No pivot to the center for President Biden
President Biden’s chief of staff Ron Klain has a, shall we say, interesting take on last week’s election. The voters who chose Republican Glenn Youngkin as governor of Virginia and who came close to unseating incumbent Democrat Phil Murphy as governor of New Jersey want Democrats to “do more,” Klain told MSNBC. “And that’s what we’re doing,” he continued, “again, starting next Monday, signing the infrastructure bill, working with the House to pass the Build Back Better plan, which will help bring down inflation, bring down the cost of living, bring down people’s expenses.”
Leave aside the highly questionable claim that the “Build Back Better” legislation under negotiation on Capitol Hill will reduce inflation. Focus instead on Klain’s idea that the message of the off-year election wasn’t for Democrats in Washington to slam the brakes, but to hit the gas pedal. Klain is paid to put the best possible spin on the Biden administration’s depressing combination of incompetence and aloofness. Yet even he must recognize that the president and the national Democratic Party have become too closely identified in the minds of voters with the progressive left and its lack of constructive solutions to inflation, crime, the border, and education. Rather than double down on his bid for a “transformational” presidency, Biden has a chance to narrow his focus, prioritize, and address the issues of most concern to the suburban independents who next year will decide the fate of the House and Senate. It’s an opportunity he’s not taking.
Allow me to introduce, for example, Saule Omarova, the Beth and Marc Goldberg professor at Cornell Law School and senior fellow at the Berggruen Institute in Los Angeles. On the very day that voters across the country rejected the Democratic Party’s turn to the left, the White House officially nominated Professor Omarova to be comptroller of the currency. The comptroller is the nation’s chief banking regulator, supervising some 1,200 financial institutions of all shapes and sizes and, according to its website, “approximately 70 percent of banking activity in the country.” To hear the word comptroller is to picture a faceless bureaucrat, dutifully and routinely checking boxes to ensure the steady flow of capital in the economy. And yet President Biden wants to fill it with an activist intellectual who is—and I say this in the kindest way possible—a nut.
Omarova was born in Kazakhstan in 1966. She immigrated to America during her mid-20s. Senator Pat Toomey (R., Pa.), an early opponent of her nomination, has requested that she provide a copy of a thesis she wrote at Moscow State University, which she attended thanks to the Lenin Personal Academic Scholarship. The thesis is titled “Karl Marx’s Economic Analysis and the Theory of Revolution in Das Kapital.” Given the place (the Union of Soviet Socialist Republics) and circumstances (Gorbachev’s glasnost and perestroika) in which Omarova attended college, it’s reasonable to conclude that she adopted a favorable, if maybe slightly qualified, attitude toward both Marx and revolution. Then again, we can’t really say. Omarova has kept the paper to herself.
Toomey’s interest in Omarova’s intellectual background has led a few of her supporters to accuse him of bigotry and xenophobia. The charge is ridiculous. Toomey isn’t worried about the professor’s ancestry or country of origin. He’s opposed to her ideas. What’s striking is that immigrants from the former Soviet Union and its satellites tend to be viscerally anti-communist and anti-socialist: Having lived under totalitarian regimes, they are especially attuned to infringements of personal and economic liberty and are mindful of human-rights abuses conducted in the name of “People’s Republics.”
Professor Omarova didn’t get the memo. “Say what you will about old USSR,” she tweeted on March 31, 2019, “there was no gender pay gap there. Market doesn’t always ‘know best.'” Well, one can say a lot about “old USSR”—how it was a force for oppression and evil, for starters. To single out the fact that “there was no gender pay gap”—an assertion Omarova never backed up, probably because the pay gap is zero in the gulag—is to recall the old fellow-traveler line that Communist tyranny isn’t so bad because Cubans have “health care.”
When another Twitter user suggested Omarova might be out of her depth, she replied:
I never claimed women and men were treated absolutely equally in every facet of Soviet life. But people’s salaries were set (by the state) in a gender-blind manner. And all women got very generous maternity benefits. Both things are still a pipe dream in our society!
This is Joe Biden’s nominee for comptroller?
