Victoria Guida on the Politics of Monetary Policy

A Macro Musings Transcript

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David: Welcome to Macro Musings, the podcast series where each week we pull back the curtain to take a closer look at the important macroeconomic issues of the past, present and future. I'm your host, David Beckworth of the Mercatus Center, we are glad you've decided to join us.

David: Our guest today is Victoria Guida. Victoria is a reporter for Politico where she covers monetary policy and financial regulation, including extensive coverage of the Federal Reserve, the FDIC, the Treasury and Congress. Today she joins us to discuss some of the big developments in monetary policy and financial regulation over the past few years and what policy changes might be on the horizon.

David: Victoria, welcome to the show.

Victoria Guida: Thanks for having me.

David: It's a treat to have you on. We've interacted before in person on Twitter, and I've been trying to get you on so now I've got you and I'm happy for it. I want to begin like I do with all my guests and talk about how did you get into this profession? How did you become a financial journalist?

Victoria Guida: Yeah, so I kind of fell into it. I majored in political science and journalism in college, so no particular focus on economics and finance, but the first couple of internships I had were business reporting internships and then I worked at the Charlotte Observer briefly after college in a business reporting role. And you know Charlotte is a big banking town, so that was sort of my first taste of that. And then when I came to Washington, I started out covering trade policy, so different area of economics, and I covered that for four years and that's how I found my way to Politico. Because they hired me for my trade expertise. And after I'd been covering trade policy for a while I felt like I sort of had understood this very small niche of the economy, and I wanted to understand more broadly how finance worked and so I ... there was an opening here at Politico and I jumped at it, so I've been covering it ever since.

David: Yeah, and you have a really neat sounding job. You literally ... well, I think you do. Let me ask you this ... you walk the halls of Congress, you knock on doors, you make calls, is that part of your job?

Victoria Guida: That all sounds right, yeah.

David: I ask because you have this great story we'll touch on briefly just to illustrate part of what you do, and that is Marvin Goodfriend's nomination for a Board of Governor position, and you were walking down the hall and you just happened to run into Rand Paul, am I telling the story right?

Victoria Guida: Yeah, well, I was sort of looking for him because he had just passed out of committee, and it was a very, very close vote. None of the Democrats, even the moderate Democrats voted for him. So I knew that ... at that time John McCain was out and that it would be a very tight vote, and Rand Paul obviously, historically being very skeptical of the Fed, I decided to try and find out if he had an opinion on Marvin Goodfriend. And it was sort of a toss up whether he would because, with nominees, especially when they're not on the floor, you can't always count on a Senator necessarily knowing who you're talking about. But it was very clear when I saw Rand Paul that he did know who I was talking about, so ... that was a relief.

David: So the rest of the story ... you're being very modest ... is that he basically said, "No", and of course Senator Rand Paul has a big hang up with negative interest rates, Marvin Goodfriend, for better or for worst has been known for a couple papers he wrote on this. So he has a much wider track record ... I mean he's a much broader person than just this one issue, but this one issue I think has come to define him for many people. In any event, I think you mentioned this with Rand Paul and then ... My understanding is this reporting really did a number on Marvin Goodfriend's nomination. Is that fair?

Victoria Guida: I've heard people characterize it that way. I mean, I guess the question is whether, if he hadn't come out so early saying that he was opposed to the nomination whether there might be a deal to do with him. I will say, it's my understanding that Randy Quarles is the only Fed Governor that Rand Paul has ever voted for. So you know, take that with a grain of salt.

David: Okay. It's a high bar to pass to please Senator Rand Paul. Okay, fair enough. But what you do is really fascinating, you walk the halls of Congress, you go to the Fed, the Treasury. So when you do this, I mean do you make a call before you go, do you pull out your Rolodex ... how do you make this happen? You wanna do an interview, you call someone up, you go over there ... is it pretty straight forward?

Victoria Guida: You mean on the Hill specifically?

David: Yeah.

Victoria Guida: So this is actually the fantastic thing about covering Congress, is you can just walk up to members of Congress and talk to them. Particularly ... there are a couple of different places where it's easy to catch them. On Tuesdays the Senate has their caucus lunches, and so that means that the Republican senators all have lunch together and the Democratic senators all have lunch together. And the rooms where they do that are basically right around the corner from each other. So reporters just sort of hang out in the middle and catch senators as they walk by. And you can also catch lawmakers as they're going in and off the floor, which is actually the day that I talked to Rand Paul, he was leaving the Senate floor when I talked to him. And on the House side, there's an area called the Speaker's Lobby, where you actually can, if you want to, request interviews with specific House members. Presumably because there's so many more of them, so they're harder to find. But that's sort of the same deal, whereas House lawmakers come in and off the House floor, you can talk to them.

David: Very interesting. Now what about the Federal Reserve and Treasury, you go over there too, right?

