It is very possible that President Biden will show up empty-handed to COP26 in Glasgow next week. And that isn’t just because of the apocalyptic vanity of two Senators from Arizona and West Virginia. Many executive-led policies that are just a matter of political will have not been done, and some of those which have are pure paper tigers. Biden’s administration failed last week to take advantage of a lesser known, but extremely meaningful climate action opportunity. The Financial Stability Oversight Council (FSOC) released its long-awaited report on climate-related financial risk, which the President personally ordered months ago. And it was a complete flop.
While climate finance experts told Treasury Secretary Janet Yellen, who oversaw the completion of the report, to officially recognize fossil fuels as the primary driver of climate change, she somehow wrote 130 pages of content without even mentioning fossil fuels. Where experts urged her to outline specific actions each regulator could take to mitigate rather than merely acknowledge climate risk, she failed to give even one time-bound recommendation. Experts outlined dozens of specific actions regulators could take, each squarely within the federal government’s existing purview. Yellen ignored essentially all of them.
A report as pathetic as this one begs the question—why?
One potential answer, which is becoming increasingly and unfortunately more plausible, is that Yellen is covering for Fed Chair Jerome Powell, whose term expires in February, and who is hoping to be reappointed. Despite being a Trump-appointed Republican who spent years in private equity, Powell is uniquely popular among some Democrats, even some progressives, due to his relatively dovish monetary policy tendencies in recent years. But his failure to take even a semi-legitimate stand on regulation—the other half of his job that many of his supporters conveniently ignore—makes him a ridiculously poor choice for a president who has an entire Build Back Better agenda to implement.
We’ve heard rumors from sources familiar with the report’s drafting process that the Fed—Powell, specifically, but also current and former Fed staff who are employed throughout the member agencies—heavily influenced the text and its many failures. We also hear that Yellen and Powell were largely on the same page throughout the drafting process.
It’s obvious to anyone who has observed Powell’s actions that he is firmly opposed to any policy that may hurt Wall Street, private equity, or any of his profit-hungry financial buddies. He did not want a report on climate-related financial risk that pressured him to crack down on the largest and most interconnected banks. But he also could not afford to be in public opposition to the White House when his job hung in the balance.
Powell’s only option, then, was for Yellen to publish a report so milquetoast that he could comfortably vote to approve it. For her part, Yellen was willing to undermine her decades of credibility as an economist and a policymaker willing to upset powerful interests for the sake of the public good…in order to protect Powell. This was not her only potential course of action; she needed only a simple majority of the 10 votes on the council in order to approve the report, and she could have gotten six Democratic votes on a much stronger set of recommendations. But because Powell has a seat at the virtual FSOC table, and as long as Yellen remains loyal to his interests, he is shaping what’s possible for the entire regulatory body.
The reality is, also, that even if Yellen released a report with stronger, more specific recommendations, no legitimate climate regulation will occur as long as Powell is at the helm of the Fed. Many of the potentially most consequential climate regulatory and enforcement powers are held by the Fed, so if Powell is unwilling to act, nothing will fundamentally change. This should raise alarm bells for a White House with an agenda that necessitates regulation. A Fed Chair willing to destroy the planet as long as his invitations to cocktail parties on Wall Street remain intact is not a Fed Chair who can Build Back Better.
It gets worse. Not only is Yellen publicly going to bat for Powell during what is likely the time for closing arguments regarding his potential reappointment, she has been willing to openly disregard the basic facts to do so. Last Sunday on CNN, she said that “during his term, […] regulation of financial institutions has been markedly strengthened,” and that he has maintained post-Dodd-Frank reforms to strengthen the financial system. This is simply untrue. Fed actions under Powell have significantly weakened banking protection rules put into place following the 2008 financial crisis.
It’s worth noting that the Fed is currently, as the American Prospect’s David Dayen put it, “the nation’s only bank regulator” — that is, current and former staff at the Federal Reserve occupy key leadership roles at many of the nation’s financial and economic agencies. Former Fed associate director—and current Fed employee— Michael Hsu is the acting Comptroller of the Currency. Yellen brought a slew of her former Fed colleagues with her to key posts at the Treasury, including Undersecretary for Domestic Finance Nellie Liang, Principal Deputy General Counsel Laurie Schaffer, legislative affairs guru Linda Robertson, and more.
This means that the Biden administration’s economic policy reflects the preferences of the Fed’s famously cliquish bureaucrats. Fed lifers have rarely taken the central bank’s duties as a regulator especially seriously, preferring the prestige of monetary policy debates and enjoying a generally close relationship with the same Wall Street banks they oversee. One reason we have a Consumer Financial Protection Bureau is that the Fed, which used to have jurisdiction over consumer protection duties, clearly did not care about this part of the job in the wake of the 2008 financial crisis.
All of the Fed lifers who have spread across other agencies worked under Powell during the deregulatory heydays of the Trump administration. The Fed’s dangerously top-heavy structure means they all took orders from Powell — if not personally, then from his powerful Chief of Staff Michelle Smith. These are people accustomed both to deferring to the Federal Reserve Chair, and to viewing their duty to regulate as extremely minor in comparison to other, higher-minded debates. It’s not hard to draw a line between these cultural issues and the FSOC’s willingness to laugh off climate-related financial regulation.
Powell’s refusal to be a proper regulator, let alone do what is within his power to mitigate climate risk, is a central problem. He appears to be causing Yellen to dilute FSOC’s power so much that nothing of importance will happen as long as he is in power. And that, in turn, is leading to Biden attending the critical climate talks in Glasgow with nothing but crumbs and empty words. The international community recognizes Powell’s role here—he lagged far behind global leaders in joining the Network for Greening the Financial System, waiting to officially join until Biden’s win was clear.
Let’s review who is at fault here: Powell, for failing to regulate. Yellen, for seemingly allowing Powell to call the shots of FSOC, and for implicitly supporting his reelection. And the cliquish culture of Fed bureaucrats for being unwilling to see outside of their own, vain blinders. As for Biden, that remains to be seen. He could reappoint Powell, ushering in several more years of harmful deregulation and hurting his own agenda. Or he could chart a new course, squeeze the executive branch and its financial regulators for all they’re worth, and show up as a real climate leader for the first time.