by Miles Kimball, Confessions of a Supply-Side Liberal
Ever since the 2008 Financial Crisis, the Fed has been controversial. I think three things took away from the respect they had commanded: not having avoided the Financial Crisis, being involved in bailing out banks, and not getting a quicker recovery afterwards. Not predicting the Financial Crisis was a failure that was widely shared; bailing out the banks was necessary given that first failure; the last hit to Fed prestige was in an important sense justified; see “America’s Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks.” One of the Fed’s most important jobs is to get quick recoveries. In the aftermath of the Financial Crisis of 2008, it didn’t.
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For the most part, the Fed has gotten good marks for what it did during the COVID-19 pandemic. But the Fed remains more controversial politically than it was before 2008.
One thing that can put the Fed on more solid ground politically is when Chairs appointed by a president of one party who have done a good job are reappointed by a president of the other party. That happened for Ben Bernanke. It probably should have happened for Janet Yellen. Now, Joseph Biden has the chance to depoliticize the Fed somewhat by reappointing Jerome Powell. Jerome Powell was appointed to the Board of Governors by Barack Obama and appointed Chair by Donald Trump. Jerome has, thus, a bipartisan imprimatur already, that would be burnished further by being reappointed Chair by Joseph Biden.
I am a great admirer of Nick Timiraos as a journalist covering the Fed. Yesterday, he had another excellent bit of reporting with “Progressive Opposition to Jerome Powell Clouds His Chances for Second Term as Fed Chairman.” All quotations below are from that article.
Jerome Powell should have no trouble getting through the Senate:
Powell, a Republican who was nominated to the Fed board as a governor in 2011 by Mr. Obama and tapped to become chairman in 2017 by Mr. Trump, is generally well-liked by lawmakers from both parties. Analysts believe he is likely to draw enough support from Republicans and Democrats to win confirmation by a comfortable margin. Mr. Powell won support from 84 senators during his Senate confirmation in 2018; 68 of those senators remain in office, equally split between the party caucuses.
But he would have to be nominated for reappointment by Joseph Biden. There are some trying to discourage that:
… some progressives are unhappy with his bent toward easing financial regulations that were put in place after the 2008 crisis and think the central bank should have someone more in sync with Democratic politics in charge.
The most likely alternative is Lael Brainard:
If Mr. Powell isn’t given a new four-year term next February, when his current term expires, the leading contender for the job is Fed governor Lael Brainard, an economist appointed to the board in 2014 by former President Barack Obama.
Although experience as Chair is valuable, Lael Brainard otherwise doesn’t seem likely to pursue a dramatically different monetary policy:
Mr. Powell and Ms. Brainard have had similar views on monetary policy in recent years …
But there are some differences on other policies: Lael Brainard might be tougher in requiring banks to be financed more heavily by stock and less by borrowing, and she favors a Fed digital currency:
… Ms. Brainard has in recent months argued more forcefully for the Fed to develop a central bank digital currency. Mr. Powell has said he is undecided on whether the risks outweigh the benefits. Ms. Warren has also recently talked up the potential benefits of such a project.
Being tougher in requiring banks to be financed more heavily by stock and less by borrowing is important. (See “Higher Capital Requirement May Be Privately Costly to Banks, But Their Financial Stability Benefits Come at a Near Zero Cost to Society.”) But Joseph Biden can further that by other Fed appointments, particularly for the vice chairman of bank supervision:
The four-year term of vice chairman of bank supervision, currently held by Randal Quarles, expires in October. …
Administration officials are considering former Fed governor Sarah Bloom Raskin as a possible candidate for that job. Ms. Raskin, a lawyer, served as deputy Treasury secretary in the Obama administration from 2014 to 2017. She was critical last year of some of the Fed’s emergency lending programs and argued officials should have done more to prevent broad market backstops from benefiting certain energy companies.
Other appointments to the Board of Governors of the Fed also matter:
The Biden administration also has been working on filling a vacancy on the seven-member Fed board of governors. The two leading contenders for that job are Williams Spriggs, chief economist at the AFL-CIO, and Lisa Cook, an economics professor at Michigan State University.
Besides making the Consumer Financial Protection Bureau happen, one of the best things Elizabeth Warren has done is make pushing banks to be financed more by stock than by borrowing a litmus test for relevant government officials a central issue. I would be delighted if supporting this – which is often called “high bank capital requirements” – became a key litmus test for Fed appointments. Financial stability matters. And most people smart enough to conduct high-quality monetary policy will be smart enough to see the importance of high bank capital requirements as well. So this isn’t a litmus test that is very costly to the good performance of the Fed’s other duties.
If Joseph Biden does nominate Lael Brainard as Chair, the succeeding musical chairs game is interesting:
If Mr. Powell gets a second term, Ms. Brainard is likely to be asked to serve as the vice chairwoman or as the vice chairwoman for bank supervision.
Richard Clarida’s current term as vice chairman expires in January.
But if Lael Brainard becomes Chair …
Another candidate being considered for the job [as Vice Chair] is Seth Carpenter, an economist who spent 15 years at the Fed, most recently as deputy director of the monetary affairs division.
Mr. Carpenter worked at the Treasury Department from 2013 until 2016. He was nominated in August 2014 to be assistant secretary for financial markets; he filled the position on an acting basis, but his nomination wasn’t ever considered by the Senate. He became global chief economist at Morgan Stanley last month after serving in a similar capacity at UBS Group AG .
I have met Seth Carpenter at several conferences. I am a fan. I would love to see him as Vice Chair of the Fed.
I have this complaint against Richard Clarida:
My curiosity is piqued to see what will happen with these upcoming Fed appointments.
This article appeared on Confessions of a Supply-Side Liberal 12 August 2021.
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