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The Planet Needs A New Fed Chair

The Takeaway

There’s good news about the purported progressive split on the Fed Chair nomination: Even some of the most vociferous defenders of Federal Reserve Chair Jerome Powell agree that Governor Lael Brainard, the only Democratic member of the Federal Reserve Board, would provide continuity on the Fed’s crucial full employment framework. That makes her the consensus choice. The grassroots groups who are critical of Powell agree that Brainard would be strong on monetary policy and view her as a vast improvement on financial regulation and climate.

In other words, most progressives agree that Brainard is either just as good as Powell (the employment-focused view) or better (the employment + financial stability view). She is the consensus pick.

In this post, we summarize the debate up to this point. If you take away one thing, it should be this: Powell defenders like the staff of Employ America and Matt Yglesias all agree that, on the merits, Brainard has the skills and attitude needed to push forward with the full employment framework. And grassroots groups have made it clear: So long as Powell is Chair, the proposed alternative of appointing a strong regulator as Vice Chair for Supervision won’t be enough to influence the Fed’s direction on financial regulation, climate, and racial justice.

The most common arguments from Powell’s defenders are that (1) the Fed’s financial regulation mission is unimportant compared to its monetary policy mandate; (2) climate-related financial regulation is a sideshow that won’t meaningfully affect financial stability or carbon emissions; and (3) Powell is indispensable to maintaining a full employment framework. The last of these points is often implicit. It is common for Powell’s defenders to praise his approach to monetary policy, including by arguing that full employment or low interest rates might help advance climate goals. What they rarely note, much less dispute, is that Brainard supports and could implement the same or better monetary policy.

Here are brief responses, followed by a more detailed discussion:

  • Wall Street oversight is a core part of the Fed’s mission. The 2008 financial crisis, which triggered the decade-long economic malaise that the Fed’s full employment framework sought to reverse, happened largely because regulators were asleep at the switch. Powell has pursued a Wall Street friendly deregulatory agenda.
  • Addressing the climate crisis is a growing part of that oversight mission. European regulators have raised the alarm: banks are underprepared for the dangers they face from climate change and aren’t moving quickly enough to address them. Powell has said the Fed is looking at climate risk, but he hasn’t taken any meaningful action. 
  • If the Fed takes the threat that the climate crisis poses to the financial system seriously, its actions will lead to carbon emissions reductions. Oversight has been used to push banks away from risky asset classes and lending practices, and fossil fuel companies have been highly sensitive to anything that limits their bank financing. 
  • Full employment policies will help advance climate policy, but they must also advance racial and economic justice. Powell’s reaction to the COVID meltdown bailed out Wall Street first, and left communities to pick up the scraps.
  • Powell isn’t indispensable to preserving the full employment framework. Defenders of Fed Chair Alan Greenspan made similar arguments, with disastrous results. The Biden administration should reject the dubious and risky idea that only a Republican man can deliver full employment. The President should choose someone whose views align with the administration on all of its priorities.

The Details

For months, climate hawks have been highlighting the Fed’s critical role on climate and calling on Federal Reserve Board of Governor’s Chair Jerome Powell to do more. Their voices have joined with others who have long criticized Powell’s Fed for its deregulatory agenda and lack of focus on racial and economic justice.

As President Biden’s decision on who should be his next Fed Chair looms, progressive champions on the Hill, like Reps. Alexandria Ocasio-Cortez, Ayanna Pressley, Rashida Tlaib, Chuy Garcia, Mondaire Jones and Cori Bush and Senator Sheldon Whitehouse, have started calling for him to replace Powell with someone who will fulfill the administration’s vision on climate, racial and economic justice, and Wall Street oversight.

Given Powell’s norm-breaking campaigning for Fed Chair in 2017 (and ongoing reappointment campaign), it’s unsurprising that defenders have come out of the woodwork to argue for his reappointment. As reports from Politico and Bloomberg have noted, the defenders include a number of left-leaning macroeconomists and journalists, who back Powell’s reappointment because of his leadership in guiding the Fed to emphasize full employment over low inflation. In contrast, those calling for a Fed Chair who is strong on financial regulation, racial and economic justice, and climate change in addition to full employment include the Service Employees International Union, Action Center on Race and the Economy, Sierra Club, and other consumer and investor advocates, Wall Street watchdogs, and numerous grassroots groups focused on climate, racial and economic justice, and Indigenous rights. All of these groups agree that Lael Brainard can deliver the same economic policies, while also doing more on fulfilling the Fed’s other responsibilities.

