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Op-Ed | The American Prospect | April 2, 2021

Janet Yellen's Blind Spot On Regulation

ClimateExecutive BranchFinancial RegulationLarry Summers
Janet Yellen's Blind Spot On Regulation

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Treasury Secretary Janet Yellen was initially greeted as an ideal compromise pick. She is the first actual economist to lead the Treasury Department in decades, a fact that should make past presidents stare at their toes.

But ten weeks into Biden’s term, the limits of Yellen’s background are showing. Yellen’s research as an economist focused mainly on poverty reduction, and her legacy at the Federal Reserve was mainly one of shifting monetary policy and promoting full employment. Expertise in these areas is obviously something to celebrate in a Treasury secretary, especially during the COVID-19 recession. Yellen helped design and defend the American Rescue Plan’s price tag against tendentious critics like Larry Summers.

With so many competing priorities, it’s justifiable that Yellen has not given her full attention to every single crisis under her purview. But she can no longer dodge her other big duty: financial policy and Wall Street regulation. The neoliberal justification for pulling past Treasury secretaries like Tim Geithner and (ugh) Robert Rubin from Wall Street and the Wall Street–dominated New York Fed was that overseeing the banks is a core duty of the department. While those appointments were regrettable, the assignment of responsibility holds true. Unfortunately, Yellen’s recent congressional testimony raised concerns about her eagerness to fulfill that duty and regulate for the crises ahead of her.

The headlines from the testimony concerned a verbal sparring match between Yellen and Sen. Elizabeth Warren over BlackRock, the world’s largest asset manager, controlling over $9 trillion in assets. Warren inquired whether Yellen would designate BlackRock as a systemically important financial institution (SIFI), better known as being “too big to fail,” and thus subject it to more extensive oversight and regulation.

Yellen’s answer didn’t please the senator. “Rather than focus on designation of companies, I think it’s important to focus on an activity like that and to consider what the appropriate restrictions are,” Yellen said, referring to fire sales of mutual funds.

This is straight out of BlackRock’s lobbying playbook. In 2013, Treasury’s own Office of Financial Research produced a red-alert report on BlackRock and other asset managers, claiming that having so much money herded into the same handful of investments by so few hands could leave the system vulnerable when those hands inevitably make a mistake. The clear implication was that BlackRock needed SIFI designation, and fast. In response, BlackRock pulled off one of the great lobbying grafts of the Obama era. It pushed its own paper which argued that nonbank financial giants ought to have their risk assessed differently than banks, as if the effects on the economy were so different when insurer AIG collapsed in 2008, versus investment bank Lehman Brothers.

This approach, which Yellen seemed to endorse, is the one Donald Trump’s regulators took for the last four years through the Financial Stability Oversight Council (FSOC), the regulatory consortium that decides who gets the SIFI label and then conducts the enhanced oversight that designation brings on. Leading FSOC is one of Yellen’s core duties as Treasury secretary.

Under Steven Mnuchin, FSOC flipped from watchdogging the biggest companies to peddling “activities-based” oversight, precisely what Yellen endorsed. That she would want to continue an effective disarmament brought on by the Trump administration is baffling and dangerous.

Warren, too, seemed baffled. “If a $9 trillion investment company failed, would that likely have a significant impact on our economy?” Warren asked, referring again to BlackRock. This shouldn’t have been a curveball. As Warren outlined, BlackRock owns a stake in just about every company in the S&P 500, and its $9 trillion in assets under management is higher than the GDP of any nation on Earth besides the United States and China. It’s also exponentially larger than the amount any actual SIFI manages, including Goldman Sachs ($2.14 trillion), JPMorgan Chase ($2.6 trillion), and Morgan Stanley ($1.24 trillion). How can a firm whose influence on the global economy is several times bigger than the “too big to fail” banks not itself be too big to fail?

In addition to its own $9 trillion of assets under management, BlackRock operates the Aladdin computer system, which analyzes and assesses risk for a broad range of financial institutions. In 2013, Aladdin handled about $11 trillion in assets. By last year, it was up to $21.6 trillion—about $5 trillion more than the United States’ own GDP. Any malfunction or faulty risk assessment could put that gigantic wad of money in peril.

Again, there is a case for SIFI designation based purely on information in the public record. Yellen has at her fingertips far more data, through FSOC’s prior BlackRock investigations and analysis from the Office of Financial Research. And yet, Yellen claimed it was “not obvious” to her “that designation is the correct tool to address” systemic risks potentially posed by BlackRock. She raised the fact that past administrations had already investigated SIFI designation—those being the Obama administration, which built a prominent revolving door with BlackRock, and the Trump administration, which was ideologically spiteful of any constraint on business whatsoever.

Warren was unsatisfied. “You are the head of FSOC now,” she said to Yellen. “How are you supposed to know what the risk is if you’re not actually doing the investigation through FSOC?”

BlackRock is not the only priority for Yellen at FSOC. U.S. financial regulators have the ability to shift capital away from climate-destroying and financially risky industries like fossil fuels. But it appears that Yellen does not want to use her existing powers to push for this.

Last week, she apparently said that she saw FSOC’s role as “arranging discussions” among regulators who are responsible for “assessing risks” from climate change. This light-touch approach to FSOC leadership is inadequate, given that her role requires so much more. Yellen also said that she didn’t see FSOC playing a role in telling financial institutions what kind of lending they could do. This is absurd. FSOC’s entire function is to prevent risky behavior by “too big to fail” institutions—in other words, telling them what they can and cannot do.

This bizarre hesitance to use FSOC as intended means that Yellen is happy to allow banks to finance fossil fuels and deforestation, insurance companies to insure these activities, and stockbrokers to trade shares in these (temporarily) profitable but deadly corporations.

Yellen has also slow-walked on her January 19th promise to appoint a climate leader at a “very senior level” to lead a climate “hub” within the Treasury Department. It seemed all but a done deal that former Federal Reserve governor and climate finance expert Sarah Bloom Raskin would fill this position, to the delight of climate activists. But over ten weeks have passed, and even after Yellen said this week that creating a climate hub was a priority of hers, there are no signs of a designated climate leader, let alone climate leadership, at Treasury. And Raskin is being floated for other positions, a sign that she was never actually offered the climate finance job at Treasury.

Beyond failures to hire, Yellen has failed to fire two powerful holdovers from the Trump administration: Internal Revenue Service Commissioner Charles Rettig and acting Comptroller of the Currency Blake Paulson. Both have continued with Trumpian deregulatory and anti-government actions. Paulson has allowed a controversial charter for the fintech company Protego to be approved. Rettig has seemingly misrepresented his agency’s audit record and signaled that it may not meet a deadline to launch the new child tax credit program by this summer. Yellen should be ensuring that all corners of her department are affirmatively working to advance the Biden agenda and the public interest; these are two instances where the opposite is the case.

Yellen’s expertise as an economist is valuable, but her reluctance to act thus far is unacceptable. Her primary duty is not to talk up bills on CNN; it’s to use her existing powers to protect the financial system and restore the regulatory cops to the beat. She must step up and do her duty.

PHOTO: “Janet Yellen, 14 February 2017” by Federalreserve is licensed for use by Wikimedia Commons.

ClimateExecutive BranchFinancial RegulationLarry Summers

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