Legalmatter

By: Brian J. Meli

In a few weeks, the Federal Reserve’s Open Market Committee (FOMC) will meet to decide whether to raise short term interest rates for the first time since 2006; a decision that could have wide-ranging implications, not only for the stock market and the broader economy of this country, but for a world economy that, many believe, is showing signs of turning over.

The fact that the Federal Reserve is contemplating such a move comes as a surprise to exactly no one. For the better part of a year, even causal market observers have been anticipating a rate hike; with everyone from retired pensioners to veteran money managers hanging on the Fed’s every word. This heightened state of awareness owes to the fact that the Fed’s zero interest rate policy (ZIRP), has been widely credited with helping pull the U.S. economy back from the brink of collapse, and with bringing about the sustained stock market advances we’ve witnessed since the spring of 2009. The fear is that a rising interest rate environment will slam the brakes on, and even reverse, that progress.

There’s even a name for this interest rate mania: FedWatch. And if you care to, you can see what the experts are calculating the odds of a rate hike to be in real time. Or you can visit the Fed statement tracker to try and divine the Reserve Board’s thoughts from its last eighty or so official statements—each one conveniently marked up to show how it differed from the last. Whatever you call the current obsession with basis points, it has put the Federal Reserve Board of Governors under an intense public spotlight; one that only glows brighter and hotter the longer it keeps the federal funds rate at zero.

All this incessant debate, speculation and grousing over the words of five enigmatic economists deliberating inside a secretive Washington enclave, represents a degree of scrutiny unparalleled for a body of unelected appointees. 

Or does it?

There is another much discussed (and oft-maligned) clandestine panel of decision makers in the nation’s capital that has had to contend with a high degree of public engagement throughout its storied history; a history that predates the Fed’s by over a century. This group is also no stranger to high-profile controversy or second-guessing, and its headquarters are located right down the street from the Federal Reserve. I’m speaking, of course, of the nine justices who make up the Supreme Court of the United States.

When you stop and consider it, the nation’s central bank and its highest court have a lot more in common than just an area code and a fancy marble facade. They both reach decisions via a presidentially appointed and congressionally approved committee; they’re both comprised of top intellectuals from prestigious, Ivy League institutions; they both have (loosely defined) liberal and conservative voting blocs, and they both stir the fierce passions of an interested electorate. They also happen to be two of the most important civc institutions in America today; responsible for setting the country’s social, ethical and philosophical course through the complex, interrelated and shifting landscapes of law and economics.

The degree of public attention these twin pillars of American democracy and capitalism attract is far from unwarranted. When it comes to the most powerful central bank in the free world and the highest court in the land, an informed and engaged public is a moral imperative. But all that attention does beg a provocative question: How much does it matter? For all the effort people expend trying to predict and influence the decisions of these two bodies; for all the hand-wringing, protesting, postulating and pontificating, which of these two institutions is actually the more influential in the everyday lives of average Americans? While that’s plainly an unanswerable question, it might still be fun to try. So try we will.

Side-by-side: The Federal Reserve and The Supreme Court

Popular following 

When it comes to followings, there’s no doubt the Supreme Court has the larger, more populist one. That’s due in part to the perception that the decisions of the Court have a direct application to everyday life; and partly to a wholesale lack of understanding among average Americans about what the Federal Reserve actually does. Ask a hundred people to describe the Supreme Court’s job, and you’re likely to get a range of answers surrounding the notion of upholding and interpreting the Constitution. But ask the same hundred people about the Fed, and you’re likely to get a lot of blank stares, interspersed with vague half-answers about money printing.

This isn’t the public’s fault. The Federal Reserve deals in the highly complex and theoretical world of macroeconomics; a world of mathematical models, quantitative analysis and highly technical, arcane language that only those trained in finance and economics speak. (And even some of them don’t speak it well.) Concepts like monetary base, money multipliers, debt monetization and aggregate demand are elusive and highly unapproachable topics to most people. And even more commonly used terms, like inflation, interest rates and GDP, are only superficially understood by many.

Janet Yellen, Chair of the FRB / ©DonkeyHotey

On the other hand, it doesn’t take a Ph.D. in behavioral economics to assume an informed position on the constitutionality of same-sex marriage, the right to discriminate based on religious beliefs, or the constitutionality of federally mandated healthcare. Sure, the language of the Supreme Court is filled with antiquated latin terminology like certiori, per curium, habeus corpus and amicus, but once those terms are decoded, they’re quite comprehensible. The same can’t be said of forward guidance, inverted yield curves and dynamic stochastic equilibrium.

