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Sarah Bloom Raskin, seen during her tenure as Deputy Secretary of the Treasury
Sarah Bloom Raskin served as a governor of the Federal Reserve from 2010 to 2014, where she championed the need to protect consumers, rein in financial abuses, and address inequality. She went on to serve as Deputy Treasury Secretary for the remainder of Obama’s second term. Raskin combines progressive values with an astute technical knowledge of both institutions. In a progressive Democratic administration, she would be on a short list to serve either as Treasury Secretary or chair of the Federal Reserve. Before being appointed to the Fed by President Obama, Raskin served as chief financial regulator of the state of Maryland. She is currently a fellow at Duke University working on financial regulation, and has also taught at Stanford and the University of Maryland. Raskin spoke with Prospect Co-Editor Robert Kuttner about issues in the CARES program and the Fed’s bailout of capital markets. This is a lightly edited transcript of their conversation.
Robert Kuttner: What concerns you about the long-term consequences of these emergency measures undertaken by the Federal Reserve and the $2.2 trillion CARES legislation once the crisis is behind us?
Sarah Bloom Raskin: We are in the midst of a massive restructuring of the economy. It might be hard to see because of the pandemic, but the actions taken by the Federal Reserve and by Congress in the CARES Act will have profound consequences for the economic landscape—both in terms of economic concentration and inequality. As we’ve seen in responses to other economic crises, a stark divide is showing up between buoyant sentiments in financial markets and impoverished economic conditions on the ground. That’s never a good formula for inclusive recovery.
The Federal Reserve is going to have a $9 trillion balance sheet, presumably by the end of the year. This is unprecedented. So we have to understand the consequences—first, in terms of this size. Has the Fed itself become a direct market participant? But also in terms of the substance of its holdings. What exactly does the $9 trillion portfolio consist of?
With the Fed’s latest decision to purchase and take as collateral new categories of risky assets—namely less than investment grade—these policies could effect a major transfer of wealth to holders of junk bonds and other risky asset classes. So there’s this initial transfer of wealth, which in extreme could look like a dumping onto the Fed’s balance sheet of risky and unsustainable debt from firms that made poor investment decisions. Are we going to think about paying for these private blunders as a necessary by-product of an otherwise prudent liquidity facility? Or is it some backdoor attempt to saddle the American people with other people’s bad assets? Or is it a new privatized bypass to the bankruptcy code?
And then there’s the question of how this huge acquisition by the Federal Reserve gets unwound. Will it be sold quickly, which could cause new disruption, but at least would indicate that the purchase was an attempt to ease a temporary market dislocation rather than provide a bailout? For assets that are not going to be sold off the Fed’s balance sheet, have they been chosen with some objective criteria related to their long-term ability to revive the economy? Think about oil and gas as an example. If the Fed buys up fossil fuel debt and holds on to it, how much is this debt likely to be worth later when the Fed decides to sell it? And then, will there be oversight over these mechanics, as also seems necessary to assure that the process isn’t corrupted and isn’t simply rewarding the politically connected? To what extent has the Fed become the cover for decisions that properly belong to elected representatives in a properly functioning democracy?
RK: The speculators had a field day and now they have all these junk securities that the Fed is going to take off their hands. Yet if we just let them sink, that could drag down the whole economy. What should we do about this on the other end? What’s the remedy looking at this a year down the road?
SBR: Right now, the financial fire hoses are turned on full blast and the dollars are spraying everywhere. Not only are we not yet certain that the relief is landing with the intended beneficiaries, but at this moment no one seems ready to be thinking about the potential damage of this approach. We’re thinking “put out the pandemic,” but at some point policymakers are going to have to pivot in their thinking towards the long-term consequences of their decisions.
The Federal Reserve made an explicit decision to go below investment grade in the securities it is buying. And as you know, investment grade itself doesn’t mean Triple A. Investment grade goes as low as Triple B. So what we now see will be purchases of securities that are less than Triple B. When the books get written on the response to this crisis—as they inevitably will—we will all see that very early into this crisis, the Fed went below Triple B. Already you’re seeing headlines like this: “Borrowers Look to Raise More Than $2 Billion in Test of Appetite for Junk Issuers.” You’re going to start seeing that the Federal Reserve has in essence created a floor beneath which valuations cannot fall.
