Tom Williams/CQ Roll Call via AP Images
Treasury Secretary Janet Yellen testifies during a House Financial Services Committee hearing, December 1, 2021.
In 2013, progressives cheered when key senators blocked President Obama’s likely appointment of Larry Summers to chair the Fed, in favor of Janet Yellen. She was not just the first woman to chair the central bank, but also the first labor economist and the only liberal Fed chair since Marriner Eccles in the Roosevelt era.
Yellen, unlike most Fed chairs, honored the Fed’s “dual mandate” to pursue full employment as well as price stability. When Joe Biden turned to Yellen as his Treasury secretary, she seemed the ideal candidate.
That was then. It’s been a long way down. Janet Yellen has turned out to be the big disappointment of the Biden administration.
During her years at the Fed, Yellen increasingly took on the outlook of the institution—willing to support the economy with large bond purchases, but overly friendly to the financial industry. Between 2018, when she left the Fed, and 2020, Yellen took over $7 million in speaking fees from financial companies such as Barclays, Citigroup, Goldman Sachs, and Citadel.
When she moved to the Treasury, Yellen not only brought with her a Fed outlook. She also brought over several career Fed officials. Critics inside and outside the administration refer to Yellen’s “Fedification” of the Treasury.
The most powerful and conservative of these is Nellie Liang, whose title is Under Secretary for Domestic Finance. But that understates Liang’s role. On financial regulatory issues, Liang is de facto secretary. Never has the adage been truer that personnel is policy.
The Fed is an independent agency. The Treasury secretary is part of the president’s Cabinet. But Yellen continues to view herself as an independent player, much as she did at the Fed, and resists anything that seems partisan or political. This sensibility, of course, gives her a profound status-quo bias, since all of the regulatory decisions or non-decisions made by Treasury are nothing if not political. The mentality is reinforced by Liang and the other top policymakers Yellen has brought with her from the Fed.
IN 2010, CONGRESS PASSED the Dodd-Frank Act to prevent a recurrence of the abuses that led to the 2008 financial collapse. Arguably, the most important single concept in Dodd-Frank is the idea that both banks and non-banks that are “too big to fail” (and thus would be bailed out in a crisis) need to be more carefully monitored and regulated. In the great bailout of 2008–2009, the Treasury and Fed spent or lent trillions to rescue lightly regulated investment banks and insurance companies such as AIG, whose impending collapse risked taking down the system.
It was the Obama Treasury, under Secretary Tim Geithner and Assistant Secretary Michael Barr, that drafted most of what became Dodd-Frank. Not surprisingly, the new law concentrated authority in the Treasury.
Dodd-Frank’s key mechanism for increased monitoring and discipline is the Financial Stability Oversight Council (FSOC), which is chaired by the Treasury secretary and includes heads of nine other key financial regulatory agencies. The idea is to coordinate financial regulation across the government and prevent what’s called “regulatory arbitrage”—bankers finding ways to play off one regulator against another and to slip between the cracks.
Among FSOC’s key responsibilities is to identify “systemically important financial institutions” (SIFIs) that would pose serious risks if they collapsed. A non-bank designated as a SIFI is subjected to tougher regulatory requirements, such as higher capital requirements, periodic stress tests, and so-called “living wills” that provide plans to wind down operations in cases of losses without triggering a financial crisis. A SIFI displaying signs of financial stress can be required to suspend dividend payments, forgo share repurchases, or raise additional capital. Needless to say, financial institutions resist this designation.
In December 2019, Trump’s Treasury secretary Steve Mnuchin, formerly of Goldman Sachs, issued new Treasury guidelines supposedly changing the SIFI criteria from identifying institutions to identifying “activities.” This was a transparent ploy to prevent any new SIFI designations. Mnuchin had already removed three non-bank SIFIs that had been designated by the Obama Treasury—AIG, MetLife, and Prudential—and raised the SIFI threshold for banks from $50 billion to $250 billion. As a result, today there are no non-bank SIFIs.
Yellen has the power to reverse Mnuchin’s guidelines, which do not require a formal rulemaking. But despite pleas from dozens of consumer groups and other regulators, she has not done so. This inaction also reflects the priorities of Nellie Liang, whose division has responsibility for FSOC.
Yellen continues to view herself as an independent player, much as she did at the Fed, and resists anything that seems partisan or political.
On January 24, 30 groups sent Yellen a formal letter requesting Yellen to act. The groups included Americans for Financial Reform, Better Markets, Center for American Progress, Consumer Federation of America, Open Markets Institute, Public Citizen, and the Revolving Door Project.
