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No Virginia, There Really Is No Such Thing as "the Fed"

posted by Adam Levitin

Once again, the WSJ is publishing nonsense about the CFPB. It's really painful to see conservative admin law types write about federal agency structures when they don't understand the basic facts. The WSJ ran an op-ed by Adam White, a think-tanker at AEI and George Mason, that tries to take on the claim that if the CFPB's funding is unconstitutional, so is that of the Board of Governors of the Federal Reserve System. But Mr. White runs into trouble with his argument in his first paragraph when he refers to the "Federal Reserve" and "the Fed." The problem: there is no legal entity called "the Federal Reserve." We refer to it that way colloquially, but it's actually more complicated, and the complication really matters here. 

"The Fed" is actually "the Federal Reserve System," which consists of twelve private regional reserve banks and a federal government agency called the Board of Governors of the Federal Reserve System. The Board is a full-fledged federal regulatory agency. It makes rules, engages in supervision of financial institutions, brings enforcement actions, and undertakes administrative adjudication. In short, it does all the same type of things as the CFPB.

So consider what Mr. White writes: 

But the Fed and the CFPB are profoundly different. The Federal Reserve Banks earn revenue from their own open market operations and from priced services, and in turn they pay assessments to the Fed’s Board of Governors. Other agencies, such as the Federal Communications Commission, often earn revenue by charging user fees for services. The Supreme Court has long recognized the constitutionality of such fees.

The CFPB does none of those things. It is a law-enforcement agency, and it is simply reaching into the Fed’s wallet and spending money that belongs in the Treasury, all without the trouble of congressional appropriations.

Notice the conflation of "the Fed" and the Federal Reserve Banks. But the relevant comparison is between the CFPB and the Board of Governors, not between the CFPB and "the Fed." The Board of Governors is nothing more than a law-enforcement agency, just like the CFPB. In fact, the Federal Reserve Board is the primary enforcement agency for the Consumer Financial Protection Act for some 657 banks, enforcing exactly the same statute the CFBP does.  

Not surprisingly, the Federal Reserve Board is funded exactly the same way as the CFPB:  with an assessment on the regional reserve banks. The CFPB isn't "reaching into the Fed's wallet." Instead, both are collecting assessments from the regional reserve banks, which is the price of the regional reserve banks' unique federal charter privilege. 

Now it is true that the CFPB does not levy the assessment directly on the regional reserve banks. Instead, the Federal Reserve Board is required to levy the assessment for the CFPB. The Board, however, has no discretion about the amount levied. It just moves the money from the regional reserve banks' accounts it maintains to the CFPB's account. In short, it is only a matter of book-keeping, and it's risible to think that book-keeping conveniences rise to the level of constitutional significance. The Board is just a ministerial agent of the CFPB for the purpose of the assessments.  

What about the other part of White's argument, that the CFPB is "spending money that belongs in the Treasury"? He argues that:

The money that the CFPB takes from the Fed is in fact “drawn from the Treasury,” because the Fed’s profits would otherwise go there as required by law.

Yes, the Board of Governors must remit surplus funds to the Treasury annually, but there is no guaranty there will ever be surplus funds; Congress does not control the Board of Governor's budget. So this is not "money that belongs in the Treasury," until there is a surplus. Until the funds go into Treasury, they are not Treasury funds. But if we take Mr. White's mistaken logic seriously, then the Board is only a pass-through to Treasury... which is exactly what he is claiming it is not vis-a-vis the CFPB.  Hmmm. (It's actually easy to resolve the pass-through issue if one takes "profits" seriously--the Board is merely a pass-through to the CFPB, but it is not a mere pass-through to Treasury because of the conditionality of profits, which the Board itself partially controls because it controls its own spending.)

Additionally, Mr. White seems to assume that but for the CFPB all the money would flow to Treasury. That's wrong. The CFPB is relieving the Board of some of its pre-Dodd-Frank Act consumer protection duties; but for the CFPB, at least some of the money would be spent on more consumer protection work at the Board of Governors. So the idea that the CFPB is somehow spending Treasury's money is just incorrect. 

The unavoidable truth is that the Federal Reserve Board and the CFPB stand or fall together on the constitutionality of their funding. If the Court is honest about the actual structure of government agencies, there is no principled way to differentiate the Federal Reserve Board's funding from the CFPB's. Either they are both constitutional or neither is. 



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