Toomey is not the only senator whose eyebrow is raised. Jon Tester of Montana, a Democrat, is also concerned. It’s not hard to see why. There is a connection between Omarova’s rosy view of the Soviet economy and her far-out plans for the United States.
Consider her 2020 paper, “The People’s Ledger: How to Democratize Money and Finance the Economy.” It offers, she says, “a blueprint for a comprehensive restructuring of the central bank balance sheet as the basis for redesigning the core architecture of modern finance.” She would like to subject the Federal Reserve, which these days has enough trouble keeping inflation in check, to a “series of structural reforms that would radically redefine the role of a central bank as the ultimate public platform for generating, modulating, and allocating financial resources in a democratic economy—the People’s Ledger.”
Like utopian socialists of old, Omarova “envisions the complete migration of demand deposit accounts to the Fed’s balance sheet.” She proposes a “comprehensive qualitative restructuring of the Fed’s investment portfolio, which would maximize its capacity to channel credit to productive uses in the nation’s economy.” Guess who gets to decide which uses are productive.
The result, Omarova concludes, would be a financial system that is “less complex” than it is today. Which I suppose is true, since a government monopoly is “less complex” than market competition. It also tends to be less efficient, less productive, less innovative, and less accountable to consumer demand. But hey—maternity benefits!
Anyone not immersed in and comfortable with the recondite buzzwords of the legal academy and radical left might read “The People’s Ledger” in mounting confusion and alarm as Omarova proclaims the virtues of wage and price controls, politicized credit, and expert control and planning of the commanding heights. It doesn’t take long for the paper to get into “the seas will be made of lemonade” territory, portraying for an economy of 330 million people integrated in a global economy of 8 billion a grandiose and completely unworkable “system” that is so rationalist and reductive it only could exist in the mind of an intellectual.
Since January, America has slowly awakened to the reality that it elected Joe Biden president only to be governed by Elizabeth Warren. As voters watched academic fashions spread destruction in classrooms, on the border, and in cities, they turned against the president and Democrats in general. Isn’t it in President Biden’s political interest—much less the country’s—to pull Saule Omarova’s nomination and recommend someone else, someone boring, for the job? And if the White House persists in its support for the good professor, can’t we agree that its tone-deafness and general wackiness has put it on a direct course for an electoral shellacking? In America, thank God, Omarova doesn’t rule. The people do.
The Republicans on the House Ways and Means Committee took another whack Thursday at a Biden Administration proposal to force banks to report to the IRS on their account holders’ private annual aggregate financial activity.
The administration has repeatedly pushed back against its critics who claim the initiative will lead to banks reporting individual transactions to the IRS. Opponents of the initiative say that no matter where the threshold for reporting is $600 as originally put forward or $10,000 as it is now, the reporting of aggregate data will still act as a trigger for more audits.
Experts in tax policy say that even at the $10,000 level, most Americans could still expect to have their private information turned over to the IRS. What the Biden Administration wants targets people who are not payroll wage earners, meaning tradesmen and women, independent contractors, farmers, and others who do not get paid a set wage every two weeks.
“Democrats’ IRS surveillance scheme is not about going after high earners and wealthy corporations, but instead is about going after working Americans and Main Street job creators — who Democrats assume are tax cheats,” the committee said in a release that also identified the top ten ways to get yourself surveilled by the IRS:
Despite the apparent levity of Thursday’s release, the issue remains serious. The government’s increasing desire to surveil private activity using the new technologies made available by Big Tech is worrisome. Privacy, as we have known it for most of our lives, may become outmoded yet there’s a practical side to this too.
The revenues needed to pay for Biden’s big government Socialist agenda aren’t there and the higher taxes included in the Bernie Biden budget resolution won’t generate them. under the current tax code. Remember, the latest analysis says the new spending and benefits included in their proposal is nearly twice as big as the $3.5 trillion over ten years is advertised as being. That’s a lot of money — and thinking you can find it by upping the number of audits is like saying it can be found between the couch cushions. The increased reporting to the IRS to trigger more audits exists primarily so the politicians who want to spend more money enlarging the welfare state can say it’s paid for. If instead, we fined politicians for telling lies, the budget would soon be balanced with plenty of money left over.