Query, Bob: Why did this need to be done at this moment? Are we saying that we don’t have enough market players to buy up less than investment-grade securities?
There are plenty of vulture funds out there. In fact, there’s a pretty robust set of market participants who don’t mind buying up junk. I’m not saying that this is a condition that the Federal Reserve should have never considered loosening, but did we really have to loosen it this week? Of course, this brings us right to the absence of accountability in this decision-making. The inspector general was fired and the oversight board has not been put in place. Even so, on the accountability front, I think there are some things that could be done even with the current law.
First of all, there is the issue of transparency. The CARES Act says that the Fed needs to report every 30 days on the amount of lending that they’re doing. That’s a start, but it turns out that the requirement has a loophole. The Fed has discretion to withhold the names of the borrowers as well as significant terms. Maybe at this moment it would not make any sense for the Fed to exercise that discretion. There is no reason why Congress and the American people cannot know who those borrowers are, the terms of their loans, the kind of repayment, the interest rate, and what kind of collateral is being taken.
RK: What if the Fed just says, “Sorry, we’re not going to do that”?
SBR: Well, let’s try and get ahead of that. Let’s evaluate arguments as to why it’s important for the Fed to disclose that information to Congress and the American people.
RK: What are the other two ideas?
SBR: Well secondly, we need to know more about the relationship that the Federal Reserve and Treasury are entering into with outside investment firms to run these credit facilities. Major financial firms including BlackRock, PIMCO, and State Street are all going to become agents of the Fed, which is hiring them to implement these programs.
Can we see what the terms are of these arrangements? I think we should know how much they’re being paid and what the deliverables are, as well as have the right to see their invoices. It’s not just for reasons of conflict of interest; they are likely already disclosing that they’ve created walls to separate other parts of their businesses that are doing similar things. But in addition, deploying powerful market players can have ramifications as decision-making moves further outside the realm of democratic accountability, the consequences of which may be felt for years.
Then there is the third thing. The special inspector general who’s supposed to be part of the accountability mechanism pursuant to the CARES Act was fired from that role. But that doesn’t mean that the work of the Congressional Oversight Panel can’t begin. While many people who are not on the front lines fighting the pandemic are homebound, let’s start having online hearings every week, where the American people can hear testimony from the Federal Reserve and Treasury, or their agents, BlackRock, State Street, PIMCO, and have them explain what decisions are getting made in real time. It’s an imperfect solution, but it needs to move ahead.
RK: Everything you’re suggesting would be enormously helpful. It also seems to me that Trump and the Fed can find ways to wriggle out of this. With 22 million people seeking unemployment assistance and the SBA program out of funds, Congress will surely pass more relief packages. We’re going to see a lot of pressure from corporate America via Mitch McConnell to get the Democrats to go along with more bailout. That’s playing out this week. If you were advising Nancy Pelosi how to play this, you would take those three ideas and lock them into statute as part of this deal?
SBR: Yes, providing for explicit accountability would be clearly better.
In addition, let’s not forget that there was a pre-pandemic fragility of government that this is all getting built on. We often forget what the environment looked like pre-pandemic, but significant parts of government have been demolished or hollowed out.
Part of the problem in getting relief money out the door quickly is that parts of the federal government’s infrastructure have been cut to the bone. I was thinking about this last week when I woke up in the middle of the night and realized: “The flags; they’re going to forget the flags at Treasury.” We’re all having these COVID-inspired dreams these days, but mine, lately, have a policy twist. Before Treasury makes a direct cash payment, they can put a “flag” on it. A “flag” in this context is just a piece of computer code that tells the banks that this money must go to the recipient directly and cannot be diverted to a debt collector or for bank overdrafts. Normally, the debt collectors have garnishment orders that they put on people’s accounts, and the banks have to heed those orders, unless Treasury puts on the flag.
