The Fed’s Great Dissenter

A dissent can seem cranky. Look, you lost. Don’t waste everyone’s time relitigating the case.

On the other hand, a well-argued dissent can sustain the losing side, creating a foundation of logic and evidence on which to build a comeback. A dissent by Justice John Marshall Harlan in the Supreme Court’s notorious Plessy v. Ferguson “separate but equal” decision in 1896 was cited more than half a century later in the Brown v. Board of Education decision of 1954, which struck down segregated schooling.

Lael Brainard has emerged as the great dissenter on today’s Federal Reserve Board of Governors, the seven-member body that oversees the central bank. In multiple decisions, she has not only voted against the board’s deregulatory agenda — challenging its positions on matters such as liquidity requirements, trading rules and capital buffers for banks — but she has also detailed her reasoning in forceful terms. That has made her a challenge for the Fed chair, Jerome Powell, and its vice chair for supervision, Randal Quarles. And it has made her a hero to those who favor strong financial regulation.

“Her dissents are a milestone,” says C. Nicole Mason, president of the Institute for Women’s Policy Research. “Having someone like her, who in some ways might cause disruption, I think is really important.” The dissents signal to the financial industry that the relief it is getting — the thinning of its sometimes-costly safety cushion — may not last. That awareness could lead banks to leave some of that cushion in place in case they need it again, says Dennis Kelleher, co-founder and president of Better Markets, a pro-regulation organization.

Partly because of her aggressive regulatory stance, Brainard has been mentioned as a possible successor to Powell as chair of the Fed in the event that President Biden chooses not to nominate Powell for another four-year term when his current term expires in February. Last month, Senator Elizabeth Warren, Democrat of Massachusetts, called Powell “a dangerous man to head up the Fed” because of his deregulatory posture. If Biden keeps Powell, he could still name Brainard to succeed Quarles when Quarles’s term as vice chair for supervision ends later this month. But pitting Powell as chair against Brainard as vice chair for supervision would make life unpleasant for both.

Rather than handicapping the horse races, I want to focus on Brainard’s dissents and why they matter. (I didn’t speak with her for this piece.)

“The process of putting a dissent on record illuminates how much is at stake,” says Kathryn Judge, a professor at Columbia Law School. Deregulation, she notes, is often presented as a “rebalancing” after regulations have been put in place. But what Brainard’s dissents reveal, Judge explains, is that deregulation hasn’t been “neutral fine-tuning”; it has consisted of policy changes that “consistently reduced the regulatory burdens on banks.”

Judge clerked for Justice Stephen Breyer on the Supreme Court. “Once you have a dissent, the majority has to be far more careful in their reasoning,” she says. “It puts the burden on the majority not to gloss over but to plainly explain what they’re doing and why.”

In July, Better Markets issued a report emphasizing just how unusual Brainard’s dissents have been in an organization — the Board of Governors — that prizes unanimity. Her vote against a deregulatory rule in April 2018 “was the first time a Fed governor voted against a regulatory change in more than seven years at that time,” Better Markets stated.

Brainard, 59, joined the Board of Governors in 2014. Before that, she earned a doctorate in economics from Harvard, worked for the consulting firm McKinsey, taught at the Massachusetts Institute of Technology, served as deputy national economic adviser in the Clinton administration, worked for the Brookings Institution and then served as under secretary of the Treasury in the Obama administration.

Her dissents are nuanced, typically agreeing with some parts of the majority decision while disagreeing with other parts.

In October 2018, she wrote that proposed reductions in regulatory safeguards for banks with $250 billion to $700 billion in assets “weaken the buffers that are core to the resilience” of our financial system, adding that “this raises the risk that American taxpayers again will be on the hook” if a bank fails.

In October 2019, she wrote that a modification of the Volcker Rule, which restricts trading by banks, “weakens the core protections against speculative trading” that keep banks from losing money on bad bets and going bust.

In March 2020, she wrote that an easing of what the Fed calls a stress capital buffer — a safety margin that is customized for banks based on their performance on a stress test — “gives a green light for large banks to reduce their capital buffers materially.” She noted that banks had been paying dividends in excess of their profits, reducing their safety cushions, “for several years on average.”

In June 2020, she wrote that proposed regulatory changes “could again leave banks exposed to the buildup of risky derivatives, which proved to be a significant risk in the financial crisis” of 2007 to 2008.

In October 2020, she wrote that a rule easing banks’ liquidity requirements ignored the historical lesson that “liquidity distress at a large bank can quickly metastasize” into the need to sell assets at fire-sale prices to raise money, causing big losses.

There’s a psychic cost to all that dissenting, especially if one is not a naysayer by nature. And Brainard does not seem to be. She has often worked to build majorities among her fellow governors for important decisions. Early last year, she led work on a Fed plan for revamping the Community Reinvestment Act — a law that pushes banks to issue more loans in poor communities — that was substantially tougher than the plan favored by other federal regulators.

In other words, she’s not just trying to throw a wrench in the works.

Then there’s the matter of her being a woman in a largely male field. Janet Yellen, the former Fed chair who is now the Treasury secretary, has said that women in economics “feel less valued and less included socially,” adding that many also “feel that their talents are not fully realized.”

Is it possible that being a woman has something to do with Brainard’s willingness to buck the conventional wisdom at the Fed? Anat Admati, a Stanford University economist, says it’s possible. “My nonscientific experience has been that there are relatively few women in this space, and they’re disproportionately willing to engage with a range of opinion,” she says. “Maybe they’re less prone to groupthink.”

Number of the week

0.4 percent

The seasonally adjusted increase in average hourly earnings of production and nonsupervisory workers in the United States from August to September, according to a survey of economists by FactSet. The official number will be released in the monthly jobs report on Oct. 8.

Economists at Goldman Sachs wrote on Sept. 30 that hourly wages of nonsupervisory leisure and hospitality workers rose at an annual rate of 22 percent from March, when the American Rescue Plan was adopted, through August, “in part because emergency unemployment benefits had a much larger effect on labor supply at lower wage levels.”

Quote of the day

“Remember that Money is of a prolific generating Nature. Money can beget Money, and its Offspring can beget more, and so on. Five Shillings turn’d, is Six: Turn’d again, ’tis Seven and Three Pence; and so on ’til it becomes an Hundred Pound. The more there is of it, the more it produces every Turning, so that the Profits rise quicker and quicker. He that kills a breeding Sow, destroys all her Offspring to the thousandth Generation. He that murders a Crown, destroys all it might have produc’d, even Scores of Pounds.”

— Benjamin Franklin, “Advice to a Young Tradesman” (1748)

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