to provide greater visibility into the work it does and the reasons for doing it. Nonetheless, many remain suspicious of the Fed. These folks will find a lot to like in Fed Up – especially the author’s recommendation to eliminate the Fed’s full employment mandate and instead have the Fed focus exclusively on price stability. But for the rest of us, who are trying to gain a better understanding of how the Fed operates, reading Fed Up feels like we’ve wandered into the author’s private therapy session – one where nothing gets resolved.
 The following are just three examples of articles that try to assess the impact of post-crisis monetary policy, specifically the Fed’s quantitative easing programs: “Did Quantitative Easing Work”, “QE And Its Global Consequences”, “Quantitative Easing Is Ending. Here’s What It Did, in Charts”