Victoria Guida: Yeah, so for Treasury I have a pass which allows me to go there when I want to. I usually only go there when I have a specific reason to be going there. You know a briefing or a press conference or something. There is a press room that used to be much more active, you know in the days before the internet when Treasury would just come down to the press room and give people papers. So there are some people that do sort of work out of that press room, but like I said, I usually only go there when I have a reason to. The Fed does not have a press room so I definitely only go there when I have meetings with people or there's a board meeting.

David: Okay. Very interesting and sound like a lot of fun, what you do.

Victoria Guida: It is.

David: I can imagine. What about Twitter? Do you find Twitter useful in your job?

Victoria Guida: I do, although I also think I'm just a little bit addicted to it, so I'm on it all the time. But yeah, no it's sort of a way to monitor any miscellaneous stuff. I mean I get a lot of information coming into my inbox, obviously. I'm trying to keep to keep in contact with people throughout the day over email, talking over the phone. But Twitter is kind of a catch all. I follow a lot of really useful people on Twitter, so I find it useful for that reason. Also just generally as a journalist I kind of dig Twitter because in an age of the internet, where you can get your information from so many places, I think that building sort of individual trust and trust for your news organization on a more personal level is really important. Because nobody has any reason to listen to you unless you give them some reason to trust you and think that reading what you're writing is worthwhile, so I like it for that reason, too.

David: Yeah, it's a great place to build up relationships and network and to get to know people you wouldn't otherwise know that are interested in the same topics that you are.

David: Well let's move on to Congress specifically and some of the issues they have dealt with. So we just had the election a few weeks ago, which makes the 115th Congress a lame duck Congress, now the few weeks it has left in the year. I wanna talk about them first, then we'll talk about the new Congress coming in in January. But let's talk about the accomplishments or maybe the failures of the congress that was led by Republicans. Can you talk about any legislation they passed that was consequential on the financial regulatory front?

Victoria Guida: Yeah, so the main one of course is S.2155, or whatever name you wanna call it. The "Relief for Main Street Act" or the "Bank Lobbyist Act", I feel like it has a million different things that people call it. Yeah, so that bill that made reforms to Dodd-Frank. That is something that was years in the making, and so the fact that it was actually able to get done was a huge deal for the financial industry. And basically what that did is ... It didn't exactly change many of the rules of Dodd-Frank, but what it did is it made some of the rules apply to fewer institutions. And that is of course somewhat controversial, but you know, it was more minor in its direction than it's sometimes cast.

David: So it was more of a tweaking of Dodd-Frank, which is the big law that was written, hundreds and hundreds of pages that came out of the great financial crisis to reform the financial system and banking. And these are some of the highlights I found, and correct me if I'm wrong. So it provided regulatory relief for banks with less than 250 billion dollars in assets, whereas before the cut off was 50 billion, is that right?

Victoria Guida: That's exactly right.

David: Okay. And there were some other minor things, some exemptions for small banks on the Volcker Rule, reporting requirements, stress tests and so forth. And a number of Democrats on the banking committee supported it as well as Republicans. But as you mentioned, this has been several years in the making and what led to its fruition this year. What happened? How did all the stars line up for it to come to a head recently?

Victoria Guida: Right. So you know the negotiations in the previous Congress were largely between Richard Shelby, who was then Chairman of the Banking Committee, and Sherrod Brown, who's the ranking member, or the top Democrat on the committee. And they did not really see eye to eye on this, and there were a lot of other moderate Democrats that were involved in the conversation but they sort of deferred to Brown for the time being. And then when this Congress started, there was a continuation of those negotiations with Mike Crapo and Sherrod Brown. They made progress there where Brown was able to bring the bill in his direction in some areas, but he ultimately couldn't get there. And at that point the moderate Democrats stepped in and finished the work.

Victoria Guida: So it was ... I guess there were a lot of different people that were involved in making this happen, but it was years in the making.

David: Yeah, and again there the emphasis is on the small community bank, and I think that's the only way it did pass, right? In the sense that no one was gonna support a bill that would do big regulatory relief for the big international banks the structurally ... the systematically important banks.

David: So Victoria, your colleague Zachary Warmbrodt had an article in Politico about the big banks not feeling the love in DC, and he had this quote from a partner at Capital Alpha where he says, "One of the striking characteristics of the easing of financial regulations since President Trump took office is that the very biggest banks haven't gotten a lot of wins in Washington. The old presumption was that Wall Street always got its way in DC, but that really hasn't been the case in recent years." He's quoting this person here. And your colleague goes on to say, "And these banks aren't suffering, they still have the tax cut and there's other deregulatory moves coming to a head from the Fed and other agencies." But is that generally true that the big banks haven't been as successful as they hoped in shaping the deregulation?

