Mark Schiefelbein/AP Photo
Federal Reserve Board Chair Jerome Powell prepares for his appearance before the House Financial Services Committee on Capitol Hill, March 6, 2024, in Washington.
Who is President Biden’s worst appointee? It isn’t even close. That would be Jerome “Jay” Powell, appointed as Fed chair by Trump in 2018. Biden reappointed Powell in February 2022.
Why reappoint a former private equity operator and Trump favorite to one of the most powerful posts in government? Biden liked the idea of appearing bipartisan. Powell also persuaded Biden that he favored low interest rates.
We all know how that worked out. Misjudging the inflation caused by supply shocks, Powell led the Fed to raise rates eight times and still hasn’t cut them.
But even worse than Powell’s reversal on monetary policy have been his ongoing efforts at the Fed to undermine bank regulation, leading to the failure of Silicon Valley Bank and other banks. Details are in this report by Better Markets.
This week, Powell went public with his behind-the-scenes efforts to sabotage a critically important rule, issued in draft form by the Fed and other banking agencies last July, to require large banks with $100 billion or more in assets to hold more capital as reserves against losses. The rule is the final step in the international effort known as the Basel III process that began after the financial collapse of 2008, to both strengthen and better align the bank regulations of different nations.
When the proposed rule was issued, Powell joined the Fed’s Democratic governors in support; the two Republican governors were in opposition. Powell issued a statement ostensibly in support of the rule, but his words read more like a statement of misgivings. His comments virtually coached industry critics on which holes to poke in the draft rule.
In his semiannual testimony before the House Financial Services Committee Wednesday and the Senate Banking Committee Thursday, Powell came out of the closet, walked back his previous nominal support for the rule, and vowed to make “broad and material changes” to water down the rule. Dissembling about the fact that he has only one vote, Powell took for granted that he would bring others at the Fed with him, and isolate Fed Vice Chair for Supervision Michael Barr, the architect of the strong draft rule.
This represents a victory for the biggest banks, which have been waging a massive PR and lobbying campaign claiming the higher bank capital standards will reduce lending and be bad for small businesses. In fact, the standards would reduce bank speculative activities and modestly cut into exorbitant bank profits and executive bonuses.
Powell’s strategy is to slow-walk issuance of the final rule, which he told the Senate Banking Committee could be completed by the end of 2024. The premise is that more research or deliberation is necessary, but that is a smoke screen for gutting the measure or letting it die entirely. The final rule should be issued now.
It fell to Sen. Elizabeth Warren to call out Powell on his hypocrisy. A year ago, she reminded Powell, “You talked a lot about getting tougher on the banks, but now the giant banks are unhappy about that, and you’ve gone weak-kneed on this.”
As it happens, Powell’s timing is terrible. New York Community Bank, which grew rapidly by recklessly acquiring other banks, is now on the verge of going broke. In 2022, NYCB more than doubled its size, acquiring Flagstar Bancorp and parts of failed Signature Bank, raising its total assets above the $100 billion threshold. Had a stronger capital rule been in effect, NYCB would have had to proceed more prudently.
For the moment, NYCB has been kept afloat by an infusion of a billion dollars in cash—in other words, capital—by a group led by Trump’s former Treasury secretary, Steve Mnuchin. More capital was needed before the bank’s speculative tailspin, not after.
The symmetry of players and their plays is all too perfect. Goldman Sachs veteran Mnuchin and former private equity operator Powell are part of the same Wall Street gang that has been letting banks run wild, in order to pump up the income of their cronies.
In this case, Mnuchin’s private bailout may or may not save the bank. If Powell succeeds in eviscerating the capital rule, there will be more public bank bailouts.
