Why Is the Fed Chairman a Bank Regulator (or an Economist)?

The NY Times has a pretty significant error in its reporting on the Summers vs. Yellen Fed Chair race. It says that Yellen was the head of the Federal Reserve Bank of San Francisco, which was Countrywide's regulator. That's wrong. FRBSF was never Countrywide's primary regulator. That was the OCC and then OTS. The regional Feds are not anyone's primary regulator, not least as they are private entities, not government agencies. They arguably have a secondary quasi-regulatory role, but that's it. They are not the same as the Board of Governors of the Federal Reserve System, which is a federal regulator. Yellen really can't be tagged with any of the blame for Countrywide, at least based on what's reported. The NYT should correct this point, which comes off as a bit of a smear on Yellen.

That said, the article seems to inadvertently underscore two critical issues that are not being discussed at all. First, why do we have a single job (Fed Chairman) that merges monetary policy (chairing the Fed's open markets committee) and bank regulation (chairing the Board of Governors)? There is a historical answer to this, as monetary policy used to be much more closely related to bank regulation, and bank regulation also used to be a much simpler affair, primarily because banks were simpler. But it seems strange today to have the Fed as one of four federal prudential regulators (OCC, FDIC, NCUA, Fed), and as the regulator for bank holding companies AND in charge of monetary policy. There's a good case that Dodd-Frank should have stripped the Fed of all quotidian bank regulation responsibility and left it with monetary policy and as a lender of last resort.

The second issue is why is the list of Fed Chair candidates inevitably just a bunch of economists given that bank regulation is arguably now the more important of the Fed's dual roles? (Actually treble, as the Fed also acts as an important payment system operator.). Why on earth would anyone think economists, no matter how brilliant, would be the go-to group for bank regulators? Economics studies the supply and demand of lots of things, including money, but that's quite different from bank regulation. Bank regulation simply isn't part of the typical economist toolkit. There are some economists who know a lot about bank regulation, but there are also some non-economists who know as much, if not more. (To name a few, Fed governors Dan Tarullo or Sarah Raskin Bloom or former FDIC chair Sheila Bair, all, I believe, lawyers by training, but also with bank reg experience as an academic, a state bank regulator, or a Congressional staffer.)

To be sure, we don't always demand real expertise of other regulatory heads--Mary Jo White isn't a securities expert, for example--in part because we recognize that the head of some agencies, even independent agencies, are political appointments, but the Fed has always tried to maintain an aura of being technocratic and apolitical. Indeed, it almost has to because its raisin d'être and authority stems from its claim to technocratic neutrality. Otherwise we'd just be back to monetary policy in presidential politics and Cross of Gold speeches. But perhaps it's time that we take the technocracy claim seriously and appoint someone with the technocratic bank regulation chops, rather than an economist. Or if we can't do that, then split up the monetary policy and bank regulation posts. Let the economists tend to monetary policy and regulatory experts tend to the banks.