Victoria Guida: Well on the congressional side I would say that's definitely true. And you can see that in their trade groups. They've sort of been shaking up a bunch of different lobbying groups that they have. The Financial Services Roundtable was merged with the Clearinghouse and is now called "The Bank Policy Institute". And the Financial Services Forum, which represents the CEO's of the eight banks that are designated as important to the global financial system, that group had sort of gone dormant and now it's back with a vengeance. So I do think that that kind of reflects the fact that banks felt disappointed that they didn't really get much out of this bill that passed.

Victoria Guida: But I will say that ... You mentioned the tax cuts, that's obviously something that's huge for the banks. And also on the regulatory side, there's still a lot of room for them to benefit from what's happening at the Fed. So it's not like the banks are suffering. But yeah, it was really key for the moderate Democrats in the Senate to say, "Hey, this doesn't benefit Wells Fargo, this doesn't benefit Goldman-Sachs." You know, the sort of bogeymen that get the base angry. So I think that that was by design in the bill, that it was focused more on regional banks and community banks.

David: Okay. One of the questions this raises for me, and this has been a point made by others in this conversation, is what is the right approach to bank regulation? So you can think of this bill passed by Congress as kind of regulating to some extent by size, right? So the bigger the bank, the more concerned we are therefore we keep the regulations on them. The smaller banks, we kind of give them a pass. But some have argued it might be better to regulate by the type of activity versus the size itself. So Thomas Hoenig, the FDIC Vice-Chair and former Kansas City Fed President, had an op-ed in The American Banker late last year with the title, "A Bank's Activities, Not Its Assets, Should Decide Regulatory Status". Where is that conversation now? Is that a common view in DC among policymakers, or is that just something that's kind of growing at this time?

Victoria Guida: It's definitely a common view among industry and more so on the Republican side. So the reason why S.2155 didn't include that is because ... I guess the reason for an asset threshold is it's sort of a backstop, right? That at least you have this guarantee that the regulators will supervise this particular size of banks. The law that passed this year allowed the Fed, for banks between 100 billion and 250 billion dollars in assets to decide whether there were any activities that were being conducted by any of the banks in that bucket that warranted them still getting stricter regulation. So the Fed released a proposal that sort of overhauled their framework for regulating large banks by saying, "Hey, if you do these types of activities and you're at least this size you fall into this bucket. If you're doing this, you fall into this bucket."

Victoria Guida: And so it's no longer really clearly size related. So it's ... For example, Northern Trust, which is a custody bank, it's below 250 billion dollars in assets, but it's actually, under the Fed's new proposal, it would be regulated more stringently than US Bank or a PNC, that are actually bigger than it is but they have maybe what the Fed considers, I guess, a less systemically risky business model.

David: Now that makes sense. 'Cause they could have a big spillover effect on other financial firms in the industry. And I guess, you know as I sit back it's easy to say, "Why don't we regulate by activity?", because size is easy, you're right, you can set a threshold, it's pretty cut and dry, it may be crude. But the flip side of that is I bet it can be very difficult also to regulate by type of activity. How do you define the safe activities versus the unsafe activities. So I imagine both ways it's not just an easy landscape, it's gonna be tough no matter what you do.

Victoria Guida: Right. Well and the Fed has some pet things that it worries about, which are guided at least in part by its experience in the financial crisis. So, for example, reliance on short term funding. That was obviously a huge problem in the financial crisis, and so they're worried about if banks suddenly are gonna have a bunch of their funding pulled if markets start to panic.

David: Okay. Well let's move on to some legislation that didn't make it through the Congress, the 115th Congress. And this one received a lot of attention maybe a year or so ago, and this was the "Financial Choice Act", Jeb Hensarling was the chair of the House Financial Service Committee, and he kind of pushed this thing through and it got passed through the House, but didn't get past Senate. Tell us about it and its history and what was controversial about it.

Victoria Guida: Yeah, sure. So I think that Chairman Hensarling kind of always knew that it was not gonna be viable in the Senate, but as I'm sure you know, he's the type of person who is always going to put out what he wants ... maybe not ideally, I don't know if the Financial Choice Act would be exactly what he would want, but he always seemed to be the type of person who wanted to stick by what he believed more so than feeling like he could chalk up a lot of wins. That seemed to have changed as he reached the end of his tenure in Congress, he seemed a little bit more willing to compromise, I guess, maybe more focused on his legacy.

Victoria Guida: But yeah, so the reason why the Financial Choice Act was controversial is because unlike the bill that did pass, it would have repealed portions of Dodd-Frank. So it would have gotten rid of this authority called "Orderly Liquidation Authority", …

Victoria Guida: ... which allows the FDIC to basically take over a failing mega financial institution and unwind it in an orderly fashion. There are a lot of Republicans who think that that constitutes a bailout because the FDIC can get a line of credit with Treasury. That line of credit is capped but it is there and so Republicans, like Chairman Hensarling really hate that. That's one of the things that it would do. It also had some monetary policy pieces of it. It would have imposed a rule on the Fed that basically said, "Hey, you have to come up with a specific strategy for how you're going to conduct monetary policy and tell us what you're doing and then any time you deviate from that strategy you have to tell us why." The Fed really hates that bill-

David: Right.