The following is adapted from John H. Cochrane’s remarks at the European Central Bank’s Conference on Monetary Policy: Bridging Science and Practice. His full presentation about the challenges facing central banks is here.
Central banks are rushing headlong into climate policy. This is a mistake. It will destroy central banks’ independence, their ability to fulfill their main missions to control inflation and stem financial crises, and people’s faith in their impartiality and technical competence. And it won’t help the climate.
In making this argument, I do not claim that climate change is fake or unimportant. None of the following comments reflect any argument with scientific fact. (I favor a uniform carbon tax in return for essentially no regulation, but this essay is not about carbon policy.)
The question is whether the European Central Bank (ECB), other central banks, or international institutions such as the International Monetary Fund, the Bank for International Settlements, and the Organization for Economic Co-operation and Development should appoint themselves to take on climate policy—or other important social, environmental, or political causes—without a clear mandate to do so from politically accountable leaders.
The Western world faces a crisis of trust in our institutions, a crisis fed by a not-inaccurate perception that the elites who run such institutions don’t know what they are doing, are politicized, and are going beyond the authority granted by accountable representatives.
Trust and independence must be earned by evident competence and institutional restraint. Yet central banks, not obviously competent to target inflation with interest rates; floundering to stop financial crisis by means other than wanton bailouts; and still not addressing obvious risks lying ahead; now want to be trusted to determine and implement their own climate change policy? (And next, likely, taking on inequality and social justice?)
We don’t want the agency that delivers drinking water to make a list of socially and environmentally favored businesses and start turning off the water to disfavored companies. Nor should central banks. They should provide liquidity, period.
But a popular movement wants all institutions of society to jump into the social and political goals of the moment, regardless of boring legalities. Those constraints, of course, are essential for a functioning democratic society, for functioning independent technocratic institutions, and incidentally for making durable progress on those same important social and political goals.
It’s Not About Risk
The European Central Bank and other institutions are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies—policies to force banks and private companies to defund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects.
Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that
[f]irst, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . . .
Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.
Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.
That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financialproblem.)
Next, we contemplate a pervasive regime essentially of shame, boycott, divest, and sanction
[to] link the eligibility of securities . . . as collateral in our refinancing operations to the disclosure regime of the issuing firms.
We know where “disclosure” leads. Now all companies that issue debt will be pressured to cut off disparaged investments and make whatever “green” investments the ECB is blessing.
Last, the ECB is urged to print money directly to fund green projects:
We should also consider reassessing the benchmark allocation of our private asset purchase programs. In the presence of market failures . . . the market by itself is not achieving efficient outcomes.
Now you may say, “Climate is a crisis. Central banks must pitch in and help the cause. They should just tell banks to stop lending to the evil fossil fuel companies, and print money and hand it out to worthy green projects.”
But central banks are not allowed to do this, and for very good reasons. A central bank in a democracy is not an all-purpose do-good agency, with authority to subsidize what it decides to be worthy, defund what it dislikes, and force banks and companies to do the same. A central bank, whose leaders do not regularly face voters, lives by an iron contract: freedom and independence so long as it stays within its limited and mandated powers.
The ECB in particular lives by a particularly delineated and limited mandate. For very good reasons, the ECB was not set up to decide which industries or regions need subsidizing and which should be scaled back, to direct bank investment across Europe, to set the price of bonds, or to print money to subsidize direct lending. These are intensely political acts. In a democracy, only elected representatives can take or commission such intensely political activities. If I take out the words “green,” the EU member states, and EU voters, would properly react with shock and outrage at this proposal. If the ECB bought different countries’ bonds at different prices and in different quantities to reward those making greater progress on “green” policy implementation, there would likely be an outcry.
That’s why this movement goes through the convolutions of pretending that defunding fossil fuels and subsidizing green projects—however desirable—has something to do with systemic risk, which it patently does not.
That’s why one must pretend to diagnose “market failures” to justify buying bonds at too high prices. By what objective measure are green bonds “mispriced” and markets “failing”? Why only green bonds? The ECB does not scan all asset markets for “mispriced” securities to buy and sell after determining the “right” prices.
