The Fed needs diversity of thought
President Joe Biden has nominate Three bright, diverse candidates to fill vacancies on the Federal Reserve Board of Governors.Predictably, Republicans are already complaining about their views, especially those Sarah Bloom RuskinNominee for Vice-Chair of Oversight, who has expressed concerns about the impact of climate change on financial stability and is interested in the risks posed by shadow banking, cryptocurrencies and cybersecurity. Conservatives said her appointment would “politicize banking regulation”.
These arguments are cynical and flawed.First, the notion of “politicizing” the Fed ignores the fact that it has become increasingly political over the decades, as the central bank, through choice and force, has become major economic players in the country.
Starting with Alan Greenspan, the Fed has successfully used low interest rates to prop up asset prices and prolong business cycles. Average recovery cycle has been widening since 1982. This makes it convenient for politicians of both parties not to make hard decisions involving trade-offs between interest groups. Instead, they put the onus on the Fed to keep the 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 the Fed expanded its quantitative easing program in 2010. Since then, it has been monetary policy, not fiscal policy, that has driven the recovery.Biden is trying to change that, his rebuild better agenda. But polarized politics in Congress means it’s harder than ever to pass serious, long-term fiscal stimulus. This puts more political pressure on the Fed.
Inflation is forcing central banks to start scaling back loose monetary policy, at least for now. This will eventually have some huge market implications. In the past ten years, Financial risk It has shifted from traditional banking to areas such as private equity, non-financial companies and fintech. Now is an opportune time to consider expanding the types of risks the Fed is focusing on — from cyber, cryptocurrencies and climate to geopolitics.
In fact, this has already happened in Randy Quarles, President Donald Trump’s vice chairman of oversight. He will chair the Financial Stability Council, an international body that coordinates national financial regulation, in July 2021, when the council released a white paper on addressing climate-related financial risks. These things are not at all as controversial as the Republicans say.
At the same time, the industry is getting ahead of regulators and politicians. Insurers have been articulating the economic and market risks associated with climate change for years. More and more companies themselves are being hit by the market for not dealing with it. CEOs actually desperately need more guidance on consensus expectations in this regard. The Fed would be remiss in ignoring climate.
The same goes for cybersecurity, which Bloom Raskin studied when he was undersecretary of the Treasury, as well as cryptocurrencies and digital coins. If this is “political” then it is political all over the world. Dozens of central banks are exploring or experimenting with digital currencies. For regulators, wider adoption of these technologies is both an opportunity and a challenge.Over time, for dollar location as global reserve currency, risks the Fed should pay close attention to.
The Fed should work closely with regulators such as the SEC, which may pass Financial Stability Oversight Board. This umbrella group brings together all U.S. financial regulators to assess future risks. A wider, broader dialogue within and outside central banks is critical to uncovering risks that often lie between regulators, especially at a time when we are going through such a major technological, geopolitical and financial market shift.
It’s also worth remembering that the Fed actually has a three-pronged job, which includes not only keeping inflation low and employment high, but also making community economies more stable.That community mission Over the years, it has received far less attention than the details of trading rules or capital requirements.But it’s arguably more important, given the quantity Speculative retail investing today.
One of the most worrying things about the “everything bubble” the Fed is brewing is that it has turned us all into speculators. Not just professionals, but individuals buying Bitcoin and other highly speculative assets, using new online trading platforms and driving markets in ways that require more scrutiny.
That’s why expanding the diversity of Fed thinking and the range of risks being studied is a good thing. As former Minneapolis Fed President Narayana Kochellakota recently wrote, “Fed officials are too homogenous, more homogeneous than they are supposed to defend the wider well-being of Americans. May resonate with banks and investors.” Biden’s new roster will help address that, broadening horizons and risk management in the process. Hope this is a smooth confirmation.