Victoria Guida: … because they see it as Congress trying to exert political pressure over their monetary policy decisions.

David: I follow this more closely from that part of it and the Fed almost hyperventilated when they saw that. They were just really very much against it. I have my priors and I have my biases I'm sure, but to me, I saw it more as "You pick a rule, Federal Reserve. You choose it, and if you deviate from it you tell us why." The Fed, I think, viewed it less benignly. They viewed it as putting really tough structure on it that would kind of handcuff it to this rule, so I know they pushed back pretty hard against it.

Victoria Guida: Yeah, well, like anything else that I think the Fed probably worries about what's the worst possible thing that could happen with a rule like that? Not necessarily that anyone who wants to impose it is automatically acting in bad faith or anything like that. But the Fed is also, as you know, extremely paranoid about losing its independence at all times, so they have to consider every angle.

David: Sure. The other thing with the Choice Act which, I believe, a key component was it created an off-ramp for banking organizations. You mentioned it would do away with some of Dodd-Frank, but my understanding is if the banks had so much capital, they funded with so much capital, they could no longer be bound to parts of Dodd-Frank. Is that right?

Victoria Guida: Right, exactly. That was the central piece of this.

David: Okay.

Victoria Guida: The reason it was called the Financial Choice Act is it would actually give banks the option to choose between the current regime or a ten percent leverage ratio, which is basically ten percent equity compared to debt. It's interesting, because actually the law that ultimately passed developed a similar thing, but only for community banks. Yesterday the FDIC released a proposal that would, basically, allow community banks to escape from a lot of more prescriptive regulations if they have a leverage ratio of at least nine percent and meet some other qualifications so, in some sense, at least a piece of that actually became law.

David: Oh, that's interesting. I wonder if they were inspired by the Choice Act. You think the FDIC was inspired in part by what they saw Jeb Hensarling do? His proposal?

Victoria Guida: I'm not sure. I mean, it was part of ... like I said, it was part of S.2155.

David: Oh, okay.

Victoria Guida: There were a lot things that came out of the House that were incorporated, but it was also a big push by the community banks because they hated that they were subject to Basel III requirements and all these things that they said, "Look, we weren't responsible for the financial crisis. These rules were never intended to apply to us." But, yeah, I do think that this idea of a leveraged ratio was pushed in a lot of fronts and certainly Chairman Hensarling is one of the big Congressional proponents of that. I don't know to what effect that was because of the Choice Act, it was probably more because that's what the community banks were pushing for but there's sort of a chicken and an egg question, I guess.

David: Sure. You mentioned Jeb Hensarling wants to leave with a legacy, right? So maybe he can take this and go home with a small victory.

Victoria Guida: Right.

David: Okay, let's move now to the new Congress, the 116th Congress which will start in January. Maxine Waters will take lead on the House Financial Services Committee. How will she change the direction of that committee and what do you expect to happen?

Victoria Guida: There's a big question right now as to the extent that Maxine Waters is going to focus on oversight. I mean, obviously it's a big, big focus for her. It's been a big, big focus for her over this past Congress to look into Trump's finances. She's sent multiple letters to Deutsche Bank, which is, of course, President Trump's main bank. She's also introduced a bill that would allow for the breakup of very large banks that have repeated consumer violations. That's, of course, targeted at Wells Fargo. I think that everyone expects oversight to be a part of her agenda, the question is to what extent that's going to dominate the focus. She seems to be sort of playing up the notion that she is going to also want to legislate, want to work with Republicans where she can. She's deeply passionate about affordable housing issues, poverty issues, things that affect minorities. I do think that she will also want to get some legislation done on that front, because it's deeply important to her.

Victoria Guida: Some of it depends, as Congress always does, on how early on in the Congress there is, maybe, something that happens that poisons the relationship between the parties in the new Congress. It'll be really interesting to see what order she decides to go about doing those different types of things, but it'll be some combination of that. Some combination of oversight and then maybe focus on legislating in areas where there is some potential for working with Republicans.

David: It'll be interesting to see how she works with, not just her committee, the Republicans reaching across the aisle. There's an interesting Politico article on Patrick McHenry wanting to lead the Republican side of that committee, but also the Senate Banking Committee. Now that the Senate has more Republicans, any thoughts there, where the Banking Committee will go on the Senate side and what does that mean for Representative Maxine Waters getting anything done that she wants to do?

Victoria Guida: Yeah, Chairman Crapo has already demonstrated in this past Congress a desire to work with Democrats. Obviously, in the Senate, to get stuff done you have to work with Democrats.

