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9 12, 2024

Karen Petrou: Do We Need the Financial Stability Oversight Council?

Shane Smith2024-12-09T09:17:27-05:00December 9th, 2024|The Vault|

On Friday, the Biden Administration’s FSOC proved yet again that it deserved Rohit Chopra’s dismissive description as a “book report club.” As far as we can tell, all it has done for all of the last four years is issue some nice papers about digital assets and the payment system about which nothing was ever done and put forth dutiful annual reports along with two new systemic-designation standards with which it has since done absolutely nothing. We’ll take our usual look at this year’s annual report, but it will be even less relevant than usual because FSOC is likely to do at least as little in Trump 2.0 as it did with its own recommendations during Trump 1.0. Given this sorry record, should the Department of Government Efficiency eviscerate the Council?

Sure, why not if all FSOC plans to do is as meaningless as all is town over the past eight years. Still, Congress wasn’t wrong when it created a Council designed to force communication across super-siloed regulators and to look hard at nonbanks outside their reach. Indeed, as nonbanks increasingly dominate core intermediation and infrastructure functions, a forward-looking, effective FSOC would be a vital safeguard against market success derived principally from regulatory arbitrage.

Effective system-wide governance is not impossible. Late last month, the Bank of England showed what can and should be done to address systemic risk. Using the Bank’s authority to govern across the financial industry, it released a “System-Wide Exploratory Scenario” (SWES), essentially a financial-system wide stress …

Karen Petrou: Why the World Needs a Financial Stability Board That Isn’t This Financial Stability Board

Shane Smith2024-11-25T09:04:12-05:00November 25th, 2024|The Vault|

Donald Trump often upends conventional neoliberal wisdom, but one of the seemingly most frightening things the President-Elect espouses is contempt for the global order embodied in bastions such as the Bretton Woods international financial institutions, NATO, the UN, and the World Trade and Health Organizations. A less-known archetype of right global-order thinking is the Financial Stability Board. It has so far been spared by Mr. Trump, likely only because it has yet to come to his attention. Moving out ahead, two House Republicans vying for HFSC Chair are already insisting that each will, Samson-like, pull down the FSB’s banking, insurance, and securities pillars. Will the global financial system crumble to the lowest common denominator as FSB advocates proclaim? I doubt it. Indeed, shaking global financial standard-setters out of their well-stocked echo chamber could actually do global finance a world of good.

Like all the other global-order monuments, the FSB was founded with the very best of intentions. The 2008 crisis and warning tremors in the late 1990s proved at grave cost how financial earthquakes know no borders. What better than a new body of global financial standards akin to those that keep cross-border telecommunications humming to protect global banking, insurance, securities, commodities, and payments? And thus, the G20 brought forth the FSB in 2009.

The FSB promptly did the best it could as quickly as it could not only to ramp up subgroups such as a renewed Basel Committee, but also to tackle the absence of resolution protocols for the …

Karen Petrou: What the Fed Must Do to Make Monetary Policy Work

Shane Smith2024-08-19T09:22:53-04:00August 19th, 2024|The Vault|

Later this week, monetary-policy disciples – at least those who agree with the Fed – will gather around the campfire atop Jackson Hole to ponder the question set before them: whether monetary-policy transmission has been effective and, since it’s awesomely obvious it hasn’t, what might be done about that. The plan is clearly to float trial balloons in the clear mountain air to see if the Fed’s thinking about the new plan slated for 2025 is any better than that which lay behind its disastrous 2019 monetary-policy rewrite. Those allowed into these August precincts will have much of value to say this time around much as they sought to do the last time the Fed asked for all their views. Odds are, though, that Jackson Hole will not consider three non-econometric phenomena that lie behind recent policy misfires: economic inequality, NBFI migration, and the strong counter-cyclical impact of Fed supervisory policy.

Why do these matter so much?

First to economic inequality. The last time the Fed rewrote its monetary-policy model, it deigned to consider economic inequality, but promptly dismissed any reasons to worry. There were, though, lots of them.

The 2019 inequality exercise suffered from the same problem as most Fed models: reliance on representative-agent, not heterogeneous data showing distributional disparities. This approach thus reaffirmed blithe convictions that anything that keeps employment high and inflation in check is good for lower-wealth and -income households because it’s good for everyone else. See my book for why that’s grievously wrong and recent …