Powell’s defenders dismiss the importance of Wall Street oversight at the Fed and mischaracterize valid concerns about the effects of low interest rates without adequate regulation of the big banks. On climate, Powell’s left-leaning defenders largely make two claims: the Fed can’t do much on climate change, and Powell’s full employment policies are the best thing anyone can do on climate. With a few exceptions, these arguments show a lack of engagement or understanding with the criticisms of Powell. They are also rife with punditry about the politics of renomination and have a disturbing undercurrent: the belief that only Powell, a white Republican investment banker, can be trusted to manage the economy. None of these arguments offers a convincing refutation of the bottom line: Biden can choose a Fed Chair like Lael Brainard who maintains the correct focus on full employment while also improving on Powell’s immense shortcomings

Claim 1: Wall Street oversight isn’t an important part of the Fed’s role

At its most aggressive, proponents of this claim treat financial regulation as some kind of weird obsession, an inability to see the forest for the trees. A related claim is that since COVID didn’t trigger a financial crisis, the Fed is doing just fine on overseeing megabanks.

It’s telling that all of these dismissals ignore the housing bubble and subsequent 2008 financial crisis. Post-mortems found that overly permissive regulatory practices were a critical cause of the market meltdowns. It was the financial crisis that created nearly a decade of malaise that Powell’s full employment framework needed to solve. This makes Powell the equivalent of a fire marshal who finally pours enough water on a blaze, but still isn’t too sure about that whole “fire code” thing and thinks arson isn’t a matter for law enforcement. It’s true that a massive infusion of money prevented a meltdown in March 2020, but the fire hose was needed in part as a result of Powell’s own neglect of growing risks

This is an important component of the climate case against Powell. Bank financing of carbon emissions creates risk, just like their support for subprime mortgages did back in 2007. Even as his European counterparts raise the alarm for climate threats to the financial system and take action, Powell’s contribution to U.S. climate risk regulation has been merely to join an international working group and start some committees. It’s gotten him some positive press, but it hasn’t made the financial system any safer.

Criticism that the financial regulation and climate cases against Powell are rooted in a desire to reduce growth also fall flat. Anyone looking at the boom in meme stocks, crypto scams, real estate valuations and private equity profits can be excused for feeling some disquiet about the state of the financial system. The availability of free money can create a host of nasty, unintended consequences without adequate rules in place to limit speculation and promote safety, soundness, and equity. Discussing these consequences and suggesting that low interest rates must be coupled with strong financial regulation is pro-growth. The Fed must continue to prioritize full employment. But without robust oversight, the path to full employment will be fraught with stumbling blocks from financial crisis, climate harms, and unstable and unequal growth. Ultimately, these dangers will threaten the clean energy transition unless the Fed properly wields all of its tools, not just monetary policy. 

Claim 2: The Fed can’t do much to reduce emissions

In an opinion piece in The Atlantic called “The Planet Needs Jerome Powell,” climate writer Robinson Meyer discusses a couple of possible interventions and concludes  “all these ideas…won’t reduce carbon pollution.” Macroeconomics writers have also criticized climate financial regulations as “Rube Goldberg contraptions” or as simply unsuited to the task.

Reality: These arguments, at best, consider only a single tool available to the Fed, capital regulation. To call these views incomplete or uninformed is generous. There is plenty of reason to believe that even the most modest interventions like requiring disclosures related to climate risk and integrating climate considerations into bank supervision will change banks’ behavior. And the Fed has much more direct, stronger tools as well—right up to and including expressly limiting certain assets or activities or ordering the banks to stop engaging in unsafe and unsound practices.

The arguments are also mistaken about the effectiveness of the tools that they do discuss. The empirical evidence that capital regulation affects bank behavior is far more encouraging than these economists and journalists suggest. When regulators added strict new capital requirements for ownership of the right to service residential mortgages (a surprisingly risky endeavor), banks cut their exposure to this asset type as much as fivefold. Similarly, after regulators issued guidance cautioning banks against overly risky leveraged lending, they found it drove a marked decrease in that activity. It’s true that the exact level of reductions can’t be quantified ex ante, but it’s not negligible. 