David: Yep.

Victoria Guida: To what extent the two of them, Chairman Crapo and Chairwoman Waters will be able to work together, that remains to be seen. One of the things that I wrote about in the wake of the election is the fact that these moderate Democrats, Heidi Heitkamp, Joe Donnelly, lost. That, I think, will be an interesting dynamic. Obviously, with them losing to Republicans, that gives, theoretically, industry-friendly policies more votes in the Senate but, because you do need Democrats to actually get anything passed through the Senate, you need Democrats to deal with. So it will be interesting to see which Democrats replace those people on the committee. Whether they're more progressive in the vein of Elizabeth Warren and Sherrod Brown or whether there could be more moderates like maybe a Gary Peters that could join the banking committee. So it will be really interesting to see what happens on the Democratic side.

David: Absolutely, and to add to that, I think we're gonna see a lot of excitement, drama, and fun from Sherrod Brown and Elizabeth Warren if they decide to run for president, right? That would be a great platform to get publicity, make a statement, so forth.

Victoria Guida: Oh, yeah. I think that'll be ... The whole 2020 election will be hugely interesting for the financial industry. Maybe not in a good way, for them.

David: Right.

Victoria Guida: It'll be interesting to see whether there are any kind of litmus tests on what you want to do to big banks. Whether Glass-Steagall comes back as, sort of, a point that everyone has to agree with or whether there will be any coming back to, "Oh, well, it's the shadow banks that need to be more regulated." That'll be a really interesting dynamic to watch.

David: Yeah, so let me step back and ask this question. Neel Kashkari, the Federal Reserve President

, has been pushing really hard with his bank and has conferences on too big to fail banks and financial institutions that still exist, and they want to break them up. Is there any momentum, support, that you can see happening within the next Congress for something along those lines?

Victoria Guida: I would say that's a pretty resounding no.

David: Okay.

Victoria Guida: But, if, let's say Elizabeth Warren gets elected president. Let's say you then have a Democratic Congress, then the calculus might change.

David: Oh, okay.

Victoria Guida: But in the coming Congress, with President Trump, with a Republican Senate, even on the Democratic side I don't think there's consensus that they would want to take that severe of an action. I don't think that there's gonna be any type of serious Glass-Steagall legislation that could be passed. It's interesting, you mention Neel Kashkari, his proposal would be to raise capital requirements, in some cases prohibitively high, so banks basically break themselves up because they can't bear the cost of having that much capital. So that's something that you could theoretically do with the regulators, but that would not happen at the regulators that we have now. I mean, even Daniel Tarullo, who is obviously not Wall Street's favorite person, even he didn't really seek to do that.

David: It's interesting that there is some consensus on both the left and the right that banks do need to fund with more capital. Even Jeb Hensarling's Choice Act was incentivizing more capital funding, right? Then people on the left, progressive, also recognize this. It would be interesting to see at some point in the future if there is some way to come together to really put through legislation or regulation that would encourage more funding with capital.

Victoria Guida: Right, and that is basically the decision that was made in Dodd-Frank. After the financial crisis, you could have said, "Hey, we're gonna break up the banks." Or, you could say, "Instead of doing that we're gonna make them hold a lot more capital." Of course, Dodd-Frank also did a whole bunch of other things. Someone like Chairman Hensarling probably would have preferred they just raise capital and perhaps raise it more. As you were saying, is kind of ironic that this is something that very conservative people and very liberal people agree on. There is a question as to whether risk-based capital requirements or just, sort of, a straight leverage ratio is better. You mentioned Tom Hoenig earlier, he obviously is very supportive of the leverage ratio and the Fed is much more supportive of risk-based capital requirements and they see the leverage ratio as more of a backstop. That tends to be the wheezy disagreement there.

David: At the end of the day, who holds the final power, the Fed or the FDIC on that issue?

Victoria Guida: The Fed tends to take the lead on most of these macro issues. The FDIC has a say and so these are inter-agency proposals, but I would say that the Fed generally has more weight.

David: The last word?

Victoria Guida: Yeah.

David: Yeah. Let's move on to the Treasury now, from Congress. Our secretary is Steven Mnuchin, has he left any kind of mark? Does he have a legacy? Is he moving things in a different direction the past few years?

Victoria Guida: It seems like one of the main things that Secretary Mnuchin has really focused on is a lot of the international stuff. You know, sanctions. You can understand why, there's plenty going on with Iran and North Korea and on and on and on. I think that he's been a really interesting player there. He always jokes about how he feels like he now has a PhD in sanctions.

David: Nice.