Here are two interpretations of the ECB’s proposal:
One: we looked evenhandedly at all the risks to the financial system, and the most important financialrisk we came up with just happens to be climate.
Two: we want to get involved with climate policy. How can we shoehorn that desire into our limited mandate to pay attention to financial stability?
Who Gets the Green Light?
How should we judge the proposal? I think it’s pretty obvious that the latter interpretation is true—or at least that the vast majority of people reading the proposal will interpret it as such. Feeding this perception is the central omission of this speech: any concrete description of just how carbon sins will be measured.
At face value, “carbon emitting” does not mean just fossil fuel companies but cement manufacturers, aluminum producers, construction, agriculture, transport, and everything else. Will the carbon risk and defunding project really extend that far, in any sort of honest quantitative way? Or is “carbon emitting” just code for hounding the politically unpopular fossil fuel companies?
In the disclosure and bond buying project, who will decide what is a green project? Already, cost-benefit analysis—euros spent per ton of carbon, per degrees of temperature reduced, per euros of GDP increased—is lacking. By what process will the ECB avoid past follies such as switchgrass biofuel, corn ethanol, and high-speed trains to nowhere? How will it allow politically unpopular projects such as nuclear power, carbon capture, natural gas via fracking, residential zoning reform, and geoengineering ventures—which all, undeniably, scientifically, lower carbon and global temperatures—as well as adaptation projects that undeniably, scientifically, lower the impact on GDP? Well, clearly it won’t. The ECB is embarking on one specific kind of green policy, popular at the cocktail parties at Davos, but having little to do with cost-benefit analysis or science of climate policy.
In sum, where is the analysis for this program? I challenge the ECB to calculate how many degrees this bond buying plan would lower global temperatures, and how much it would raise GDP by the year 2100, in any transparent, verifiable, and credible way. Never mind the costs for now: where are the benefits?
And how would the ECB resist political pressure to subsidize all sorts of boondoggles? If the central bank does not have and disclose neutral technical competence at making this sort of calculation, the project will be perceived as simply made-up numbers to advance a political cause. All of the central bank’s activities will then be tainted by association.
This will end badly. Not because these policies are wrong, but because they are intensely political, and they make a mockery of the central bank’s limited mandates. If this continues, the next ECB presidential appointment will be all about climate policy: who gets the subsidized green lending, who is defunded, what the next set of causes is to be, and not interest rates and financial stability. Board appointments will become champions for each country’s desired subsidies. Countries and industries that lose out will object. This is exactly the sort of institutional aggrandizement that prompted Brexit.
If the ECB crosses this second Rubicon—buying sovereign and corporate debt was the first—be ready for more. The IMF is already pushing redistribution. The US Federal Reserve, though it has so far stayed away from climate policy, is rushing into “inclusive” employment and racial justice. There are many problems in the world. Once you start trying to shape climate policy, and so obviously break all the rules to do it, how can you resist the clamor to defund, disclose, and subsidize the rest? How will you resist demands to take up regional development, prop up dying industries, subsidize politicians’ pet projects, and all the other sins that the ECB is explicitly enjoined from committing?
A central bank that so blatantly breaks its mandates must lose its independence, its authority, and people’s trust in its objectivity and technical competence to fight inflation and deflation, regulate banks, and stop financial crises.
A Narrow Role, and Essential
Working for a central bank is a bit boring. One may feel a longing to do something that feels more important, that helps the world in its big causes. One may feel longing for the approval of the Davos smart set. Why does Greta Thunberg get all the attention? But a central bank is not the Gates Foundation, which can spend its money any way it likes. This is taxpayers’ money, and regulations use force to transfer wealth between very unwilling people. A central bank is a government agency, and central bankers are public servants, just like the people who run the DMV.
Central banks must be competent, trusted, narrow, independent, and boring. A good strategy review will refocus central banks on their core narrow mission and let the other institutions of society address big political causes. Boring as that may be.
The Wuhan Flu’s impact on the U.S. economy is self-evident — and not just because we’ve seen three years’ worth of stock market gains wiped out in three weeks’ time. There’s a human cost, not just for the people who’ve become sick and for those who didn’t recover but for everyone whose life has been turned upside down.
