Yesterday, the Supreme Court heard oral argument in Trump v. Cook, the case considering whether President Trump properly removed Fed Board member Lisa Cook for cause because she purportedly made misrepresentations in certain mortgage documents. After listening to the argument, I had a few observations about the likely outcome in the case, and potential next steps for Congress.
But first, some context. Congress has created two categories of political appointees: those who can be fired “at will” (i.e., for whatever reason the President wants), and those who only can be fired “for cause” (i.e., for inefficiency, neglect of duty, or malfeasance). Congress decided the Cabinet Secretaries and the sub-Cabinet level appointees in their agencies could be fired at will. They serve “at the pleasure of the president,” for you West Wing fans out there. But Congress wanted some agency heads to be more independent—to be appointed by the President and confirmed by the Senate so there was some political accountability, but not subject to removal from their jobs simply because they did something the President disliked.
When Congress created the modern financial regulatory agencies—like the Federal Reserve in 1913, the FDIC in 1933, and later the SEC—it chose to make them independent agencies with leaders who could only be removed for cause. The thinking was that if financial regulators had to worry that their decisions on interest rates, bank supervision, or consumer protections could cost them their jobs, they would bend to political pressure, which would lead to worse long-term outcomes. Independence, Congress believed, would produce more stability and certainty for consumers and regulated entities.
In the wake of the 2008 financial crisis, Congress created two new financial regulatory agencies: the Consumer Financial Protection Bureau (CFPB), which regulates consumer financial products like mortgages and credit cards; and the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac. Congress thought these new agencies were akin to the Fed, the FDIC, and the SEC, and accordingly made the CFPB and FHFA Directors removable only for cause.
The Supreme Court upended this model five years ago. In Seila Law v. CFPB, the Court held that the CFPB’s structure violated the separation of powers because its director could not be removed at will by the president. In other words, Congress unconstitutionally constrained the President’s authority to execute the law by limiting his ability to fire an Executive Branch official. The remedy was permitting the President to fire the CFPB Director for any reason he liked. The following year, in Collins v. Yellen, the Court extended that reasoning to the FHFA Director.
One might think that rationale applies to Federal Reserve officials as well, but the Supreme Court has suggested that it thinks the Fed is somehow special because it is a pseudo-private entity that exercises authority (namely, monetary policy) that is not truly Executive Branch authority. Consequently, a majority of Justices seem to think that while other agencies exercising independence is unconstitutional, it’s acceptable (even desirable) for the Fed to do so.
This distinction makes little sense, if you ask me. I suspect it derives less from some close reading of the text, history, and structure of the Constitution and more from a desire to avoid what the Justices believes are dire economic consequences from direct presidential control of the Fed’s interest rate-setting function. (Justice Barrett alluded to that concern in her questioning.) But as yesterday’s argument reinforced, a clear majority of the Court views the Fed as different from other agencies Congress had deemed independent.
With that, four observations on the argument:
The argument went poorly for Trump and his Solicitor General, John Sauer. There appear to be at least 5 (and maybe as many as 8) votes for the propositions that: (a) the statutory language permitting the President to remove Fed Board members only “for cause” is important to preserving the Fed’s continued independence; and (b) a Board Member removed for cause must have some kind of process for contesting that claim for the removal, otherwise the for-cause protection is functionally meaningless.
That said, it wasn’t clear what a majority of Justices would support as the appropriate process for contesting a removal claim. In the oral argument, the Justices spent a long time asking counsel for each side about what type of process would be enough, and what kind of standard of review a court should have in evaluating that process. Ultimately, I suspect the Court will produce a majority opinion that explains what constitutes a proper basis for removing a Fed Board member for cause (i.e., Does the rationale have to relate to the official’s conduct while in office? Does the rationale have to implicate the official’s capacity to properly discharge their duties?), and provides a roadmap for the type of process a removed official is entitled to for contesting their removal.
The details of this holding will matter a lot for determining whether Fed Board members actually have independence or have it in name only. If the bar for proper “for-cause” removal is very low, then a motivated President can probably comb through a Board member’s history and find some small thing to put forward as a basis for removal. For example, is the Fed going over its projected budget on building renovations a proper basis for removal? Is racking up multiple unpaid parking tickets? And if the Court’s standard of review for the removal decision is highly deferential, then that allows the President to inch even closer to having direct control of the Fed and interest rate decisions.
After a meandering start to the oral argument, Justice Kagan really focused the Justices’ attention on the key issue: if a Fed Board member can only be removed for cause, but there's no real process for contesting the factual basis for a removal and no ability to compel POTUS to reinstate Board member, then there's no actual protection. That led to tough follow-up questions on that point from Justices Gorsuch, Barrett, and Kavanaugh that exposed the weaknesses in the government’s case. Justice Kagan’s ability to identify weak points that are likely to resonate with the more conservative Justices is a consistent strength of hers.
As a reminder, I’ll be doing a Substack Live at 1:30 PM EST today with Professor David Gamage, a co-author of the California wealth tax proposal that’s generating a lot of interest (including at Davos, where—you will be surprised to learn—it’s quite unpopular). Tune if you’re interested, and/or leave a question for David if you have one.
It does seem completely arbitrary. Are they just protecting their own wallets? Are the other committees just protecting the little people they don’t give a damn about? Does Congress have any power or not? The supremes seem to just want to cut it down to two branches. And Congress doesn’t seem to have a problem with that so long as they can keep their cushy jobs with their gerrymandered districts. What a mess.
Dang if I ain't done found me a seam of pure gold staff work. Thanks for the pointer, Jared.
Things that Work: California's initiative in carbon-banking forests management. and how it helps the Trump-Proofing. I'll comment in a better place on how this impacts the wealth .
I got to my technical economics from my original passion for critical political economy. I am in the high-priviledge tail of many distributions. Like my daughter pointed out, the guys selling off the Joad's little plot of land in the opening of Grapes of Wrath worked for my grandfather.
As a tease, the secret ingredient in natural-resources practice in California these days is presence "at the table" of representatives of the American Indian sovereignty.
I am a native of the settler community of Loyalton. We have the extraordinary fortune to live in the super-ancient territory of the Washoe. Our forebears cut down the Washoe Forests, in the employ of urban capital, in London, New York, Minneapolis, and above all San Francisco. Our place tribe, the Washoe Tribe of California and Nevada, and their neighbors and cousins of the Reno-Sparks Indian Colony, have been our communities' strong if quiet allies, as together with our partners in California's Natural Resources Agency we innovate our way back to the garden.
The main thing wrong with us loggers, incluownding our Indian coworkers, is that there ain't enough of us, and those of us who do have some of the training and experience to address our challenges have all kinds of challenges of our own.
Washoe Forests Carbon Bank. Si se puede. Venceremos!