Fri. May 20th, 2022


President Joe Biden nominate three smart, diverse candidates to fill vacancies on the Federal Board of Governors. Predictably, Republicans are already complaining about their views, especially those of Sarah Bloom Raskin, the nominee for vice president of oversight, who has expressed concern about the impact of climate change on financial stability and has an interest in the risks posed by shadow banking, cryptocurrencies and cybersecurity. Conservatives say her appointment will “politicize banking supervision”.

The arguments are cynical and flawed. To begin with, the idea of ​​“politicizing” the Fed ignores the fact that it has been increasingly political for several decades now, in the sense that central bankers, by choice and by force, major economic actors in the country.

From Alan Greenspan, the Fed has successfully used low interest rates to boost asset prices and stretch the business cycle. Average recovery cycles have expanded since 1982. This has made it convenient for politicians from both parties not to make difficult decisions involving trade-offs between interest groups. Instead, they are shifting the responsibility to hand over to the Fed an economy that is increasingly driven by asset price inflation, rather than by 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 expanded. Monetary policy, not fiscal policy, has driven the recovery since then. Biden tried to change it with his Build Better Back agenda. But polarized politics in Congress means it’s harder than ever to pass on serious, long-term fiscal stimulus. This puts more political pressure on the Fed.

Inflation has forced the central bank to start reversing its easy monetary policy, at least for now. It will eventually have some major market impacts. Over the past decade, financial risk has migrated from the traditional banking sector to areas such as private equity, non-financial corporations and fintech. This is the right time to think about extending the mandate of the types of risks the Fed is looking at – from cyber, crypto and climate to geopolitics.

In fact, it has already happened below 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 it issued a white paper addressing climate-related financial risks. This stuff is simply not as controversial as Republicans say it is.

Meanwhile, the industry is moving in front of regulators and politicians. Insurance companies have been outlining the economic and market risks associated with climate change for years. Companies themselves are increasingly getting a market hit because they do not handle it. CEOs are actually desperate for more guidance on consistent expectations on this front. For the Fed to ignore the climate would be a breach of duty.

The same goes for cyber security, which Bloom Raskin looked at when he was deputy secretary of the treasury, as well as cryptocurrency and digital currency. If it is “political”, then it is political all over the world. Dozens of central banks are exploring or experimenting with digital currencies. Wider acceptance of this represents an opportunity, but also a challenge, for regulators. This will be no less true over time for the dollar’s position if the global reserve currencya risk that the Fed needs to look at carefully.

The Fed needs to work closely with regulators such as the Securities and Exchange Commission, which has raised cryptocurrency and cyber-risk targeting issues, perhaps through the Financial Stability Supervisor. This umbrella group brings together all US financial regulatory bodies to evaluate future risks. Larger, broader discussions, inside and outside the central bank, are crucial to the detection of risk, which often falls on the seams between regulatory bodies, especially now that we are undergoing such major technological, geopolitical and financial market shifts.

It is also worth remembering that the Fed actually has a three-pronged job, which involves not only keeping inflation low and employment high, but also making communities more economically stable. That community mandate has received far less attention over many years than the details of trading rules or capital requirements. But it’s probably more important, given the amount speculative retail investment today.

One of the most worrying things about the “all-bubble” created by the Fed is that it has turned us all into speculators. These are not just professionals, but individuals who buy bitcoin and other highly speculative assets, use new online trading platforms and move the market in ways that need to be explored much more closely.

This is why expanding the diversity of thinking at the Fed, and the universe of risks being studied, is a wonderful thing. As former Minneapolis former Fed President Narayana Kocherlakota recently wrote, “Fed officials are too homogeneous and tend to have more empathy with banks and investors than they do with the broader set of Americans whose well-being is supposed to be theirs. to defend. ” Biden’s new list will help to correct this, to broaden perspective and risk management in the process. We hope this is a smooth confirmation.

rana.foroohar@ft.com



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