#treasury

31 03, 2025

Karen Petrou: The President Ditches the Dollar

Eliza Allen2025-03-31T10:49:46-04:00March 31st, 2025|The Vault|

Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.

As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.

Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order …

10 03, 2025

Karen Petrou: Will Bessent Do It Better?

Eliza Allen2025-03-10T10:18:10-04:00March 10th, 2025|The Vault|

There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.

Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy …

10 02, 2025

Karen Petrou: Payment-System Politics and the Havoc It Wreaks

Shane Smith2025-02-10T09:16:53-05:00February 10th, 2025|The Vault|

Any bank that granted even just “read-only” access to its payment services with as few controls as the U.S. Treasury would and should be harshly sanctioned by its supervisors. Who steps in to ensure the smooth functioning of the multi-trillion Treasury payment system? Do any of Mr. Musk’s operatives know what would happen if they pulled the wrong plug and disabled critical payments on U.S. debt or to American citizens such as those for Social Security? And, what if they don’t care if they disrupt payments if they believe this suits a political purpose?

When I wrote my memo last week hoping that these fears are alarmist, we didn’t know then what we know now about unlimited payment system access by a key DOGE warrior since named to head the Fiscal Service and the youth, inexperience, and dubious histories of the payment-system teams. Do any of them know that payment-system finality is an essential element of payment-system credibility and financial-system stability or do they view the payment system as a video game with a prize for the team member who finds the target that rings the loudest political bell? Do any of these Trump appointees know that making even a little mistake could be catastrophic in a system handling trillions of dollars in billions of transactions or are they looking for viral moments on encrypted social-media platforms so they become the envy of like-minded young men?

As FedFin noted last week, what Congress and the press took as a pledge …

3 02, 2025

Karen Petrou: Why Playing with Treasury’s Payment System is Playing with Fire

Shane Smith2025-02-03T09:04:54-05:00February 3rd, 2025|The Vault|

In just two weeks, Donald Trump has done something no one ever expected which he may not even intend: overturning the axiomatic expectation that a full-faith-and-credit obligation of the United States government is the best there is. Now, the U.S. will honor its commitments only if it still likes them. Anything that upends financial-market axioms stokes systemic risk and stoking is now so heated that it threatens even the multi-trillion Treasury market on which U.S. prosperity and global financial stability depend.

Is this alarmist? Yes, but then who would have thought the White House would issue an edict freezing all federal funding or maybe just some federal funding even though more than just some federal funding was frozen? Who would have thought the U.S. would cease all but a very few foreign-aid payments including those with other sovereign governments no matter which geopolitical or humanitarian interests are sacrificed? Even if some of this was audible on the campaign trail, none of it was thinkable to anyone counting on constitutional checks and balances along with a sound sense by someone in the White House of second-order effects.

It is in this context that one more Trump Administration action is particularly worrisome and why I fear even for the once-sacrosanct promise that the U.S. will not just honor its commitments, but also pay its bills. Elon Musk’s acolytes at DOGE have now been granted unfettered access to the Treasury payment system. Why?

Maybe it’s just curiosity or maybe DOGE wants to update …

16 12, 2024

Karen Petrou: The Likely Banking-Agency Rewrite

Shane Smith2024-12-16T09:09:18-05:00December 16th, 2024|The Vault|

Will the Trump Administration and an agreeable Congress really make sense of U.S. bank regulation? I’m not sure that what they do will indeed make sense, but there’s so little sense in the current system that I’m confident they’ll have no qualms about vaunting the institutional barricades that have thwarted due-process reformers since a Senate Banking chair proposed to create a “Federal Banking Commission” in the early 1980s. Little in the U.S. regulatory colossus is in as much need of creative disruption as banking; the tricky bit will be to ensure that tearing down the current framework doesn’t leave it in ruins.

One reason for decades of inaction is the federalist structure of U.S. bank regulation, which allows for choice among a federal, state, or hybrid (state member) charter. Whatever is done to federal bank regulation and federal charters, there is no way Congress will even try to redesign the state-based option. It might expand preemption, but that’s as far as even this group of radicals will go because Congress will not allow each Member’s state to lose much in the federal reform many of them otherwise want.

Congress will also tread softly on one political demand: that from small banks for a regulator more likely to listen to their pleas. Right now, that’s the FDIC, which owes its supervisory role over the decades to small banks despite numerous grievous FDIC mistakes along with the agency’s tunning inability to resolve banks bigger than a bread box.

New leadership may remove …

12 08, 2024

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

Eliza Allen2024-08-12T10:24:30-04:00August 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 …

2 07, 2024

FedFin: Taking Trump Still More Seriously

Arezou Rafikian2024-07-02T16:24:40-04:00July 2nd, 2024|The Vault|

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance. We reviewed our forecast at the start of this year on exactly this point. Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons. Our updated, complete forecast follows….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

31 10, 2023

FedFin Assessment: New White House AI Policy Promises New KYC Requirements, Banking-Agency Guidance

Arezou Rafikian2023-10-31T13:33:25-04:00October 31st, 2023|The Vault|

In this report, we assess the detailed executive order (EO) issued late Monday afternoon after days of private showings of selected versions. Much in the EO’s binding provisions address near-term AI-related threats to national-security, pandemic-risk, and infrastructure vulnerabilities and much related to AI-related opportunities derive from internal procedures Mr. Biden urges the federal government to develop along with workforce protections and biomedical research. The EO also reiterates the Administration’s values and presses agencies to work still harder on voluntary industry standards that many have been drafting or disagreeing on since the White House and Congress first called attention to AI risk. What comes of these provisions in the EO remains to be seen, but the Administration has also used tools such as the Defense Production Act’s authorization for direct economic intervention to mandate an array of new AI commercial and technology safeguards.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

15 03, 2023

FedFin Assessment: Post-SVB Deposit Insurance Reform

Arezou Rafikian2023-03-15T16:58:47-04:00March 15th, 2023|The Vault|

Cementing prior denouncements of 2018 Dodd-Frank “rollbacks” into legislative action, 17 Democratic senators and 31 House Members today took direct aim at Trump-era banking policy by introducing legislation that would repeal Title IV of the Economic Growth, Regulatory Relief, and Consumer Protection Act. But, while this initiative is gaining considerable attention, its legislative prospects are dim – indeed, even Senate Banking Committee Chairman Brown (D-OH) suggested as much…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

…

13 03, 2023

FedFin First Take: Failure Fall-out

Arezou Rafikian2023-03-15T16:50:33-04:00March 13th, 2023|The Vault|

As we noted last night, the President concurred with Treasury, the Fed, and FDIC in deciding that SVB’s Friday failure and imminent runs on Signature Bank and, most likely, others posed a systemic risk. This determination permits the FDIC to override all the efforts to end the moral hazard feared when uninsured depositors are fully protected in bank resolutions and came with a new Fed facility making it still easier for banks to obtain liquidity from the Federal Reserve. As we also observed, much effort is being made to assert that none of these backstops is a bailout, a conclusion sure to draw considerable discussion and dissent even from those who concur that the scale of potential run risk Monday morning could not otherwise have been averted. With this risk hopefully now resolved, much policy and political debate will begin about the Administration’s decision; why Silicon Valley Bank was so vulnerable;…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…