The letter pointed out that in 2019, Yellen as a private citizen had joined former Fed chair Ben Bernanke and former Treasury secretaries Jack Lew and Tim Geithner, warning Mnuchin that his guidelines “make it impossible to prevent the build-up of risk in financial institutions whose failure would threaten the stability of the system as a whole.”
The public-interest groups received no response to their letter. I asked Yellen’s office for a comment, and did not get a reply.
Another key part of the Dodd-Frank Act intended to prevent systemic risks before they become critical was the creation of a new Office of Financial Research, also lodged at the Treasury. The idea was that Treasury researchers could take a deep look at new financial techniques such as cryptocurrencies, non-bank fintech players, and other hybrids that blur banks and non-banks and create risks requiring remedies. OFR was intended to be the research arm of FSOC. This was also neutered by the Trump Treasury, and not revived by Yellen or Liang.
Trump’s Treasury cut OFR staffing by 40 percent, from 214 authorized positions to 128. Its research output dropped from 27 reports in Obama’s last year to just seven in 2021. Even worse, the Trump appointee to head the office is still in place. He is Dino Falaschetti, a far-right economist who was head of the Mercatus Center at George Mason University.
One of the best things about Biden is the quality and vigor of his regulatory appointees. But because of Yellen’s institutional and ideological conservatism when it comes to regulating finance, the administration is badly divided between the more assertive regulators—Gary Gensler at the SEC, Rohit Chopra at CFPB, Lina Khan at the FTC, Martin Gruenberg at the FDIC—and Yellen’s Treasury and her more conservative allies, such as yet another career Fed official, Michael Hsu, whom Yellen picked to lead the Office of the Comptroller of the Currency.
Not long into Hsu’s tenure, last December, there was a public confrontation between Hsu and the two liberals on the board of the FDIC, on which Hsu sits, over whether Hsu would side with the FDIC’s holdover Trump-appointed chair or the liberals on a proposal to seek tighter regulation of bank mergers. Hsu initially supported the idea, then backpedaled when the Republican chair, Jelena McWilliams, opposed it. But after McWilliams found that the law was not on her side, she abruptly resigned, leaving Gruenberg, a progressive, as acting and presumably long-term FDIC chair. But Hsu remains an uncertain ally of robust regulation.
Yellen has also rankled the more progressive senior staff at the White House. In most cases, the naming of top subcabinet officials is a matter of negotiation between the Cabinet official and the White House staff. According to my reporting, Yellen has had a freer hand than most.
Though Yellen’s regulatory agenda is far from that of most Biden appointees, some of Biden’s closest-in longtime staffers, such as Mike Donilon and Steve Ricchetti, are said to value her as a reassuring figure for financial markets in a time of crisis. This gives Yellen leverage for her premise that she functions as a free spirit. Nor is there anyone on the White House senior staff for whom financial regulation is a high priority.
It was exactly this reassurance mentality that led Obama’s appointees in 2009 to prop up rather than break up the biggest banks that were the biggest offenders in causing the 2008 collapse. Fed Chair Ben Bernanke, supposedly a reassuring figure to Wall Street like Alan Greenspan before him, was useless in holding back the tides of collapse that were the result of bad policies.
YELLEN AND LIANG ARE ALSO at odds with the more assertive Biden financial regulators on how to deal with cryptocurrencies. Nellie Liang recently testified before the House Financial Services Committee on stablecoins and crypto generally. Her testimony, echoing the November 1 report of the President’s Working Group on Financial Markets, conceals deep divisions within the Biden administration.
The White House report, drafted by former Fed people at the Treasury, takes the position that stablecoins need to be brought into the banking system and regulated by the Fed; and that Congress needs to legislate in the whole area of crypto. But SEC Chair Gary Gensler, joined by CFTC Chair Rostin Behnam, argued persuasively that the regulatory agencies already have plenty of authority to regulate in this area, and that any legislation that could get 60 votes in the Senate would be far worse than the present regulatory framework.
The drafting of the report was the object of great contention. After some offending language was deleted and other language added, Gensler as a member of the working group reluctantly signed it. But he immediately issued a release of his own as SEC chair, declaring that stablecoins “raise emerging financial stability concerns” and that regulators already had plenty of authority and reason to act.
Though cryptocurrencies are blindingly complicated, both in their technology and in their potential for financial risk, they basically fall into a few broad categories, most of which can and should be regulated under current laws either as securities or commodities. What’s new is the technology, not the underlying concepts.
