Since a revolving door was installed at the entrance to the West Wing of the White House, it has been difficult to keep track of the comings and goings in America’s corridors of power. Anything written about the Trump administration’s personnel and policies may be invalid before it is published.
At least for the time being, however, the key economic-policy actors remain in place. Steve Mnuchin is still Treasury Secretary and has not been mentioned in dispatches during the latest power struggles. Gary Cohn continues to chair the National Economic Council, though he is reported to be unhappy about some of the president’s statements on non-economic issues. And of course Janet Yellen is still at the helm at the Federal Reserve, at least until February next year.
But this stability does not seem to indicate a single settled view on economic and financial policy, particularly the future framework of financial regulation. A remarkable recent interview in the Financial Times with Fed Vice Chairman Stanley Fischer laid bare some major disagreements.
Central bankers typically make a virtue of understatement and ambiguity. Fed watchers need to analyse minute differences in wording and tone to identify shifts in thinking. As Alan Greenspan famously told a Congressional committee, “if I turn out to be particularly clear, you have probably misunderstood what I said.” So the language used on this occasion by Fischer, normally the mildest and most courteous of men, should cause us to sit up and take notice.
He argued that the United States’ political system “may be taking us in a direction that is very dangerous.” Referring to moves to roll back elements of the new regulatory order established in response to the debacles of 2008-9, he lamented that “everybody wants to go back to the status quo before the great financial crisis.” And he declared that “one cannot understand why grown intelligent people reach the conclusion that you should get rid of all the things you have put in place in the last ten years.”
This is remarkable language, which merits deconstruction. Fischer cannot possibly mean literally that “everybody” wants to return to the status quo ante. The academic community is mainly in favour of even tighter regulation of banks, with higher capital requirements. With few exceptions, the press is even more hawkish. Furthermore, I do not know a single bank chairman who thinks that going back to leverage ratios above 40, and tier 1 capital of 2 per ent, would make any sense at all.
So who is “everybody” in this formulation? The phrase reminds me of my mother’s frequent observation that “somebody,” unnamed, had not tidied his bedroom (I was an only child). But here the suspect is not so obvious. The only concrete proposals to emerge from the administration so far are in a thoughtful paper published in June by the U.S. Treasury. It is true that the paper’s title, “A Financial System that Creates Economic Opportunities,” has a political flavour; but the specific ideas it floats are not exactly those found on the wilder shores where “free banking” advocates roam.
The authors of the paper – which was signed by Mnuchin himself – want to reform the complex, incoherent, and overlapping patchwork of regulatory agencies left in place since the crisis. Former Fed Chair Paul Volcker, hardly a lobbyist for investment banks, has been making the same argument for some time.
The paper also recommends some rationalisation of the extremely complex rule books, relieving some simpler banks of the most burdensome and costly processes, and reducing the number of required regulatory submissions and stress test exercises. One can argue about the details, but, overall, this does not look like a return to a pre-crisis free-for-all. There is no suggestion in the paper that capital requirements should be significantly lowered, though it does recommend that the capital surcharge for systemically important banks should be “reevaluated.”
The one worrying section, for a non-U.S. reader, concerns international standards, which should be accepted and implemented only if they “meet the needs of the U.S. financial system and the American people.” Exactly how the latter will be consulted on the calibration of risk weights in the Basel accord is not spelled out.
It is, nonetheless, hard to see why this document should have so rudely disturbed Fischer’s equipoise. Perhaps he was giving us a glimpse of more fundamental disagreements on financial regulation at the heart of the administration. Or perhaps the Fed itself fears that regulatory rationalisation is code for some cutback in its own responsibilities, which have been expanded remarkably since the crisis.
It would be unfortunate if the Fed’s opposition to change prevented a debate on whether, ten years on, every one of the changes made – often in a tearing hurry – make sense, both individually and collectively. After all, many changes in the competitive environment within which banks operate – new payment systems, peer-to-peer lenders, shadow banks, and the rest – require careful analysis and thought.
So the U.S. Treasury is surely right to open a debate. And it has done so in a thoughtful fashion. Central bankers should take care not to suggest that there is nothing to discuss, that nanny knows best and the children should not ask awkward questions, like “Why?” That was never a good way to persuade a teenage boy to keep his room tidy. It will not work for lawmakers or banks, either. - Project Syndicate