Lo and behold, the part of Treasury that cuts these checks—the Fiscal Service—historically a talented and able group—is riddled with vacancies, unfilled positions not just at the political level, but critical vacancies at the career level. The career staff people are there administration after administration. They know how everything works, where everything is. They would remember to do the flags. They had retired, and not been replaced. In fact, Treasury is now trying to get these talented career professionals back on the job. Again, a little late. But this goes to my point that the government has been looked at as a liability, a cost center. The administration’s view is that we have to shrink it, make it more “efficient,” but that just means more malleable and vulnerable. Guess what: Government is an investment, and the failure to invest in these people and these resources has profound consequences which are vivid now.
RK: Our colleague David Dayen, who has been doing a lot of reporting on this, found that Treasury’s refusal to require flags was deliberate. They do allow debt collectors to get those checks.
SBR: Right. And now we’re hearing the reports of people who are expecting $1,200 and getting maybe half of that. You demolish the government servants and allow private agendas to control what government does.
RK: The Democrats ought to have a list of ten or more fixes that have to be in the next law, including the three you mentioned, so that it’s mandatory rather than urging the Fed to do it out of the goodness of its heart.
SBR: That’s right. It’s hugely challenging legislating in the midst of a crisis, and language is bound to be imperfect. The problem, though, is not turning the faucets, it’s the plumbing. It’s not just the cash, it’s getting the cash to the recipients and getting oversight over that process. The plumbing is clogged. It’s not really Congress’s role to be the implementer of the laws, that’s the role of the executive branch. But you see what happens when you let the investment in that implementation wither away. When it collapses, you can’t do things.
RK: The aid is not reaching the people who need it. What might be more direct ways of getting money to unemployed people and small businesses—without middlemen, with more a direct government role, whether that’s the Fed, the IRS, or whoever? Entering a credit on the account of an individual or a business is not that difficult. The IRS cuts tens of millions of EITC checks. The Fed could also do this. Instead, we’ve got this convoluted process in an urgent situation. What would you suggest as a more efficient way of doing this?
SBR: Let’s talk about the money that was earmarked for small businesses. It was good policy to tie this money as forgivable loans to firms holding on to employees. That was a smart feature. Unfortunately, the website of the Small Business Administration is notoriously the most crashable website out there. Even pre-pandemic, businesses could barely rely on that website. Now, when the SBA is having to ramp it up one-hundred-fold, guess what? It’s not working. This rollout problem was compounded by the banks not quite knowing what the rules of the road were with the Paycheck Protection Program, adding to the confusion regarding how people apply. It was a major debacle in terms of early implementation.
RK: In the meantime, is there a better way of getting that cash out the door than relying on the banks who don’t even see this as a big profit center, who are nervous that they are going to be held liable for bank secrecy or the Foreign Corrupt Practices Act, or somebody who cheats down the road, then the government goes after them after the fact. They’ve spent a lot of time negotiating with the Treasury over whether they’d be held harmless. The compromise on that as I understand it was the rule that you have to have a preexisting relationship as a creditor, not just a preexisting bank relationship. In the meantime, until we fix the plumbing, is there a better way of getting this money out using the Fed, the IRS, or somebody?
SBR: There was a sliver of time to get this right. It was a hard goal to meet, but early on I was optimistic that getting funding out the door ahead of all the unemployment would have mitigated some of the harm. In other words, if Treasury and the SBA had gotten money into the pockets of small businesses as well as individuals, we might have cushioned the blow, and mitigated the possibility that firms would have to lay off people. But of course that sliver of time was lost.
I’m a little more pessimistic about what could happen now. You’ve seen the unemployment numbers, you’ve also seen in the various 50 states people stand in a virtual line trying to get some assistance out of the unemployment offices. What could’ve been done was to have the payrolls directly taken over by the Treasury, so that you bypass all these intermediaries and just have Treasury handle payrolls. It’s massive, but that could have potentially been a quick solution which would have permitted us to stay in front of layoffs that have just overwhelmed the economy now. Now there’s the possibility that this downturn will be flat for a long time.
RK: What kind of staffing up, with what sort of expertise?
