I suspect you’ve seen the assessments predicting Washington gridlock in the aftermath of the U.S. election. Don’t believe it. While it’s true that a fractious capitol has turned bellicose, external reality is relentless. Critical financial-policy decisions will be forced upon us – indeed many are overdue for decision. Here are just five of the most critical questions sure to be answered one way or the other in 2021.
First, there’s the financial reality redefined each day the pandemic destroys more lives and the economic infrastructure we once took for granted. Trillions in central-bank support and bank stability of a sort have somehow become so accepted that many seem to think that the financial system is invulnerable. It isn’t.
Can cross-border credit, liquidity, and operational stress be contained? Will forbearance be forever? Which sectors will the Fed support and how much risk will Treasury take for how long? Will huge Treasury issuances destabilize financial markets all over again? How long will investors sustain banking organizations battered by low rates and loan losses? What if the Fed is forced to drive rates below the zero lower bound? Is the financial system’s operational infrastructure ready for that? If not, then what?
Hopefully, none of these decisions will confront us in coming weeks, but here are four still more certain ones on which there will be U.S. action regardless of the election’s final outcome.
First, will policy-makers allow the financial system to stand unaltered despite all the March chaos and risks simmering beneath the surface of trillions spent in central-bank market intervention? The short answer to this is no, leading to a critical question: what next? The Financial Stability Board’s ponderous work on nonbank financial intermediaries will be preceded by rapid U.S. action under current law on MMFs and leveraged funds no matter who wins what.
Second, what’s to be done with Fannie and Freddie? FHFA has plans in place to end the GSEs’ conservatorship under new capital rules. It needs agreement with the Treasury Department to act as its director prefers, but that agreement will surely be forthcoming before Inauguration Day if Mr. Trump leaves the White House. A Biden Administration may not like what FHFA will do next, but it will have far bigger problems on its hands – see above.
Third, the rapid pace of technological change is only accelerating as the pandemic continues. As we have detailed, the OCC is crafting a new construct for financial technology, digital currency, and the payment system that cannot be easily undone even If Acting Comptroller Brooks is quickly forced out by a Biden Administration. The soonest that could happen is February and Mr. Brooks clearly has a lot of plans in the interim. Even if he didn’t, the disastrous ANT IPO makes it clear that global fintech and BigTech policy is being rapidly transformed – more on this to come in future FedFin reports.
Fourth, there’s climate risk which, like technology, doesn’t stand still no matter how blue and red maps are redrawn. Our new issue brief details the changes U.S. policy-makers will undertake early next year, changes confirmed just yesterday by Chairman Powell.
Fifth, demands for racial justice will not abate even if advocates do not get their way in the White House or U.S. Senate. COVID combined with continuing police shootings stoke economic and social-justice anger, likely only to intensify as conditions worsen through the winter. Republicans will not support the Democrats on direct initiatives such as a “third mandate” for the Fed, but measures such as the Democrats’ new civil-rights measure could well advance quickly after considerable refinement. And, of course, demands on financial institutions for racial equity will only continue – a problem so profound that social recognition of its cost has increased to a point at which this issue will be addressed no matter who finally grabs which gavel.
There are other immediate decisions known and – scarier still – what if the pandemic rages and the economy wobbles alongside a still-fragile financial system? The U.S. can and sadly will continue to eviscerate what’s left of democratic norms, but the hard world as it has become waits for no one.