The Federal Reserve chair is the single most powerful person in our financial regulatory regime. The 2010 Dodd-Frank Act gave the Fed a central role in pursuing the elusive but essential goal of ensuring that the financial system actually serves the needs of ordinary Americans. The Fed sets rules and scrutinizes lenders to ensure the system is well managed, stable, and focused on financial intermediation, not speculation.
That is indispensable to any discussion of American political economy. As Americans for Financial Reform has written, the easy monetary policy that all of today’s writers strongly support inevitably leads to asset bubbles, if not paired with aggressive supervision and regulation. We’re currently living through a financial speculation heyday, as the Prospect’s David Dayen has covered at length. When big bubbles pop, history shows, poorer communities and communities of color suffer the most. Black wealth, which already unconscionably trailed white wealth, has never fully recovered from the 2008 crash. To put it another way, loose monetary policy grows the economic pie tremendously, but strict regulatory policy is how the pie gets sliced equitably.
This means that, to assess a Fed chair, we have to consider how they’ve handled all of their responsibilities. Just as a president shouldn’t only be judged on whether or not they started a war, Fed chairs shouldn’t only be judged on whether they raised or lowered interest rates. That’s their most salient power, but they have other, more complex ways of affecting our lives. Financial regulation is one of the most important of these, and it’s one on which current Fed chairman Jerome Powell has failed badly.
Arguments for reappointing Powell have focused on monetary policy, and attributed poor regulatory policy, if mentioned at all, to vice chair for supervision Randal Quarles. This is a dodge. Powell has voted identically with Quarles on all of his deregulatory proposals, and is supposed to be uniquely skilled at building consensus. Supporting these rollbacks speaks to his own priorities. More simply, he is the chair. He bears responsibility for the Fed’s actions, and especially the work of his co-partisans.
Those overlooking the technicalities of Powell’s financial deregulations should consider that he’s applied the same playbook to monetary policy. Last August, Powell approved a stealthy sabotage of future efforts to prioritize employment in a non-pandemic scenario when the Fed updated its monetary policy framework statement. What matters is what the new statement didn’t say: In 2012, then–Fed Chair Janet Yellen ensured the Fed set actual numerical targets for measuring and achieving full employment, which were reasserted in 2019. One can object to the Fed’s calculations, but calculations were there, meaning the central bank could be held to some independent standard. Powell’s new framework removes any quantification for unemployment, as well as the language stating the Fed “follows a balanced approach” between curbing inflation and maximizing employment. In other words, it’s now up to Powell whether Powell has achieved maximal employment—but he still has quantitative inflation targets. When agencies have quantitative targets for one goal but not the other, which do you think they’ll care about more?
Powell’s reinvention as America’s foremost dove is also new, and potentially transitory. In 2017, Bloomberg considered him the second-most hawkish of the Fed’s six permanent voting members, and about median among all the governors. They placed him down the middle in 2015 as well. His dovish turn is welcome, of course, but it shouldn’t be considered deeply held or durable, should the political winds shift.
And at least we’ve seen an alteration of Powell’s views on monetary policy; on regulatory policy, that’s not been in evidence. Joe Biden said in 2016 that his biggest regret from a life spent in politics was deregulating Wall Street. Why should he reappoint its willing accomplice?
IN 2013, POWELL GAVE a speech where he surprisingly called Dodd-Frank “a broad and well-structured agenda to strengthen the resilience of the financial system.” He even expressed a good-faith willingness to engage those calling for greater action, saying hard caps on bank size “require, and deserve, careful analysis.”
Then Donald Trump made Powell chair in 2017, and congressional Republicans, as well as many Democrats, set about tearing down Dodd-Frank. Powell was their willing accomplice, in some cases going further than necessary to undo the very measures he’d applauded under Obama.
Powell enthusiastically backed Sen. Mike Crapo’s (R-ID) 2018 bank deregulatory omnibus. Among other changes, it quintupled the threshold for enhanced regulatory supervision from the Fed from $50 billion of assets to $250 billion. This was a giveaway to so-called “stadium banks,” which are not the mega-banks like Wells Fargo or Citi but are big enough to have a stadium named after them.