Bitcoin, the largest cryptocurrency in terms of market value, is the object of speculative investments as well as a vehicle for payments. It is analogous to gold, and thus can be regulated as a commodity. Other kinds of cryptocurrencies, like Uniswap tokens, are basically investment vehicles and can be regulated as securities. And entities that operate in this space, like FTX, can be regulated under the SEC’s and CFTC’s authorities to regulate exchanges. Non-fungible tokens—pictures of objects—are more analogous to art and can be regulated by the FTC to prevent fraud.
Because of Yellen’s institutional and ideological conservatism when it comes to regulating finance, the administration is badly divided.
The point is that any likely legislation, or delegation of authority to the Fed, would likely weaken existing regulatory powers to guard against criminal activity, fraud, and speculative bubbles. One very knowledgeable observer of the process says, “The recommendation that Congress needs to act is a feint to pretend that the SEC does not already have the authority to regulate.”
At Liang’s testimony last week, she called for stablecoins to be made part of the banking system and regulated mainly by the Fed. This idea alarms other regulators, who are not thrilled with stablecoins as one more new form of money brought under the federal financial safety net. Liang is one of those who stress the innovative potential of crypto more than the systemic risk.
Yellen was invited to come, but opted to send Liang. The other financial regulators who signed the report were also invited. According to my sources, they declined to participate because they neither wanted to lend credence to the report and Liang, nor to get into an open squabble with the Treasury. Gensler, who has taught courses on crypto at MIT, is far more expert on the subject than Liang. His course, which MIT just put free online, is better than most HBO offerings.
On last Sunday’s televised Super Bowl, among the several crypto companies advertising was FTX, a cryptocurrency derivatives exchange incorporated in Antigua. The FTX ads featured Larry David, in his role as curmudgeon, disparaging history’s great new inventions, from the wheel to the light bulb. The tagline: “Don’t miss out on the next big thing.” One issue that divides the Biden administration is whether crypto is more in the category of the wheel or credit default swaps.
TREASURY DOES HAVE ITS progressive appointees, but they are either marginalized or work on issues peripheral to financial regulation. Former Sherrod Brown staffer Graham Steele is assistant secretary for financial institutions. That sounds like a power position, but Steele reports to Liang, and has been told to stay away from FSOC issues. A source tells the Prospect that Steele’s staff was imposed on him, with the majority coming from the Fed. Julie Siegel, a former Warren economic policy adviser, has also been sidelined.
The deputy secretary, in principle the second-in-command, is Wally Adeyemo, also an ally of Elizabeth Warren. In practice, he has far less influence than Liang.
Something similar was done to Sarah Bloom Raskin, when she served as deputy to Obama Treasury Secretary Jack Lew, who gave her little authority over policy. Raskin, who has been nominated to serve as vice chair of the Fed for supervision, will be an important counterweight to Yellen, assuming that ailing Sen. Ben Ray Luján (D-NM) makes an early recovery from his stroke and can provide the 50th vote for Raskin’s confirmation.
On tax issues, to her credit, Yellen has appointed a progressive team led by Lily Batchelder. Better tax enforcement is important, but doesn’t make up for feeble financial regulation.
Just last week, Politico reported that a decision had been made to fill the other key undersecretary post, in charge of international issues. This power position, once held by Larry Summers, is reportedly set to go to Jay Shambaugh, until recently head of Robert Rubin’s Hamilton Project at Brookings. He is a traditional free-trader, quite at odds with Biden initiatives on industrial policy, reshoring, and China. Like Yellen, Shambaugh has described tariffs as a tax on consumers.
Yellen watchers expect her to be gone within a year, especially if the Democrats lose one or both houses of Congress. She has denied this. But the sense that the boss is a lame duck is also not great for morale.
One close observer, who takes a charitable view of Yellen, explains that financial regulation is just not something that interests her much. Her thing is monetary policy. When she was at the Fed, Yellen relied on the strong and progressive Fed governor Daniel Tarullo for regulation and supervision. But at Treasury, she relies on the much more pro–Wall Street Nellie Liang.
The Yellen saga is an object lesson in how even when progressives govern, they are subject to undertows. “We are a coalition government,” says one administration official, ruefully. Given Joe Manchin and Kyrsten Sinema, we know that’s true of Congress. It turns out that despite all of Biden’s superb regulatory appointees, the executive branch is also an uneasy coalition.
