The Supreme Court Is Just Making Stuff Up About the Fed

The Supreme Court is welcome to have its opinions. But it is not welcome to have its own facts. Fact-finding is at the core of the judicial enterprise, and once the Court starts simply making things up, it loses its legitimacy. 

The Court took a dangerous step in that direction today with its opinion granting the President's order for a stay of the District Court's injunction of the President's removal of a member of the National Labor Relations Board and of the Merit Systems Protection Board.

Members of the NLRB and MSPB are, by statute, removable by the President only "for cause," yet the President removed these board members (and those of some other government boards) without cause.

One of the arguments made against the stay was that "arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee." The majority of the Court disagreed, noting " The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States. See Seila Law, 591 U.S., at 222, n. 8."

That's just historical hogwash.

Let's start with the source cited. It doesn't support the Court's claim:

The dissent categorizes the CFPB as one of many “financial regulators” that have historically enjoyed some insulation from the President. See post, at 11–16. But even assuming financial institutions like the Second Bank and the Federal Reserve can claim a special historical status, the CFPB is in an entirely different league. It acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens. See supra, at 4–5. And, of course, it is the only agency of its kind run by a single Director.

Nothing in Seila note 8 talks about "the distinct historical tradition of the First and Second Banks of the United States." Seila doesn't even mention the First Bank of the United States, and note 8 does not state anything as fact; it only posits an assumption for argument's sake. No law review editor worth his salt would let this get by on a Bluebooking. "See" is to be used when the source clearly supports the proposition, but requires an inferential step. That's not the case here. The fact that the Court can't cite anything better should be a red flag that it is making stuff up.

But let's be charitable about the citation. Here's the bigger problem. The Court is just flat wrong in claiming that the "Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States." It's wrong about the unique quasi-private entity, and it's wrong about the historical tradition. 

False Claim #1: The Federal Reserve is a uniquely structured, quasi-private entity

The Court says that the "Federal Reserve is a uniquely structured, quasi-private entity." The initial problem with this claim is that there is no legal entity called "The Federal Reserve." Instead, there is a "Federal Reserve System," which consists of a three separate legal entities: 

1. the Board of Governors of the Federal Reserve System, full-blooded federal bank regulatory agency;
2. a set of twelve regional Federal Reserve Banks that are privately-owned entities with unique federal charters. 
3. the Federal Open Markets Committee, which consists of the Board plus a rotating case of representatives from the regional reserve banks. 

Critically, the FOMC is a separate legal entity than the Board of Governors. It has separate legal authorities; the open market operations of the regional Federal Reserve Banks are required to be in accordance with "the direction of and regulations adopted by the Committee," rather than by the Board. The FOMC is subject—like any federal agency—to the Administrative Procedures Act, and operates through notice-and-comment rulemaking when it puts out regulations.

The Court, however, conflates these separate legal entities, claiming that the "Federal Reserve" is a "quasi-private entity." That's wrong. The Board is a plain old federal regulatory agency. The Reserve Banks are private entities. It is only the FOMC that is a hybrid, and even then it is still a public entity, with part of its governing membership coming from the regional Reserve Banks. 

I'd call the Court's characterization of the organization of the Federal Reserve System sloppy, but I fear it's actually a motivated and intentional blurring. The for-cause removal issue is not about the FOMC, but about the members of the Board of Governors. To be sure, the members of the Board of Governors are members of the FOMC, but there is no Presidential removal power over the regional reserve bank representatives on the FOMC.

False Claim #2: The Fed "follows in the distinct historical tradition of the First and Second Banks of the United States"

There's another problem with the Court's claim, though, beyond pretending that the Board of Governors is really the FOMC by calling it all the "Federal Reserve." The Federal Reserve System most distinctly does not follow in the historical tradition of the First and Second Banks of the United States. BUS 1.0 and 2.0 were simply special, federally chartered banks that served as the government's fiscal agent. The government kept its funds on deposit at the BUS. The BUSes ended up playing a central bank (i.e., a bank for banks) role, but that was solely because of their size and branch network, as state chartered banks could not engage in interstate branching at the time, not because of any particular statutory authority or charge.

BUS did some important things the Fed doesn't do and didn't do some key things the Fed does. Unlike the modern Fed, BUS 1.0-2.0 routinely made commercial loans. It was the largest single commercial lender in the United States. That's not what the Fed does (13(3) emergency lending powers aside). Also unlike the Fed, BUS 1.0-2.0 did not perform open market operations; there simply weren't markets in Treasury debt like there are today, as it was issued much less frequently. And unlike the Fed, BUS 1.0-2.0 did not produce a national currency. BUS notes were not legal tender, even if they could be used to pay federal obligations (which were rare in the age before federal income taxation).

Critically, BUS 1.0 and 2.0 were wholly private entities, even if the US government was their largest (~20%) shareholder. They had zero regulatory authority (and pre-dated the regulatory state). The closest (and still weak) analog to BUS 1.0-2.0 is a regional Federal Reserve Bank; there is no analog between BUS 1.o-2.0 with the Board of Governors, which is where the removal issue lies. The Federal Reserve System was not an attempt to create BUS 3.0. Instead, it was a wholly different regulatory structure. The Fed is not in any meaningful way part of "the distinct historical tradition of the First and Second Banks of the United States" other than on the incredibly generic level of being a central bank.

There Is No Principled Distinction Possible Between the Board of Governors and the NLRB or MSPB for Removal Purposes

What we have here, then, is the Supreme Court trying to side-step the fact that there is not basis for distinguishing the Board of Governors of the Federal Reserve System from the NLRB or MSPB for purposes of for-cause removal. In order to claim a distinction, the Court has had to blur three separate legal entities together, pretending one is another, and then invent a history on which it was not briefed and for which there is no scholarly support. There's no nice way to say this: the Court is just making shit up. For all the fancy robes, this is a place I can see that the emperor has no clothes.

If the Court were being honest it would have to face the fact that there is no principled way to distinguish the for-cause removal protections of the NLRB or MSPB from those of the Federal Reserve Board. There is no principled way to preserve for-cause removal for the Fed, while jettisoning it for other agencies. If this Court is going to make up facts about the organization and history of parts of the government to achieve the political outcome it wants, it seriously erodes its legitimacy. It it really is all just politics, why should we listen to these bums?

I am hopeful that when this case is fully briefed on the merits, the Court will back away from a very ill-considered position.