Jacquelyn Martin/AP Photo
Federal Reserve Chair Jerome Powell speaks during a news conference, February 1, 2023, at the Federal Reserve Board in Washington.
Jay Powell has had great and pernicious influence in persuading his colleagues to support his perverse tight-money policy. But Powell’s Achilles’ heel turns out to be his indulgent stance on regulatory policy, and the connection between the two Fed realms.
If Powell was going to sharply and repeatedly hike interest rates, he needed to pay very close attention to how this would affect bank balance sheets. Not only did he fail to do that; he was a prime mover behind the serial regulatory weakenings that allowed fast-growing regional banks like Silicon Valley Bank to speculate themselves into deep trouble.
Now the Fed is in high damage control mode—control of the damage to the nation’s banking system and to Powell’s own rapidly declining reputation and influence in his own house. Three of the six current Fed governors are now Democrats appointed by President Biden—Michael Barr, the vice chair for supervision; Lisa Cook; and Philip Jefferson.
Powell is desperately trying to keep control of the Fed’s internal investigation, to whitewash the Fed’s blunders and his own role. The other members of the Fed board should be less concerned about helping to save Powell’s neck and more about redeeming a badly failed institution.
When the sainted Fed chair Paul Volcker lost his working majority on the Fed Board of Governors in 1987, he resigned, at 59, and with several years to go in his term. It could happen to Powell.
Paradoxically, if Biden had not moved Fed governor Lael Brainard to the White House as director of the National Economic Council, that would have left one more Fed governor who is very much a regulatory hawk. Brainard opposed the Trump legislation to weaken standards for midsized banks like SVB that Powell not only supported but went beyond.
But because of the current banking crisis, we are probably better off having Brainard at the White House as a senior counterweight to Powell. Unless the president had a crystal ball, this was not likely on Biden’s mind when he made the appointment, but it was providential.
The White House also will soon be nominating Brainard’s successor. Among the names prominently leaked is Janice Eberly. She is a former aide to Tim Geithner, whose policies helped bring us the last financial meltdown and prolonged the aftermath by giving priority to propping up the biggest banks with no real penalties, rather than reviving the real economy.
Eberly’s name should be off the table. Instead, how about William Spriggs, chief economist of the AFL-CIO and professor and former chair of the Howard University Economics Department. (Spriggs also serves on the Prospect’s board of directors.)
Meanwhile, Elizabeth Warren is leading calls for a thorough investigation of Powell. She has sent the beleaguered Fed chair a scathing ten-page letter, with 11 detailed questions. Among them:
- Will you commit to reimplementing the rules that you rolled back? If so, what is your timeline?
- Have you reviewed the supervisory efforts of the [San Francisco] Fed? Do you agree that failures in the supervisory process helped create the conditions that ultimately resulted in the collapse of SVB and the threat of contagion posed by that collapse?
- Do you believe the conflict of interest posed by former SVB CEO Gregory Becker’s role on the Board of Directors may have played a role in the [San Francisco] Fed’s supervision of SVB?
- Will you commit to full recusal from the Fed’s internal review of the regulation and supervision of SVB?
Powell has met his match. Don’t expect him to cooperate. Let’s see whether other public officials have Warren’s combination of deep knowledge, principle, and gumption.