SBR: Treasury could look to the considerable talent that remains in the Office of the Fiscal Service. Again, these are the people that do all of the payments, the Social Security checks, the VA benefits. They’re the disbursers of funds, they don’t make the policy decisions about how much or to whom, they are the implementers. That team could work with the IRS team because the IRS also has good expertise on how to engage in disbursements. There might also have been a role for the major payroll companies. ADP is a major payroll processor, and the government looks at ADP numbers for labor statistics. In the pre-pandemic days, when government wanted to get a preview of what’s going on in labor markets it would look at payroll numbers from ADP. What if you could have had the ADP send Treasury its payroll information and let Treasury use the information to make the payments?
RK: What a wonderful reversal that ADP would outsource to the Treasury rather than the Treasury outsourcing to ADP!
SBR: The devil would be in the details. With earlier planning into contingencies there could have been other models developed to do this.
RK: Their default setting is to have the private sector do it. But the banks don’t want to do it; their lawyers are very nervous about what liability they’re incurring if someone makes fraudulent applications about loans; so it gets bureaucratized in the private sector.
Let’s come back to the question of how this ends, when the Fed has $9 trillion on its balance sheet and a lot of it is junk. Let’s assume you’re Treasury Secretary or chair of the Fed. What does this unwinding look like and what are the right policies to pursue?
SBR: Well, first of all, I would like to see the next generation of economic policymakers inheriting a balance sheet that was constructed with an eye to sustainable value, one representative of an economy that has been revived and brought back as resilient and inclusive. There is significant opportunity in this dark moment to be setting up the American economy to be stronger than it has been, much more resilient in downturns, shocks, pandemics, and climate emergencies. We are in a portal—a gateway—that is going to lead us to a new awareness of what inclusive prosperity can mean. I hope we can walk through it with new ideas about what is possible.
But your question goes to the Fed’s balance sheet in particular. In terms of unwinding it without incurring a loss, it strikes me that the Fed’s balance sheet is going to be with us for decades. Think about how long it took to even begin to unwind the balance sheet from the 2008 financial crisis. In fact, it wasn’t even completely unwound before this new crisis occurred, and it was a lot smaller than what this new Fed balance sheet is going to look like. So it will be extraordinarily challenging to take a lot of these purchases that the Fed has made, and sell them with no loss and without market disruption. Now it’s possible that the loans will get repaid at some point in time, but it’s hard to know because we don’t know the terms.
RK: Let’s assume that it has to stay on the Fed’s balance sheet for a long while. In the meantime, some of the worst players in the national economy who made bad bets over the past ten years have succeeded in dumping liabilities onto the Fed. What do we do about that? What do we do about private equity? What do we do about junk bonds? What do we do about all the bad stuff that was never really expunged because Dodd-Frank was not done properly in the first instance, and then the Dodd-Frank regulations were gutted. Some of this is under the heading of closing the barn door after the horse gets out, but at least the next horse won’t get out next time if we do it right. Leaving aside the balance sheet question, what do you do to prevent these abuses from occurring all over again?
SBR: Consider the 2008 financial crisis. The crisis occurs and you do reforms in terms of regulation that is focused on banks. Now what you have—at least right now—is less of a financial crisis and more of a capital markets crisis. When the pandemic is behind us, the Fed will be supporting these asset classes without explicit oversight; there will be a mismatch between what the Fed owns and what it understands. The big question is what kind of economic policies come next in terms of an economy and society that demands cohesion and common purpose in order to revive sustainably.
RK: Are there people at the Fed, somewhere in the Fed system, who appreciate this and are trying to at least get a handle on what it is they are doing and not spray this in quite such a scattershot way?
They actually did put some conditions on Wells, which wanted to use the crisis as a pretext for getting the Fed to lift the cap on its size. And the Fed did not relax Wells’s conditions.
SBR: Yes. Many Fed employees stay there for their careers so have the longevity to understand that there were lessons learned.
RK: The fact that Fed Chair Jerome Powell was persuaded to hang tough on Wells is encouraging. But you could probably put in a small room the number of people who have the expertise, the influence, and the political sensibilities to be alert to these issues.
SBR: Yes, this is far removed from the kind of disclosure and transparency that Americans crave right now. I always hold out hope for educating and demystifying the work involved in creating an economy that should be working for everyone. We need to put public values and the public interest at the center of rescuing the economy.