For this reason, fed watchers tend to be a circumscribed group of highly educated bookish types, with advanced degrees and at least a foundational understanding of monetary policy. The ranks of Supreme Court followers, in contrast, are drawn from a much wider segment of the population. And their commonality is based less on their education level or net worth, than on the issues under review. The uninsured become Court followers when the issue is universal healthcare, minorities when the issue is affirmative action, women when the issue is reproductive rights…and so on and so forth.

So as far as which body draws the larger crowd, the Supreme Court wins, hands down.

Public input                              

So the business of the Supreme Court is more relevant, and therefore more interesting to the average citizen. But does that interest translate into a citizenry that has a compelling voice in the Court’s affairs?

As independent, non-elected bodies, neither the Supreme Court nor the Fed is directly accountable to the voting public. But that doesn’t prevent the voting public from making its opinions known to both. Protests outside the Supreme Court are commonplace, especially when hot-button social issues are on the docket. But there’s also a more official Court channel for public sentiment. That’s through the submission of Amicus briefs; a process by which non-parties to a Supreme Court review may submit their written arguments for why a case should be decided a certain way. These briefs are often filed by trade groups on behalf of large constituencies, and they are usually based heavily on public policy arguments that highlight the effects that an affirmation or a reversal would have on a segment of the population. So, in this sense, it could be argued that the public can, in limited instances, influence the way a Justice votes. However, the true extent of that influence is very much an open question.

Open letters, meanwhile, are sometimes sent to the Fed, usually by private sector economists, academics and money managers intent on pointing out where they see flaws in Fed policy. And, from time to time, trade groups and NGOs also issue these communications. But there is no official mechanism for inviting public comment during the decision-making process by the Fed’s Board of Governors. At least nothing on the same level as Amicus briefs.

So while neither body is especially susceptible to public influence, the Supreme Court could be said to be slightly more open.

Sphere of influence

Both institutions have enormous influence over the state of domestic affairs, there’s no question about that. But only one—the Fed—can move international markets and alter the balance of economic power around the world. Only the Fed can cause capital flight from a country, distort fixed income markets, cause large-scale capital misallocations, or spark an international currency war.

Sure, other western-style democratic countries keep an eye on how the Supreme Court rules, and treat its precedent as instructive, if not persuasive authority. And Court decisions on topics like immigration, intellectual property, international treaties and creditor rights can have significant foreign policy ripples, as Justice Breyer’s timely new book, The Court and the World: American Law and the New Global Realities serves to illustrate. Still, those effects tend to be indirect, and take time to be felt. The Supreme Court can’t change the way the world does business overnight. The Fed can.

John Roberts, Chief Justice of the Supreme Court / ©DonkeyHotey

The money trail

Follow the money, as the saying goes, and you’ll get to the heart of the matter. The amount of money committed to finance an organization is usually a good indication of its relative importance. The money trail leading back from these organizations is instructive, but it may not tell the whole story. If the bottom line number alone were the decisive factor for influence, then the Fed would win hands down, as the Fed Governors have an operating budget six times larger than the Supreme Courts’. But that number may be misleading, since the Fed employs more people. That, in itself, could be significant. Or it could just mean that the job of the Fed takes more people to do.

Independence 

While both the Supreme Court and the Fed are autonomous, nonpartisan organizations with broad discretion to act independently, both ultimately answer to Congress—the Fed directly, and the Supreme Court indirectly.

It is common knowledge that both the Federal Reserve Governors and the Supreme Court Justices must be vetted through a Senate approval process. In theory, once that process is complete, and a Justice or Governor has been confirmed, his or her decisions take place outside the purview of Congress. However, in reality, the decisions of the seven Governors and nine Justices are not impervious to congressional influence.

Congress created the Federal Reserve, along with the twelve regional Federal Reserve Banks through the Federal Reserve Act in 1913, and in doing so, it established the objectives that continue to guide the Federal Reserve banking system today: namely, price stability, low unemployment and moderate interest rates. Therefore, on paper, the Fed is technically beholden to Congress. However, because the Fed exists outside the political process, and because politicians tend not to be very savvy about the intricacies of monetary policy, the legislature takes a mostly hands-off approach, leaving the specifics to the experts. But that doesn’t mean central bankers aren’t subjected to political pressures, both directly and indirectly, from lawmakers whose priorities emphasize some of those objectives over others.

For example, balancing the budget can be easier in a low interest rate, loose money environment. And repaying the mountain of foreign debt America has accumulated is much simpler when the dollar is relatively weak. The reality is that the fiscal interests of the legislature are constantly bumping up against the monetary responsibilities of the Fed. Exactly how much one influences the other is a running question, and the topic of much debate.

