Part 3: The new leaders for the Fed, Governor Lisa Cook
Last week the Senate confirmed Lisa Cook to serve as a Governor at the Board. She is an excellent addition to the team and it's important we understand why.
The dream team at the Fed is nearly complete. Now confirmed are Jay Powell as Chair, Lael Brainard as Vice Chair, Lisa Cook and Philip Jefferson as Governors. In these times of economic turmoil, it’s crucial to have the best decision-makers at the table. We do.
Today’s post on Dr. Lisa Cook is the third in my series on the new leaders at the Board. What is likely to be Cook’s biggest contribution? Her breadth of expertise. The duties of the Board are many, and Cook will be the strongest all-around member.
Photo Credit: Ken Cedeno | Reuters
Monetary policy tends to get the spotlight, and while it is essential, so are the other core responsibilities that Congress has given the Board:
Conducting Monetary Policy
The Federal Reserve sets U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy. [Video].
Promoting Financial Stability
The Federal Reserve monitors financial system risks and engages at home and abroad to help ensure the system supports a healthy economy for U.S. households, communities, and businesses. [Video.]
Supervising and Regulating Financial Institutions and Activities
The Federal Reserve promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole. [Video.]
Fostering Payment and Settlement System Safety
The Federal Reserve works to promote a safe, efficient, and accessible system for U.S. dollar transactions. [Video.]
Promoting Consumer Protection and Community Development
The Federal Reserve advances supervision, community reinvestment, and research to improve understanding of the impacts of financial services policies and practices on consumers and communities. [Video.]
Often working in pairs, board members will take point on each area. The full Board votes on any monetary or regulatory policy decision. As a result, members who bring expertise across a wide range of areas are beneficial.
Lisa Cook fits that description to a tee. This post discusses three themes in her scholarship and how that expertise relates to responsibilities at the Fed.
Violence reduces innovation and entrepreneurship.
Cook’s research, “Violence and economic activity: evidence from African American patents, 1870-1940,” is exemplary of her scholarship. Paul Romer, a Nobel Prize winner and expert on economic growth, discusses the contribution:
Lisa presents evidence that she spent many years accumulating about a crucial point that this line of reasoning [improving contract law and offering more protection for intellectual property rights] missed. She used patenting as a proxy for the activities that spur growth and assembled convincing evidence that there is another part of the legal system that has a bigger effect: the degree to which it creates a climate of personal security by protecting citizens from the threat of violence …
After Lisa’s evidence forced me to think again about how easy it is to take personal security for granted and about the profound effect that a lack of personal security can have on optimism and a willingness to invest in the future,
Cook’s expertise in entrepreneurship has broad implications. As one example, see her recent report, “Policies to Broaden Participation in the Innovation Process,” at the Hamilton Project. In addition, it is relevant to some functions of the Board.
First, understanding productivity is helpful for monetary policy because the Fed must understand underlying trends when making decisions about interest rates in recessions and recoveries. Entrepreneurship affects productivity and likely the neutral rate of interest, which prevails when the economy is in equilibrium. That rate appears to have fallen over decades, a topic of concern at the Fed. Cook’s background in determinants of growth may help inform the debates about the neutral rate.
Second, community development is another area where Cook’s scholarship on entrepreneurship will be useful. This function was created so that the Board could fulfill its responsibilities under the Community Reinvestment Act of 1977 (currently being updated). The Act instructs the Board to ensure that banks meet the lending needs of low-and-moderate income families, businesses, and communities, which often include racial and Ethnic minorities. Understanding the complex conditions affecting entrepreneurs, including racism and violence, should help the Fed as it works with banks to understand the myriad challenges facing minority-owned businesses. And tragically, racial violence against Black individuals is as real now as it was hundreds of years ago, with rope traded in for semi-automatic weapons.
Finally, to conduct this research, Cook collected years of historical data. As she describes in this interview (with transcript) with Russ Roberts on EconTalk it was a painstaking process requiring ingenuity. That’s often the case with policy questions at the Fed. It’s important to have a Governor who can direct such complex data collection. Quality decisionaking starts with quality data.
Racial segregation affects racial violence.
Another strand of Cook's scholarship explores how segregation affects violence in African American communities. Her research, “Racial Segregation and Southern Lynching,” with Trevon Logan and John Parman, shows that characteristics of the community, specifically the degree of segregation between white and Black residents, are strongly associated with the number of lynchings.