Congress and President Donald Trump have thus far managed to enact several economic stimulus proposals, none of which have been perfect but all of which have been necessary. That process stopped over the weekend when House Speaker Nancy Pelosi’s demanded — and Senate Democrats bowed to her wishes — that every item on her party’s wish list be included in the latest package.
That fight may be resolved, or everything may freeze where it is. What that means, as the global pandemic spreads and we work out what to do, is uncertain. The already approved plan to move Tax Day to July 15 is a winner. So is the proposal to suspend payroll tax collection through the end of the year, retroactive to March 1. That plan, authored by Steve Forbes, Art Laffer, and Stephen Moore would give business a temporary but immediate 7.5 percent reduction in the cost of each worker and give each worker a temporary but immediate 7.5 percent increase in pay.
The big issue for many, especially those in the upwardly mobile middle class, is the burden imposed by home mortgages. For most families it’s their single biggest expense each month. And if one or both parents aren’t working because their workplace has been shuttered as part of government-mandated efforts to slow the spread of COVID-19, lots of people may be thinking they might lose their homes.
That’s a fear the Washington politicians must face head-on. This probably means some form of forbearance for homeowners by taking actions to persuade mortgage providers to allow a reduction or temporary halt in monthly mortgage payments.
To lessen such a burden for needy Americans, any attempt to do this must also ensure continued liquidity for certain companies that lend to borrowers, through no fault of their own, most in danger of financial collapse. A consumer level pause on mortgage payments does not, however, alleviate of lenders the requirement they pay what is owed to those underwriting the mortgages in the first place.
For the so-called big banks, forbearance would likely not pose any real short term risk. Thanks to Dodd-Frank, they’re sitting on huge capital reserves that can be leveraged against any cash-flow concerns a temporary lull in payments might create.
This would be a huge step, many would say in the wrong direction, especially if the government or the Federal Reserve ordered the big banks to do it. That’s in part because nearly half of all mortgages are now held by what are called non-depository lenders.
There are lots of reasons for this. One is convenience. Another is the big banks’ increasing unwillingness to play in the mortgage market. And some credit-worthy applicants are simply unable to meet the mandatory threshold for credit, income, and/or other factors necessary and must go elsewhere.
Non-depository institutions accept applicants whose circumstance impose a slightly higher risk. Their mortgages are made available to those buying a first house, providing for children in a single-parent home, and veterans returning from active combat and transitioning back into civilian life.
These lenders, which include firms like AmeriSave, Reali Loans, and Freedom Mortgage, provide mortgages to Americans who would benefit most from forbearance as the jobs in their sectors of the economy are most at risk in the slowdown the pandemic has triggered. Unfortunately, these lenders do not have the same degree of liquidity as the big banks and would be disproportionately affected by a mortgage payment moratorium.
If lenders are ordered to offer forbearance as a form of financial support to borrowers, as many expect Congress will do in one form or another, then additional liquidity for non-depository lenders must be provided alongside what the big banks will receive.
It’s undeniable things have improved for lenders and consumers since the sub-prime mortgage crisis almost took the U.S. economy down in 2007. Still, that led to a bailout of a size and scope we should not routinize, even if the funds were mostly paid back. This time big banks may be hoping to recoup their losses by scarfing up assets of failed non-depository lenders that crash once their income stream stops. The “big boys and girls” should look elsewhere, perhaps to the overages on their balance sheets, and Congress should make sure this happens.
The choice of rates and options provided by the big banks’ competitors is a net positive for consumers and the overall economy. Forcing their collapse while saving the name-brand institutions who’ve already been bailed out once would be a major mistake.
by Horace Cooper
Much has been written about the over-reach of Dodd-Frank and the drag that law and its progeny will have on the financial services sector, the economic recovery, and job creation. Evidence continues to mount that the specter of over-regulation is crowding out free market solutions and restricting credit in the markets. Worse, the negative effects of government interference in the financial services industry extend well beyond large commercial banks deemed “too big to fail.” A case in point is credit unions.
Credit unions serve an important source of credit for consumers and small businesses. Historically this has been especially true during economic downturns, when the banking industry either tightened or in other ways limited credit. Continue reading