The Supreme Court, meanwhile, as the highest authority in the federal judiciary, has plenary power to interpret and rule on questions of law, and those rulings cannot be directly overruled by Congress. Congress can however, if the will of the people is strong enough, effectively override a Supreme Court decision via the legislative process, either by passing new laws or revising old ones. This is the fundamental check on the judiciary, and why it can be said that Congress can effectively negate a decision by the Supreme Court. It has happened before, and it will happen again.

So, while both bodies are independent in theory, both can be reined in by Congress. But as a practical matter, the Fed arguably has more leeway to operate unfettered than does the Supreme Court—if for no other reason than Congress is made up of lawyers, and lawyers like to write laws, not monetary policy.

Transparency 

Both bodies release detailed records, not only of their final dispositions, but of their decision making process. The big difference between them is that the Fed’s minutes, along with its “Beige Book” give public indications, albeit vague ones, of its future intentions. They tend to be forward-looking missives. Supreme Court opinions, on the other hand, are retrospective documents. Court decisions are always closely guarded secrets, and only after they’re announced does the public have any indication about why a particular Justice voted the way he or she did. Whereas with the Fed, it’s usually less a question of what they will do, and more of when they will do it (i.e. when will they raise rates, when will they end quantitative easing? etc.).

The Robes vs. The Quants 

I suppose, at the end of the day, trying to determine which of these unelected bodies holds more sway in our lives comes down to the question of: which of the two could the country less afford to be without?

On the one hand, societies have existed for thousands of years without sovereign banks manipulating currencies and stabilizing the price of money. Yet no functioning society, that I’m aware of, has ever made it very long without a well-defined, functioning rule of law.

On the other hand, if the Supreme Court disappeared overnight, this country would still be subordinate to the rule of law. Two hundred and fifty years of statute and common law wouldn’t simply disappear. And thanks to the framers of the Constitution, who created “one supreme court,” but also vested Congress with the power to establish “inferior courts,” the rest of the court system, both federal and state, would continue to function without a hiccup.

The big difference would be that the final word on federal questions would reside with the federal circuit courts; and state questions that deal with the Constitution, with the states. On some issues, that would mean we could end up with ten different sets of federal precedents, one for each of the federal judicial circuits. But in reality, that is often the case now, since the Supreme Court can’t or won’t settle all inconsistencies between the circuits. (The Court currently only grants review in about 1% of the cases it receives petitions for.) There would also be a question about who would hear original jurisdiction disputes between two or more states. But such cases are rare, and could, in theory, be decided by the circuit courts.

On the same hand, if America had no central bank, the nature of our economy would change dramatically, returning to a state resembling the one that existed prior to the great depression. Along with that comes the possibility that our country’s currency could once again be linked to the price of bullion, or some other finite resource.

With the U.S. dollar’s role as the reserve currency of the world and the medium of global trade, a dollar once again pegged to gold would have immediate and lasting repercussions for the world. The dollar would skyrocket in value, making U.S. products more expensive abroad, and sending the price of dollar-denominated commodities to the moon. Unless other countries instituted similarly extreme reforms, this would have the effect of putting American businesses at a major competitive disadvantage—at least in the short run—in a world enamored with Keynesian-style monetary stimulus. Treasury yields would crater as the world sought safe haven in American debt, causing massive capital dislocations in emerging and less stable markets. And America’s existing debt load would become unmanageable, as our government became unable to inflate it away.

The list of knock-on effects from the sudden disappearance of the most powerful sovereign bank in the world, and the inability of our government to lend money and set interest rates, would take economists many volumes to fully contemplate. They wouldn’t be all bad though. Economists of some stripes would argue that in the long run they might even be beneficial; that a strong dollar, a conservative monetary policy and an inability to suppress rates, or print money to pay for things we otherwise couldn’t afford, wouldn’t be such a bad thing. The bottom line, though, is that the economic prosperity we have grown accustomed to as a result of our government’s willingness to inject money into the system, would change in ways that we would be entirely unprepared for.

So while we may not be any closer to answering the question of which institution is more indispensable to our modern way of life than when we started, the real question might be: who could we stand a few less of in this country, bankers or lawyers? 

And that’s a subject upon which I dare not tread.

The content of this blog is intended for informational purposes only. The information provided in this blog is not intended to and does not constitute legal advice, and your use of this blog does not create an attorney-client relationship between you and attorney Brian J. Meli. Under the rules of certain jurisdictions, the material included in this blog may constitute attorney advertising. Prior results do not guarantee a similar outcome. Every case is different and the results obtained in your case may be different.