Fossil fuel firms may seek other sources of funding, but it’s clear that they feel the squeeze when bank lending is restricted. Last year, the Independent Petroleum Association of America tried using the pandemic as an excuse to get the Office of the Comptroller of the Currency (OCC) to reverse Obama-era guidance on safe lending to oil and gas producers. And oil state Senators were the impetus for a midnight attempt by Trump’s OCC to ban banks from withdrawing funding from risky industries. Such attacks show that many fossil fuel producers value banks over other funding options, giving the Fed a powerful tool to manage fossil fuel expansion, and thus reduce emissions.

Claim 3: Powell’s full employment policies are the best thing the Fed can do on climate

Meyer’s central claim is that a booming economy will help cushion dislocations from the needed transition away from fossil fuels. According to Neil Irwin at The New York Times, good economic times will even make Americans more amenable to climate action.

Reality: These arguments conflate Powell, the person, with his policies. Biden gets to choose his next Fed Chair, and he should absolutely choose someone who will preserve the Fed’s new way of doing monetary policy. But Powell isn’t the only one who can do this.

And it’s not clear that Powell’s approach to full employment is the best way to manage the transition, particularly for communities of color. The Action Center on Race and the Economy has criticized Powell for taking a trickle down approach to the Fed’s COVID relief programs instead of using the agency’s powers to directly support communities. 

Claim 4: Only Powell can protect the full employment framework from inflation hawks in Congress, the Fed’s internal processes and markets

Ultimately, all the pro-Powell arguments boil down to this. It’s why you can find some Powell proponents saying that he provides the political capital needed to keep interest rates low, even as others argue that Powell’s value is that he will know exactly when to raise rates. Powell has become a symbol of (an admittedly very good) policy, and his defenders, like sports fans who sit in the same seat during every game, don’t want anything to change. 

Reality: The truth is that the Fed has been moving in this direction for a while (in part because of the advocacy by some of Powell’s defenders) and will continue to do so regardless of whether Powell or sole Democratic Fed Governor Lael Brainard gets the Chair job.

There’s a lot that’s wrong with the idea that only Powell can guarantee full employment. First, it’s not so long ago that we had another Fed Chair hailed as an irreplaceable genius for his management of the economy. Alan Greenspan’s reign also came with sneering derision for opponents of his financial deregulation. Greenspan got out before the housing bubble he had inflated popped, but he bears a huge amount of responsibility for the 2008 financial crisis. If the Fed doesn’t change course, an upcoming fossil-fueled, disaster-riddled climate financial crisis will be a major part of Powell’s legacy.

Second, it should be concerning that many of Powell’s defenders ascribe an aura to him, a white male Republican investment banker, that they did not grant to either his predecessor, Janet Yellen, or his likeliest replacement, current Board member Lael Brainard. This gender dynamic is a real concern for an agency—and a field, economics—that has struggled with its lack of diversity.  Thankfully, under pressure, some of Powell’s strongest supporters have acknowledged that Lael Brainard would be a good choice. 

Finally, as Brad Delong, a macroeconomist and former Clinton administration official points out, assuming that the Powell of 2019-2021 will be the Powell of 2024 is a dangerous move. Powell was full speed ahead on raising rates until Republican political orthodoxy on inflation bent to Donald Trump’s will. Already, Republican inflation hawkery is coming back into vogue. Powell’s champions have used this as a defense, to suggest that only Powell can bridge the partisan divide on this issue. But it’s just as possible that with another four year term in hand and a Republican-controlled Senate flexing its oversight muscles, Powell will prematurely decide we’ve hit full employment and leave his defenders in the lurch. The administration shouldn’t buy into the fantasy that the Fed is a nonpartisan institution. Powell is a politician—it’s no coincidence that the Fed announced its first steps on climate only after Biden was elected. Biden needs to use his Senate majority, while he still has it, to pick a reliable Fed chair whom he can trust to implement his vision for the economy, climate, and racial justice. 

A Fed chair that ably continues expansionary policy and uses financial regulation to safeguard the system during the upcoming transition is what the American people deserve, and it is the only way for President Biden to make good on his commitments to addressing climate change and promoting racial and economic justice.