The real threat to the Federal Reserve

Throughout the nomination process for President Biden’s picks for the Federal Reserve Board, there have been numerous charges about various threats each nominee supposedly poses to the Fed, its mission and mandates. But none of the nominees – Jerome Powell for chair, Lael Brainard for vice chair, Sarah Bloom Raskin for vice chair for supervision and Lisa Cook and Philip Jefferson for governors – pose a threat anywhere near as significant as the Senate allies of the oil and gas industry. 

Those allies – most prominently the Republican members of the Senate Banking Committee – are now boycotting any vote on the nominees ostensibly because they want more information from Raskin, who, if confirmed, would become the most powerful banking regulator in the U.S.  

Remarkably, although the Fed and the vice chair for supervision regulate bank holding companies such as JP Morgan Chase, Goldman Sachs, Citibank and others, those banks are not opposing the nominees.

Rather, the Republicans are doing all of this because of claims, made by the fossil fuel industry, its allies and others, that Raskin poses a threat to the Fed’s independence. They claim she would politicize the Fed by going outside what they claim are its narrow mandates and consider risks related to climate. They say that will result in the Fed engaging in “capital allocation” decisions, “chocking off” capital to a particular industry and thereby “picking winners and losers.” 

But while Raskin’s opponents have correctly identified the threat, they have misidentified the source: It’s not Raskin who poses a threat to the Fed’s independence, mission and mandate, but those accusing her of doing so.

There is no dispute that the Fed’s mandates include promoting banks’ safety and soundness as well as financial stability. All also agree that the Fed’s vice chair for supervision position was created after the 2008 global financial crash in the Dodd-Frank Act specifically to oversee the supervision and regulation of banks, which was widely viewed as grossly deficient before the crash. 

Those mandates require the Fed to independently identify, assess and mitigate risks to safety and soundness and financial stability regardless of origin or source. That is supposed to be done regardless of – indeed, despite – political preferences anyone may have, including powerful senators. That’s what it means for the Fed to be independent: It alone makes decisions on risk. That is the linchpin to safety and soundness as well as to preventing financial crashes.

It is also the foundation for the Fed’s independence, and that is what is being directly threatened by the fossil fuel industry and its allies: They are using political pressure to try to get the Fed to disregard risks related to climate. 

Importantly, the risks arising from climate change and the need for the Fed to address them are well-known and widely recognized on a bipartisan and global basis. For example, Fed Chair Powell and former Fed Vice Chair for Supervision Randal Quarles, both Republicans, along with Wall Street’s biggest banks, numerous financial industry leaders and many others agree that climate change poses serious risks to the financial system. That is the overwhelming mainstream consensus.  

Nevertheless, the fossil fuel industry and its allies, including many Senate Republicans, are trying to get the Fed to create a special exemption for any risks arising from the fossil fuel industry. They are, in effect, insisting on a de facto prohibition on the Fed from even looking at risks to the financial system arising from climate. 

By doing so, senators are trying to pick winners and losers and engage in capital allocation decisions. Of course, if that were successful, many other industries would quickly lobby senators to pressure financial regulatory nominees to exclude risks from their activities.

Republicans undermining the Fed’s independence like this would be bad enough by itself, giving certain industries undeserved advantages in the marketplace, but it would be particularly consequential here. It would dramatically increase the risk of a financial crash because politically unregulated risks don’t go away; they tend to get bigger and more dangerous until they explode. 

The world has already learned the painful lessons from politicians making financial risk decisions. In the 1990s, Congress enacted a law that in effect prohibited the regulation of derivatives, which then materially contributed to causing, intensifying and spreading the 2008 global financial crash.

If the Fed is to be independent, no one should be able to tell it which risks to evaluate and which to ignore. That would require the Fed to violate its mandates and threaten to cause another catastrophic financial crash. That’s the real threat to the Fed, and that’s what’s at stake in the fight over Sarah Bloom Raskin.

Dennis Kelleher is president and CEO of Better Markets, a non-profit, non-partisan organization founded to promote the public interest in the financial market and support the financial reform of Wall Street.