Victoria Guida: On domestic finance, I think a lot of the focus from Treasury has come more from Craig Phillips, who is nominally counselor to Secretary Mnuchin, but he's effectively the Undersecretary for Domestic Finance. He's the one who has overseen the drafting of all of these reports we saw come out of Treasury. There was one on banking, one on securities, one on fintech and there were several more. Those were all really influential in terms of shaping the conversation, putting the administration out there as the regulators were looking at some of these issues. There was also a paper on the Community Reinvestment Act, because Secretary Mnuchin and the Comptroller of the Currency, Joseph Otting, that issue is really important to both of them. I think that in terms of the financial sector, the space where they've really played the biggest role is putting out those reports.

David: Okay, so that kind of sets the tone, the momentum, the direction where the administration wants to go. What about the Treasury Secretary's actions with the Financial Stability Oversight Council, or FSOC. There's been a lot of talk about the delisting of the Systematically Important Financial Institutions, or SIFIs, and particularly the non-bank SIFIs. AIG, MetLife, GE Capital, Prudential have all been removed. There are no longer these non-bank financial firms that are considered systematically important. What's been going on there?

Victoria Guida: There used to be four insurers that were designated at SIFIs, as they call them. There was one that was GE Capital and they actually spun off a bunch of their operations, so they were de-designated under the Obama administration. Then MetLife sued and they were in the process ... they won in a lower court and that removed the designation for them, and then the Obama administration had been appealing it. But then the Trump administration dropped that appeal, so that's how MetLife got out of it.

David: Okay.

Victoria Guida: Then the other two were AIG and Prudential, and those were actively de-designated under the Mnuchin FSOC, if you will. The AIG one, I'm actually surprised that it didn't get more attention just because AIG was such a big player in the crisis.

David: Right.

Victoria Guida:         They were very famously bailed out. They did shrink a fair amount. What was actually kind of interesting about that de-designation is by the time that AIG was actually designated it had actually shrunk a lot from its size during the financial crisis. That, I think, made the decision kind of interesting for people because it's like, well, they have shrunk a little bit more since when they were designated but then should they have been designated in the first place? I don't know. That was a really quick decision. They, as far as I can tell, that review was only just for a couple of months that they started reviewing AIG and then immediately de-designated them. Prudential was just de-designated recently, and that took, basically, the better part of the year, for them to go through that. Prudential's actually gotten bigger and they haven't really changed their business model at all as a result of being designated as a SIFI. Before the Trump administration came into office they were just working with the regulators and they weren't taking a MetLife approach of very publicly suing over this.

David: So the whole point, or maybe one of the points, of having the SIFI designation is to ... it incentivizes certain behavior, like you mentioned. Spin off some of your business, maybe be more cautious. What you're saying is, Prudential didn't respond to that designation, to that incentive so it makes that case a little bit more puzzling. Is that fair?

Victoria Guida: Yes, it is. But there are a few things that played into the decision that people point to. One is when FSOC de-designated AIG they said, "Well, maybe we should reconsider this notion that people who hold insurance policies might just start panicking and pulling their insurance policies." So I think that change of assumption helped Prudential. Prudential also points to the fact that they are now regulated in their entirety by the New Jersey regulator. That's a new thing that only happened a few years ago, where that regulator actually has jurisdiction to supervise even their operations in Japan, and all of that.

David: Really? A state regulator can regulate internationally?

Victoria Guida: Yeah, it's kind of interesting.

David: Huh.

Victoria Guida: But, the question there is a New Jersey regulator is much more focused on the safety and soundness of the institution and not necessarily financial stability. It is an interesting ...

Victoria Guida: So, it is an interesting case and as you said it kind of is the one that most undermines this notion of if you're designating them as a SIFI, they should theoretically change their behavior or face this tougher regulation. So, it's the trickiest one, I guess, of the bunch.

David: Yeah. Stepping back from the specific cases we just went over, does the Treasury really call the main direction, the shots on the FSOC? Has ... Does it have the most influence?

Victoria Guida: Yeah. Well, so the staff of FSOC is housed in Treasury.

David: Okay.

Victoria Guida: So, they do so much of the leg work. There is also a deputy's council. So, each of the deputies at each of the institutions will meet. But yes. I would say Treasury has agenda setting authority, the way you would expect from a chair position.

David: Yeah. I'm just thinking through scenario, for example, where the Federal Reserve wants to take one action and Treasury says no, they wanna go in a different direction. The last one standing is gonna be Treasury, at FSOC?

Victoria Guida: You mean in terms of taking active action?

David: Yeah.

Victoria Guida: Like to ...

David: Let's say that the Federal Reserve and the Federal Reserve is represented on the FSOC, is that correct?

Victoria Guida: Yes.

David: Okay. Let's say the Federal Reserve's view was Prudential should stay designated as a SIFI and they were very adamant about it. Okay. Made a very strong case and the Treasury was very adamant that they should be delisted. They shouldn't be a SIFI. Who would finally win the converse ... The debate? Would it be Treasury or the Fed?

