President Joe Biden has named three smart and diverse candidates to fill vacancies on the Federal Reserve Board of Governors. Predictably, Republicans are already complaining about their views, especially those of Sarah Bloom Raskin, the oversight vice-presidential nominee, who has expressed concern about the effects of climate change on the financial stability and looks at the risks posed by the shadow banking system. , cryptocurrencies and cybersecurity. The Conservatives say his appointment would “politicize banking supervision”.
The arguments are cynical and misguided. To begin with, the notion of the “politicization” of the Fed ignores the fact that it has for several decades been increasingly political, in the sense that central bankers have become, by choice and by force, the main economic players in the country. .
Since Alan Greenspan, the Fed has successfully used low interest rates to support asset prices and lengthen the economic cycle. Average recovery cycles have extended since 1982. This has freed politicians of both parties from making difficult decisions that involve compromises between interest groups. Instead, they blame the Fed for maintaining an economy increasingly driven by asset price inflation, rather than productivity and wage growth.
This dysfunctional dance accelerated after the 2008 financial crisis and even more so after 2010, when the Fed’s quantitative easing program widened. Monetary policy, not fiscal policy, has been driving the recovery ever since. Biden tried to change that, with his Build Back Better program. But polarized politics in Congress means passing serious, long-term fiscal stimulus is harder than ever. This puts more political pressure on the Fed.
Inflation has forced the central bank to start reversing its easy money policies, at least for now. This will ultimately have significant impacts on the market. Over the past decade, financial risk has migrated from traditional banking to areas such as private equity, non-financial corporations and fintech. Now is a good time to think about expanding the remit of the types of risks the Fed reviews — from cyber, crypto, and climate to geopolitics.
In fact, it was already happening under Randy Quarles, Vice President of Oversight under President Donald Trump. He chaired the Financial Stability Board, the international body that coordinates national financial regulation, in July 2021 when he published a white paper on climate-related financial risks. This stuff just isn’t as controversial as Republicans make it out to be.
Meanwhile, the industry is outpacing regulators and politicians. Insurance companies have been exposing the economic and market risks associated with climate change for years. Increasingly, companies themselves are taking a hit in the market for not dealing with it. CEOs are actually desperate for more guidance on consistent expectations on this front. For the Fed to ignore the climate would be a dereliction of duty.
The same goes for cybersecurity, which Bloom Raskin looked at when she was Undersecretary of the Treasury, as well as cryptocurrency and digital coin. If it’s “politics”, then it’s politics all over the world. Dozens of central banks are exploring or experimenting with digital currencies. Their wider adoption represents an opportunity, but also a challenge for regulators. This will nonetheless be true over time for the dollar’s position as the world’s reserve currency, a risk the Fed should monitor closely.
The Fed should work closely with regulators such as the Securities and Exchange Commission, which have targeted cryptocurrency and cyber risk issues, perhaps through the Financial Stability Supervisory Board. This coordination group brings together all US financial regulators to assess future risks. Broader and broader conversations, inside and outside the central bank, are crucial to detecting risks, which often lie at the seams between regulators, especially now that we are undergoing technological change, geopolitics and financial markets as important.
It’s also worth remembering that the Fed actually has a three-pronged job, which is not only to keep inflation low and employment high, but also to make communities more economically stable. economic. This community mandate received far less attention for many years than the details of trading rules or capital requirements. But it’s arguably more important, given the amount of speculative retail investing today.
One of the most disturbing things about the Fed’s “everything bubble” is that it has turned us all into speculators. It is not only professionals, but also individuals who are buying bitcoin and other highly speculative assets, using new online trading platforms and shifting the market in ways that require much greater scrutiny.
This is why broadening the diversity of thought at the Fed and the universe of risks studied is a good thing. As former Minneapolis Fed Chairman Narayana Kocherlakota recently wrote, “Fed officials are too homogenous and too likely to sympathize more with banks and investors than with the Americans as a whole they are supposed to defend well-being”. Biden’s new slate would help solve that problem, broadening perspective and managing risk in the process. Hoping this is a smooth confirmation.