By Pam Martens and Russ Martens: July 19, 2021 ~
“Will he” or “won’t he” has become the favorite chatter among the Wall Street elites, progressives, and the business press. We’re talking about whether President Biden will, or will not, give Fed Chair Jerome Powell a second term at the helm of the Federal Reserve. Powell’s current four-year term as Chair ends in early February, 2022.
The debate heated up last week. On Wednesday, Robert Kuttner, co-founder and co-editor of The American Prospect, and professor at Brandeis University’s Heller School, wrote this about Powell:
“As a Republican, he partly bulletproofs Biden against the charge of being soft on inflation, and serves as an administration olive branch to Republicans in Congress.
“But Powell has been dismal on the Fed’s other job—financial regulation. My sources say the decision hasn’t been made yet, but Biden is likely to name a new Fed chair.”
The very next day, during a Thursday Senate Banking Committee hearing with Powell, Senator Elizabeth Warren further drove home the message that Powell has been “dismal” on financial regulation. Warren criticized Powell for loosening regulations on the serially charged mega banks on Wall Street. Warren said that Powell has weakened the rules on living wills for banks (how the bank would be unwound if it became insolvent) and also weakened the Volcker Rule by allowing the banks to take on more proprietary trading risks and expand their investments into private equity and hedge funds.
Warren told Powell that she was highlighting just two specific areas but there were plenty more examples of how Powell had weakened rules on the big banks during his Chairmanship, such as: “reducing capital requirements, easing liquidity requirements, shrinking margin requirements, scaling back on supervision, weakening the stress tests.”
Warren’s complaints on Thursday were similar to the complaints made in a November report by the Americans for Financial Reform Education Fund. Its criticisms of the Fed under Powell included the following:
“During the second quarter of 2020, major banks were permitted to remove almost $2 trillion from their balance sheets for the purposes of calculating compliance with key leverage capital thresholds.
“Banks also benefited from $20 billion in direct capital relief due to a two- year moratorium on counting new loan loss reserves against their retained earnings for capital purposes. This impact is moderate currently but will increase in significance if there is in an extended recession.
“The revival of bond and equity markets thanks to Federal Reserve assistance have also driven tens of billions in additional trading and investment banking profits at the nation’s largest banks. These profits, which are so large that they seem clearly connected to the extraordinary levels of public support from the Fed for trading markets, also function to boost big bank solvency.
“When these factors are taken into account, the nation’s six largest banks are already much closer to statutory leverage limits than is generally acknowledged. For example, if not for supernormal trading profits and regulatory exemptions, Citibank would have had a supplementary leverage ratio of 5.3% as of June, 2020, just 30 basis points above the legal limit of 5%, as opposed to the 6.7% it reported.”
Citibank’s parent, Citigroup, received $2.5 trillion in secret, cumulative loans from the Fed to bail it out during the 2008 financial crash and its aftermath. That was the largest bank bailout in global banking history – all done in secret by the Fed.
Bloomberg News, majority owned by billionaire Michael Bloomberg (who made his billions leasing data terminals to mega Wall Street banks), appeared eager to rescue Powell’s second term. Yesterday, an opinion column from Matthew Yglesias appeared on the Bloomberg News digital front page, advocating for Powell to get a second term.
The opinion piece seemed to have been hastily written and vetted. It said this about who regulates the U.S. financial sector:
“…there are many federal appointees who oversee some aspect of financial regulation — directors of the Federal Trade Commission, the Federal Communications Commission or the Office of the Comptroller of the Currency, not to mention any number of officials in the Treasury and even Justice departments.”
The actual federal agencies that approve rules governing the mega banks on Wall Street are the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
How the Federal Communications Commission (FCC), which regulates what is broadcast on radio, television, and cable, could be confused with a mega bank regulator, is peculiar, to say the least. Likewise, the FTC is not a primary regulator of the mega banks, although it has in the past brought an occasional enforcement action.
Yglesias offers the following rationale for President Biden to keep the status quo in place with another term for Powell:
“Nobody benefits from a contentious hearing about a new Fed chair. Better for the White House to focus on filling other crucial jobs, including an outstanding vacancy on the Fed’s board of governors. It’s not that Powell is irreplaceable — Lael Brainard, for example, would do an excellent job. But she can get the job in Biden’s second term, or move to Treasury when Yellen is ready to step down.
“The task of replacing Powell poses great risks with little upside. For now, Biden should put the loose talk to rest and make it clear that Jerome Powell is his man.”
We take the term “loose talk” to suggest that folks should stop pointing out Powell’s “dismal” record on regulating the mega banks – because, well, it’s an inconvenient truth.
One of the Wall Street watchdogs that has been paying close attention to the last four years of cronyism between the Fed and Wall Street is the Revolving Door Project, part of the Center for Economic and Policy Research. On May 5, two of its research directors, Max Moran and Eleanor Eagan, wrote their own opinion piece for MarketWatch, a Wall Street news outlet owned by Dow Jones.
Moran and Eagan pulled no punches on Powell, writing as follows:
“The Powell Fed has racked up an absolutely miserable record on financial regulation. Powell and Randal Quarles, the vice chair for supervision, presided over the evisceration of the Volcker rule, a measure aimed at ending banks’ risky speculation on their own behalf. Powell and Quarles weakened bank stress tests and capital requirements, and last year, oversaw a backdoor Wall Street bailout in the name of pandemic relief.
“This shift has already made the recovery from the pandemic-induced downturn more painful than necessary. It also undermines monetary policy, because it strips the Fed of tools needed to prevent asset bubbles. And if you can’t forestall bubbles, pressure to increase interest rates will rise.”
As for asset bubbles under Powell’s stewardship of the Fed, the PBS program, Frontline, aired an hour-long documentary on July 13 where some of the smartest minds on Wall Street expressed concerns that the Fed has lost its way. (See the full program below.)