It is a very odd situation, to have the elected leader of the United States with a policy of such deference to the Fed that he even has his own officials refuse to make any public statement for fear of exerting influence. Even judges, whom most liberals hold in undeserved high regard, don’t get such deference. In 2011, Barack Obama openly criticized the Citizens United decision in the State of the Union. And Democrats routinely criticize judges. Unlike the Fed, judges are an entirely separate branch of government in the Constitution!
Though it’s not often presented this way, these two functions jointly foster monetary policy. The FOMC pushes interest rates up or down, and the banks overseen by the Fed transmit those choices to borrowers and lenders throughout the economy. The FOMC is like the general setting the direction of an army, and the supervisors are the mid-level officers who make sure the army can do what it is ordered to do. Generally speaking, the Fed and Wall Street are partners, and Wall Street exerts significant influence over Fed actions, simply because they work together every day to trade billions of dollars of bonds.
So why does the Biden administration stay silent about how high finance works in America? There’s no law that says they must, and there’s also no evidence that keeping politicians silent about monetary policy is good for the economy. Indeed, from 1935 to 1950, when the president directly ran monetary policy, inequality collapsed, the economy boomed, and inflation was kept low despite economy-wide mobilization to fight World War II. But since the 1980s, we’ve had a weird 40-year tradition of what is known as “Fed independence,” whereby politicians are supposed to leave the Fed and its destructive economists alone. As far as I can tell, there is no reason for this choice, except that Wall Street likes it when high finance is considered apolitical.
A hands-off policy toward any entity that makes core political-economy decisions is problematic. But we’ve seen how this deference is especially damaging in real time, primarily because the Fed has done such a bad job recently. Take the collapse of Silicon Valley Bank. SVB was regulated by the San Francisco Federal Reserve Bank, and examiners at the SF Fed didn’t act on the bank’s serious problems until the fall of the bank was imminent. This is despite public reporting in The Wall Street Journal about the hole in the bank’s balance sheet months earlier. The SF Fed examiners reportedly wrote several stern letters to SVB executives about the risks they were taking, and the executives threw them in the trash, and everyone went on with their lives until the bank collapsed.
The incompetence of the Fed examiners is quite obvious. The incompetence of the FOMC, which gave the orders to have its banks march to the tune of higher interest rates, and never bothered to care about whether the banks could handle it, is worse.
The closer you get to the facts, the more incompetent the Fed looks. Supervisors should never have allowed a bank funded with between 90 and 100 percent uninsured “hot money” deposits by venture capitalists to bet on unhedged long-term bonds. And you didn’t need to be a genius to get this fact. Everyone in Silicon Valley knew that SVB was insolvent; it was pretty much an open secret. Fed supervisors knew it, and so did the FOMC. They took no action.
And though the Fed might feel independent of politics, politics is not independent of the Fed.
In 2018, the Fed, along with its banking allies, wrote and lobbied for a bill, S. 2155, that didn’t quite take away its regulatory authority so much as give it the political cover to relax regulatory requirements over large regional banks. SVB lobbied for this legislation, but the prime actor here was the Fed itself. The general counsel of the Fed, Mark Van Der Weide, helped author S. 2155, and Fed Chair Jay Powell testified in favor of it. Janet Yellen, the former Fed chair and current Treasury secretary, supported it as well. Just a few months after Donald Trump signed S. 2155 into law, SVB announced a $500 million stock buyback program. And a few months after that, SVB began taking in huge deposits and making the bets that would lead to its undoing.
In 2019, the Fed wrote aggressive rules rolling back obligations on large regional banks. At the time, opponents of the legislation that triggered the rewrite predicted that removing requirements would lead to a blowup, but Fed officials (with one exception) nonetheless condescended to everyone who warned of too much risk in the system. Nellie Liang, who ran the Federal Reserve’s financial stability division for six years, responded to the bill by saying, “meh,” and from her temporary perch at the Brookings Institution, “It’s fine … I’m not upset about it.”
The Fed has announced it will investigate itself, which is, frankly, a very Fed thing to do. We will probably find out a few more relevant facts, as the Fed discovers that though the Fed could have done a bit better, the Fed’s stringent internal reform program that the Fed oversees will fix the problem. Don’t worry, the Fed is on it, even if the Fed is the problem. But because of deference from the White House and the Democrats in the name of Fed independence, no one will propose any real fixes. The Fed will promise to regulate banks a bit more, but of course, there’s no reason to assume the Fed will even realize what went wrong.
by Matt Stoller, The Amercian Prospect | Read more:
Image: Alex Brandon/AP
[ed. This and the article below from TAP's special issue: Washington's Secret Policy Engine.]