Victoria Guida: So, it's actually ... They take a vote.

David: Oh, okay.

Victoria Guida: And to de-designate it has to be a two thirds majority.

David: I see. Okay.

Victoria Guida: Which was actually an issue during the AIG designation, because Jay Clayton was recused and so then it became a question of, well, do you still need ... 'Cause there are 10 members of FOSC and so seven is supposed to be the threshold, but they're like, okay, well if Jay Clayton's recused though, should it be six instead? So, they ultimately did decide that it was six, but that was somewhat controversial fight over the process there.

David: Oh, very interesting. All right, well let's move on, the time we have left to the Federal Reserve. There have been a number of new faces, new leadership at the Federal Reserve. I'm gonna start with Jay Powell. So, what do you see as his legacy? I know it's kind of early to be talking about legacies, just started this year as the Fed chair, but what do you see him doing differently, where he's gonna take the Federal Reserve?

Victoria Guida: Well, so communications and transparency is definitely the answer.

David: Okay.

Victoria Guida: He has been taking a bunch of different steps that are really noticeable. I mean, just to begin, he obviously tries to not speak in economists speak. He tries to speak in ways that more regular people will understand. He's also, next year, gonna start having press conferences after every FOMC meeting instead of just four times a year. Then just recently the Fed has also announced a whole bunch of other things that they're gonna do. So, for example, next year they're going to start bringing in public input to think about how they should be thinking about monetary policy, what ... How they should specifically go about meeting their goals for price stability and maximum employment. So, really bringing in the public that way. They're also ... They've also launched a couple of new reports. One, there's coming ... One's coming out next week on financial stability, where it seems like the Fed is trying to give people a better idea of what they mean when they talk about financial stability and what they're ... How they're thinking about it. So, there is definitely a huge effort that I think he's undertaking to try and make it so that people understand better where the Fed is coming from.

David: And this should help insulate the Fed from political pressure, say from the president and people in Congress?

Victoria Guida: Right. Yeah. So, members of Congress, I mean particularly on the Republican side have called for a lot of this. I mean, you and I talked earlier about how in the Financial Choice Act, one of the provisions would basically make the Fed say, hey, this is our strategy. So, this isn't quite that, but it's more in that direction. And so it does seem to be the Fed sort of preemptively responding to a lot of the sort of nebulous criticism that they've gotten in this area. And that definitely ... Particularly among Republicans who are more likely to be critical of the Fed, it definitely, as you say, insulates them more from the threat of political action. For Trump, personally, I mean, I'm sure he is still gonna keep criticizing them as long as they keep raising rates, but that's less of a risk for the Fed if Congress is happier.

David: That's right. And I would add and an echo this point you made about the communication taking a mark turn under Chairman Jay Powell and that they have released these monetary policy rules. Now, I know it started under Chair Janet Yellen, but Jay Powell in my view has kind of stepped it up a notch. He came out one of his first testimonies and at the very end he mentioned I love looking at rules. I love looking at these monetary policy rules to give me guidance. And I think it's is the first time a chair has been so enthusiastic about it. And moreover if you look at their reports and then also on their website they give a list of different rules that kind of gives a direction of where monetary policy should be, which is something they hadn't done before. So, I think they are making a concerted effort under Chair Powell to signal what they are doing and how they're doing it.

Victoria Guida: Yeah. Well ... And certainly, you mentioned how they added in that piece on monetary policy rules to their monetary policy report under Chair Yellen. This has been a very gradual process where under each chair since Greenspan, they have slowly become more and more transparent and I remember, I don't remember where he said it, but Ben Bernanke was talking one time and he said something to the effect of every time that we've made an effort to be more transparent, it's never really gone wrong, which I think means that, maybe we're not pushing the envelope enough there. And I thought that was a really interesting statement. So, it'll be interesting to see whether all of these transparency efforts workout for Chairman Powell.

David: Yeah. It's also interesting that he mentioned in an interview he plans to wear out the carpet on the Capitol Hill. So, he's gonna be canvassing people in Congress as well as communicating to the public and hopefully insulating the Fed from as much criticism as it might otherwise receive. Well, let's move to Randy Quarles. He's now the first official vice chair for supervision. You mentioned earlier, Daniel Tarullo effectively had that role previously, but he's taken over that and he's also soon gonna be taken over as chair of the Financial Stability Board, which is an international organization that advanced economies looking at proposals for financial stability. Where do you see him taking financial reg issues?

Victoria Guida: Yeah. So, he, as I mentioned earlier, there was a proposal a couple of weeks ago that ... Where the Fed kind of overhauled regulation of larger banks by creating buckets based on the size and activities and that seems to be a big focus for him is basically this notion of tailoring. He has said ... He and Chairman Powell have both said that they think capital levels are about right. So, it doesn't seem like he's gonna be necessarily ramping up capital or lowering it. And so I think that has maybe kind of reassured people internationally that he's not gonna try and rip up the rule book, 'cause you know there was a big question around that with President Trump coming in saying he wants to do a big number on Dodd-Frank.

