#American Banker

12 08, 2024

Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024

2024-08-12T10:24:30-04:00August 12th, 2024|The Vault|

Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law.  As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture.  The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs.  However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.

The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands.  The question?  It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.

The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond.  It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has …

8 01, 2024

Karen Petrou: Reflections on Regulatory Failure and a Better Way

2024-01-08T11:25:21-05:00January 8th, 2024|The Vault|

Earlier today, we released our 2024 regulatory outlook, a nice summary of which may be found on Politico’s Morning Money.  As I reviewed the draft, I realized how much of what the agencies plan is doomed to do little of what has long been needed to insulate the financial system from repeated shock.  This is a most wearisome thought that then prompted the philosophical reflection also to be found in this brief.  It asks why lots more bank rules do so little for financial resilience yet are always followed by still more rules and then an even bigger bust.   I conclude that financial policy should be founded on Samuel Johnson’s observation that, “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”  That is, redesign policy from one focused on endless, ever-more-complex rules spawning still larger bureaucracies into credible, certain, painful resolutions to concentrate each financial institution’s mind and that of a market that would no longer be assured of bailout or backstop.

We know in our everyday lives that complex rules backed by empty threats lead to very bad behavior.  For example, most parents do not get their kids to brush their teeth by issuing an edict reading something like:

It has long been demonstrated that brushing your teeth from top to bottom, tooth-by-tooth, flossing hereafter and using toothpaste meeting specifications defined herein will achieve cleaner teeth, a brighter smile, improved public acceptance of the tooth-bearer, and lower cost to …

6 11, 2023

Karen Petrou: How Regulators Unwittingly Run Roughshod Over the Public Good

2023-11-06T15:47:01-05:00November 6th, 2023|The Vault|

Friday’s American Banker included a Kyle Campbell article quoting me reiterating some points in my recent testimony about the need for cumulative-impact analyses of the raft of pending rules.  This led others to suggest ulterior motives, arguing that calls for cumulative-impact analyses are fig-leaves dangling over efforts to gut the rules.  While advocates do not often argue for analytical purity when obscurity suits them, the absence of analytical rigor is nonetheless an abrogation of the public good by public officials.  Setting rules based on airy assertions that it will all come right in the end since there most likely won’t be financial crises or at least new financial crises like the old financial crises ensures that this regulatory round will have at least as much wreckage as those that came before.

The public good when it comes to financial policy is best measured by careful consideration of something wholly absent in all of the agencies’ thinking:  economic equality.  In its absence, the nation will suffer from still-worse political acrimony, an even worse public-health crisis, growing populations of Americans without fundamental financial security, and even higher odds for still more devastating financial crises.  How do I know this?  Look at American financial policy since at least 2000 and see what happened.

The Fed is particularly high-handed when it comes to public-good rationales not just for its rules, but also for its still more vital monetary-policy responsibilities.  The Fed cloaks itself with the “dual” mandate of “maximum employment” and “price stability” even …

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