Markets and companies have many risks to consider, but President Biden entrusts them with another: Sarah Bloom Raskin. His nominee for Federal Reserve Banking Supervisor wants to use regulation to politically allocate credit in a way that would create political and systemic financial risks.
During her Senate confirmation hearing on Thursday, Ms. Raskin tried to backtrack on her public statements in favor of climate finance regulation. “It is inappropriate for the Fed to make decisions and credit allocations based on picking winners and losers,” she told the banking committee. His denial is not credible given his long held views.
In May 2020, she criticized the Fed in The New York Times for not excluding fossil fuel companies from its emergency pandemic lending facilities. The Fed had opened its corporate bond purchase facilities to virtually all comers who had an investment grade before March 22.
“The decision to bring oil and gas into the Fed’s investment portfolio not only diverts limited recovery resources, but also sends a false price signal to investors about where capital should be allocated” , she said. wrote. The Fed, she says, shouldn’t help fossil fuel companies because they’ve spent a decade “increasing production even as they failed to turn a profit.”
But the purpose of the Fed’s programs was to protect businesses and markets from an economic depression. Ms Raskin was so politically blind that she wanted to use a five-alarm financial emergency to punish her enemies. If the Fed had followed his advice, many more workers would have lost their jobs and energy prices would be even higher today.
His statements underscore his distorted view of the Fed’s mandate, which is to keep prices stable and aim for full employment. She thinks this should include political credit allocation driven by regulatory policy and even emergency financial tools.
She elaborated on her views in a Project Syndicate op-ed in September. financial regulators, she wrote, should examine how “regulatory changes relating to disclosure, access to credit and risk pricing promote a rapid and just green transition”. Regulators must lead this transition, she added, because “market discipline and private sector initiative” alone will not be enough. She commended other central banks for “actively working to redirect instruments such as stress tests, living wills and risk-based capital standards, all within their existing mandates” to drive the anti-carbon program.
Ms Raskin tried to whitewash her views during the Senate hearing by saying that the Fed’s supervisory stance “does not involve ordering banks to lend only to specific sectors, or to avoid lending to particular sectors”. Well, of course, the Fed doesn’t literally dictate bank lending. But it can use the prudential regulations it has described to guide the allocation of bank credit.
Ms Raskin justifies punishing fossil fuels by saying she is trying to reduce systemic financial risk. But the regulations it advocates could be one of the main causes of this risk. This would force banks to write down and liquidate fossil fuel assets. This would deprive businesses of capital, increasing the risk that they and their creditors would go bankrupt. And it would push banks to make riskier investments in green energy so they can hold less capital and pay higher dividends.
Remember how banks piled into mortgage-backed securities and sovereign debt because central banks deemed them low risk. The housing and European sovereign debt crises are reminders that financial regulation can itself create systemic risk.
As chief supervisory officer, Ms. Raskin would not be just another Fed governor. She would have more power than the Fed Chairman over banking regulation, capital rules and stress testing. She said during her hearing that she would not impose financial regulation on her own, but would have a progressive Fed majority as an ally.
The timing couldn’t be worse. The Fed needs to fix the inflation mess it has created and needs political support to do so. Ms. Raskin’s policy regulation will generate opposition the Fed doesn’t need because it’s raising rates, which won’t be popular. She will also likely be a voice for easy money, adding to the risk that inflation will remain high.
The Senate should send Mr. Biden a message that he does not want a Fed that punishes industries employing millions of Americans for being unpopular on the left. Ms. Raskin is a danger to the economy and the Fed itself.
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Appeared in the February 4, 2022 print edition as “Sarah Raskin’s Systemic Risk”.