While implementing the Crapo bill, Powell attacked another of Dodd-Frank’s most important, commonsense reforms: the liquidity coverage ratio (LCR), a measurement of how much hard cash banks need on hand in case of big shocks. As Fed governor Lael Brainard wrote at the time, the Crapo bill “does not require [the Fed governors] to weaken this critical post-crisis safeguard for large banks.” Yet Powell scrapped the LCR entirely for banks with up to $250 billion in assets. For even larger banks, Powell both lowered LCR requirements and altered the formula for calculating it, to the advantage of Wall Street mega-banks. This all undermined the LCR before it ever faced a real crisis.
Powell also gambled that banks could sort out their own problems when the next crisis comes: He killed requirements that banks below the new $250 billion threshold ever submit a “resolution plan,” which explains how they’d enter bankruptcy without needing a government bailout. Powell also ensured mega-banks above $250 billion only have to submit a plan every six years. These handouts, again, were not in the Crapo bill.
Powell also neutered another Dodd-Frank reform: stress tests. Under Powell, the Fed began telling banks far more about what they’d be tested on each year, and also tried to subtly alter some of the assumptions built into stress test models to lower their standards, including by burying altered definitions in the footnotes of regulatory proposals.
Powell testified in 2018 that the Crapo bill would give the Fed “the tools that we need” to enhance standards for banks that fall between $50 billion and $250 billion. Apparently, he doesn’t plan on using those tools very often, since in 2019 the Fed finalized rules to only stress-test banks in this range every other year.
The number of dangerously big banks has also grown under Powell. He voted to approve BB&T’s merger with SunTrust, creating the first new mega-bank since the crisis, with $442 billion in assets. The Fed hasn’t rejected any of the more than 3,800 bank mergers since 2006, and the Crapo bill was like an amphetamine for consolidation in the sector.
Finally, Powell voted for every Fed effort to hack away at the Volcker Rule, the closest thing Dodd-Frank had to Glass-Steagall–style separation of consumer banking and speculation. This helped “euthanize the Volcker Rule,” in the words of former SEC Commissioner Kara Stein. Even before he was made Fed chair, Powell was looking for ways in June 2017 to make the Volcker Rule “less burdensome,” as part of asking “what parts of [financial reform] may be redundant, inefficient.”
Pay no attention to the fact that the banking sector hit record profits the year before. Clearly, the biggest problem was too much effort to protect the public from the excesses of a flourishing industry capable of leveling the global economy, and with a strong penchant for lawbreaking.
PRESIDENT BIDEN SHOULD engage in some vote-counting, a familiar act for a longtime senator. Four of the seven seats on the Board of Governors will open up over the next year: There’s one vacancy already, and three Trump-appointed governors (assuming Quarles leaves the board when his vice chairmanship ends) will finish their terms by February 2022.
In short, Biden will get to reshape the Fed in his image, as well he should; the key channel for the Fed’s democratic accountability is the nomination and confirmation of its governors. Assuming Biden continues prioritizing employment, he should have a solid five-vote majority for workers by next spring. (Brainard, though dubious at best on non-Fed issues like trade, is consistently progressive on monetary policy.)
Under these conditions, there’s no need for Biden to compromise himself on any element of Fed policy. He can pick four new governors who will work to maximize employment—like Lisa Cook, whom Sherrod Brown endorsed for the Board—all without giving an inch on regulatory policy.
My colleague Dean Baker says that financial regulation is a secondary matter to the cause of promoting full employment. By way of example, he notes that the Great Recession was caused by a housing price collapse, not the financial crisis that resulted from it. But this neglects decades of deregulation and misguided financial innovation that enabled that housing bubble to inflate, from mortgage-backed securitizations and collateralized debt obligations and other financial derivatives to credit rating agencies that looked the other way. These factors all converged to create the conditions for the bubble and crash, and the Federal Reserve’s inattention was right in the middle of it. We should want to avoid that happening again at all costs.
Powell is, at heart, a private equity man: He made millions in the leveraged buyout industry at the Carlyle Group, a secretive firm that treats workers and the American economy like its plaything. This foreshadowed what kind of financial regulator he’d be. If Biden and progressives don’t need to make common cause with a private equity man, why should they? There are no appreciable gains from reappointing Powell that can’t be achieved better through a replacement, and every day he remains at the Fed is a day Wall Street enjoys excess without fear of their highest overseer.
How Biden handles Powell’s seat will indicate whether he was serious when he said he regrets his record on Wall Street. He shouldn’t settle for second best.