At one point in Danielle DiMartino Booth’s book about her experiences as an analyst at the Federal Reserve during the panicked days of the 2007-2008 financial crisis, she quotes verbatim a meeting at the Federal Open Market Committee, then operating under Chairman Ben Bernanke.
It was March 2008. Bear Stearns had just collapsed. The FOMC was debating how to craft its official statement to lower the risk of inflation.
“On inflation expectations, because they haven’t risen very much, I agree with President Geithner,” said District Governor Donald Kohn. “I like the fact that we tell people we are aware, but we could say ‘have edged higher’ or something like that instead of ‘risen.’”
“We could use my ‘smidgen’ word, but ‘edged higher’ is better,” chimed in Frederic Mishkin, another district governor. “Went up a smidge,” Kohn responded. “Have risen somewhat?” Mishkin said. “Brian, do you have a thought on ‘risen’ versus ‘risen somewhat’ versus taking it out?” Bernanke said.
This discussion goes on for a couple dozen more lines.
“I might have run screaming from the room,” Booth writes.
Amazingly, this was actually one of the most real moments at the Fed in Booth’s recounting. The rest of the book, titled “Fed Up: An insider’s take on why the Federal Reserve is bad for America,” reveals a Fed that is extremely insular. It is overladen with personalities at the top, and throughout the top and among its thousands of analysts employed, displays an unwillingness to allow its vast intellectualism be put to use in responding to changes in the real world. Furthermore, in Booth’s subsequent interviews and as can be seen in current business news, the Fed even seems in danger of tipping over into becoming an outright political institution.
Booth had front row seats and was an active player in two sides of the economy, as an analyst on Wall Street, and as a preferred researcher to Richard Fisher, governor of the Dallas Fed. The book is a chronology of her experiences leading up to and during the financial crisis.
“Fed Up” is a book that is best read along with other financial information. “An Insider’s Take,” just as its title states. The book assumes that you already know who the major players are, such as Alan Greenspan and Ben Bernanke.
Then, through Booth’s experiences, the book takes you through other major players in charge of this country’s economy who are not as visible to the general public, such as Harvey Rosenblum, the Fed’s director of research who initially disapproved of Booth but eventually came around and asked her to collaborate with him on papers, and Janet Yellen, who succeeded Bernanke to become the first woman in charge of the Fed. In 2015, Yellen started the Fed’s current trend of raising rates back to the levels they were at before the crisis.
Booth’s insider status is never more obvious than when she’s recounting the days after Lehman Bros. was bailed out. Rather than shock and dismay, she expressed a more blasé attitude about the extent of the “too big to fail” approach, skimming over the event.
Throughout Booth’s book, there is a claustrophobic, forced, headache-inducing quality to the Fed that’s not observed very well just through the media.
Ultimately, the book and Booth’s subsequent interviews reveals a Fed that’s not only still ruled by personalities but in danger of becoming overtly political. In an interview with Seeking Alpha, Booth revealed that one of the Fed’s current board members had donated to Hillary Clinton’s 2016 presidential campaign.
That was Lael Brainard, who was the Under Secretary of the Treasury for International Affairs under Barack Obama and counselor to then Treasury Secretary Timothy Geithner. Brainard has been a board member at the Fed since 2014.
“So she would have been Treasury Secretary under Hillary Clinton,” Booth said in that interview. “I find to be a very questionable behavior from being a former Fed insider myself, to publicly donate to a presidential campaign.”
Seen in this light, when Donald Trump nominated his appointees to the Fed, like Herman Cain, although they were political appointments, would they have injected some much-needed fresh perspective into the leadership of the Fed? Or would they have exacerbated the existing problem?
And when Trump urged the Fed in early May to cut interest rates by as much as one percent – “The economy would go through the roof!” he tweeted – how right was the Fed to refuse? Would making the Fed responsive to any pressure right now tip the balance to it becoming a much more political institution? Was it the right moment to open up the Fed, make it less insular?
Through Booth’s eyes, you also see the players for their backgrounds, not just the economic philosophies that underlie their work. Janet Yellen is the granddaughter of Yiddish-speaking Polish immigrants in New York, a physician father who suffered a life-altering accident just as he was starting his practice, and whose husband is another economist, also a Keynesian. And there was Richard Fisher, who had an Australian businessman father and a South African-Norwegian model for a mother, comes across as more of a Thomas Crown-like, world adventurer type, than his inflation hawk stance would suggest.
Booth’s writing flows best when she’s recounting her days on Wall Street and her early days at the Fed, and becomes bogged down with the politics of the Fed once the financial crisis gets underway. (At several points, she alludes to research she had done on her own or with other people, but does not get into the details. What was that research paper? You end up wondering. What did the numbers say about what was going on?)
Of her time on Wall Street in the late ‘90s, she describes walking onto the trading floor “to be slapped in the face by cacophony.” “And the aroma,” she writes. “It smelled, literally, like red meat. For lunch, traders ordered steak from Smith & Wollensky and ate at their desks. Leaving your chair for a meal during the trading day meant you weren’t serious about your job.”
The scene was very different at the Dallas Fed. At that bank that occupies six acres of office space, work was taken at a more casual pace. Days were started first with working out, showering and breakfast, then followed by discussions over long lunches. “One of the few times there was hustle and bustle: 5 p.m. on the nose,” Booth writes with humor.
Booth also includes trivia about how the Fed works that’s fascinating to think of in terms of how this country’s financial system works. The Fed has 12 district banks, each tasked with a particular function. The Atlanta Fed, for instance, processes electronic checks. The Dallas Fed holds up to 2,800 steel carts that can be sent out containing cash. (North Carolina banks are overseen by the Richmond Fed.)
Booth’s prescriptions for straightening out the Fed target ways that, in her opinion, would make the Fed more responsive to the real world – make the Fed more realistic. She proposes limiting the number of academic Ph.D.s at the Fed, and granting all the District Bank presidents, not just New York’s, a permanent vote on the FOMC.
She also proposes one change to the core of the Fed’s purpose since it was created in 1913. Booth says the Fed’s dual mandate of maximizing employment and fighting inflation should be reduced to just one – inflation.
“A singular focus on maintaining price stability will place the duty of maximizing employment back into the hands of politicians, making them responsible for shaping fiscal policy… ,” she writes.
Booth cut to the heart of the issue for herself. Her father had been an investment advisor. But although he was good at handling other people’s money, he burdened his own family with a never-ending mountain of debt. “As a teenager, I learned not to answer the phone for fear it would be a bill collector,” she poignantly recounts. In the aftermath of the financial crisis, as of the book’s printing in 2015, Booth points out that monetary policy still had not returned to a place that supports the healthy habits of the average consumer.
By lowering the interest rates in the aftermath of the financial crisis and keeping them low for so long, Booth says, the Fed has contributed to a culture that has “outlawed saving.”
“Most seniors pine for a return to the beginning of this century when they could get a five-year jumbo CD with a 5 percent APR, offset by inflation somewhere in the neighborhood of 2 percent. Traditionally, 2 to 3 percentage points above inflation is where that old relic, the fed funds rate, traded. The math worked.
Under (the Zero Interest Rate Policy), only fools save for a rainy day. The floor on overnight rates must be permanently raised to at least 2 percent and Fed officials should pledge to never again breach that floor. Not only will it preserve the functionality of the banking system, it will remind people that saving is good, indeed a virtue. And that debt always has a price.”
Super interesting article.