Here’s a brief discussion of their work:
… Our finding that greater residential segregation was associated with more lynchings helps us begin to sort through potential mechanisms underlying interracial violence. In the case of the American South, residential segregation did not allow the black community to insulate itself from interracial violence, nor did it serve as a substitute for interracial violence. Instead, racial segregation appears to have inflamed interracial conflict.
This exploration of America’s history of interracial violence helps us better understand the deep roots of racial tensions in the US today … Given that racial and ethnic dynamics in rural areas play a large role in contemporary national politics, public-goods provision, and public policy, further study of how rural segregation continues to influence those dynamics is crucial.
As with Cook’s research on entrepreneurship, her study of communities could inform the Fed’s work in community development. It’s not that the Fed would pursue policies to reduce violence, de facto segregation, or racism. Still, it could provide contest in its oversight of banks and engagement with the communities. All the money in the world is not enough to support human flourishing within the context of violence.
Sound banking systems are crucial in emerging markets.
Cook also brings a depth of expertise in banking and credit systems in emerging markets. Her dissertation was “Three Essays on External and Internal Credit Markets in Tsarist and Post-Soviet Russia.” During her field research in Russia, she saw firsthand some of the challenges bankers and firms faced. Her research paper, “Trade Credit and Bank Finance: Financing Small Firms in Russia,” explains:
As recently as 1997, empirical evidence has emerged to shed light on the special challenges to entrepreneurship during economic transition in Russia. Results of a survey by Andrei Shleifer of 55 small private Moscow shops, for example, support the view that the greatest financial problems small Russian firms face, taxes and lack of access to capital on reasonable terms, have persisted. A motive for pursuing the research, as presented below, is to examine credit market arrangements that have evolved in response to the capital market imperfections reported by managers in Russia. In particular, this report will seek to explain the unique role that non-financial firms play in financing small enterprises in Russia.
Cook’s research on banking and credit systems also includes African countries like Nigeria, Ghana, Sudan, and Tunisia. One example is the book chapter, “Were the Nigerian Banking Reforms of 2005 A Success ... And for the Poor?”
The Nigerian banking system was in crisis for much of the 1990's and early 2000's. The reforms of 2005 were ambitious in simultaneously attempting to address safety, soundness, and accessibility. This paper uses published and new survey data through 2008 to investigate whether bank consolidation and other measures achieved their stated goals and whether they also enhanced development, efficiency, and profitability. Following the reforms, banks are better capitalized, more efficient, and less involved in the public sector but not more profitable and accessible to the poor. While there is greater supervision and less fragility, recorded distress was artificially low. The improved macroeconomic environment also explains some of the variation in observed outcomes and likely enhanced the efficacy of reforms.
Again, the Fed has multiple functions in which her expertise would be useful.
First, safety and soundness (the supervising and regulating of banks) is a core duty of the Fed. Central banks exist to serve as a lender of last resort in a financial crisis, as in 2008 and 2020. To limit the use of the role, the Fed carefully monitors banks and other financial institutions to ensure they are well prepared for any adverse shocks, whether specific to the bank or across the financial system. While Cook’s expertise is in banks outside of the United States, her scholarship means that she understands what are and aren’t the characteristics of a resilient banking system. (Her expertise in the Russian system is particularly timely.)
Second, Cook’s expertise could also relate to consumer protection, fintech, and payment systems at the Fed. As she has studied, accessibility is often a challenge in Africa, where many people are not connected to the formal banking sector. In the United States, nearly 5% of Americans are unbanked, and more at least occasionally use non-bank lenders like payday auto title lenders. Delays in being able to use deposited funds can be a problem for lower-income families. Some of the technology solutions in Africa, like payment networks using mobile phones, could be used.
Third, Cook’s expertise in foreign economies can help inform monetary policy. The Fed sets its interest rate to achieve price stability and maximum employment in the United States alone. However, since the Fed’s decisions ripple through the global economy, it needs to understand the potential foreign implications. Effects on emerging markets are often pronounced and create volatility. See the taper tantrum. Understanding the feedback efforts could help the Fed right size their actions. With her background in emerging markets, Cook would inform these deliberations.
Lisa Cook brings a breadth of expertise that will allow her to contribute to the Fed’s many responsibilities. She also has experience in economic policy at the Council of Economic Advisers at the White House and the U.S. Treasury. Cook has a stellar record of creating knowledge in economics and applying it to sound and inclusive policy. That’s precisely what we should expect from Lisa Cook at the Fed. She will deliver, and we will all be better for it. Godspeed.
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