Victoria Guida: It will be interesting to see how all of these different things that he's doing ultimately add up together, because he is slowly getting into the rules for the largest banks, for the mega banks, the globally active banks. And it's not clear what he's going to do there yet, but he did also say something once, which I found illustrative of how he thinks about these things. He was saying that people talk a lot about how under Dodd-Frank or after the crisis, the pendulum swung too far in one direction and now they need to swing it back and he was basically saying, I think that that implies that the Fed acted unreasonably and went further than they should have. And he said, I'm not really sure that I agree with that. And I found that a really striking statement from somebody who is basically put in to ease regulations. And that's not to say that he's not easing regulations, 'cause he definitely is. He's definitely taking a lot of actions that are making the Obama appointees that are still there nervous. Lael Brainard at the Fed and Marty Gruenberg at the FDIC, both dissented from this proposal for large banks. So, but he's not somebody that, let's say a President Hensarling would have dominated.

David: Right. He's not coming in and cleaning house with financial regs. He's more of a moderate. He's tweaking, moving things on the margin. He's not blowing up Dodd-Frank.

Victoria Guida: Right.

David: One thing you wrote about him that was interesting and I would like to get your take on this, this article actually was more on Libor than on him, but he was happy to see this movement away from Libor. So, there's a new interest rate the New York Fed is producing, I believe it's called Secured Overnight Financing Rate or SOFR and it's gonna replace Libor and he seemed real happy to see it and happy to see that more private financial firms are using it. Can you attribute SOFR if it does become truly the next Libor as a legacy of the Fed, the Fed's efforts? Or is that just something that would have happened anyways?

Victoria Guida: That is a great question. So, I think, yes, it is a legacy of the Fed. I mean, this has been a private sector effort ... I don't know if you know all of the weeds of there's a private sector committee that was convened to decide what should be the replacement for Libor.

David: Oh, okay.

Victoria Guida: And they picked what the Fed has basically developed. But the Fed convened that committee and they also are helping sort of pull it along, because the way that this whole process works is people kind of know that Libor is going away or maybe going away and so they all kind of want to make the transition, but everyone's looking around at each other making sure that they're all making it together and they're not just out on a limb by themselves. And so the Fed I think play sort of a key role in encouraging banks to do that. I mean, I think that they're also very cognizant of the fact that they don't wanna actively tell people you have to use this rate, because I think they see that as sort of outside what they should be doing. But, yes, I guess is the answer.

David: Yeah. Well, you know, I would like to see the Fed target something like the SOFR. I think moving forward there's gonna be a conversation about the Fed’s operating system, how small it's balance sheet will become. And I think the federal funds rate is no longer the same indicator that it used to be and in fact, we both been to some events recently where the discussions about interest and excess reserves and in some point I would like to see them move to something like the SOFR rate, but that's another long conversation for another time. I'm gonna go through the last few people here, the board of governors that have been nominated by the president. Let's go to Richard Clarida. He's been nominated and confirmed by Congress, by the Senate. What can we expect from him?

Victoria Guida: Yeah. So, he's ... He comes from a background where he's an economist, he's had experience in the private sector, he's had experience in the government, so he has a very well-rounded qualifications. I think ... It seems like he's playing a big supporting role for Chairman Powell. He seems to be supporting the direction that the Fed's been going so far. One of the interesting things there is we mentioned earlier this whole thing about Powell wanting to improve communications, improve transparency. There is a new communication subcommittee that Clarida is chairing and it's actually gonna be coordinating that review that we were talking about earlier, where the Fed's gonna be soliciting public input on sort of its monetary policy approach. So, he's gonna be playing, I think, a key role in that effort and on monetary policy, I guess just adding his particular perspective and qualifications to make sure that the Fed doesn't go too fast or too slow.

David: Right. Right. And he's the ... He has the vice chair position too, correct? He's not just a regular governor, he's the vice chair.

Victoria Guida: Right. Yeah. And I always wanna put vice chairman of monetary policy, but that's not, it's not his official title. It's just vice chairman.

David: But, it's tricky. It is tricky, because you have the chair, you have the vice chair for supervision, Randy Quarles. You got the vice chair, Richard Clarida. Then you've got the New York Fed President who's also important and sometimes like, well, who actually runs the meeting? So, it is sometimes a little confusing, but will be interesting to see what happens with Governor Clarida in this review that he's gonna be doing over the next year and his contributions to the FOMC. All right. What about Michelle Bowman? She's been nominated and confirmed by the Senate as well. What do we think she's gonna do?

Victoria Guida: Yeah. So, she's not really a known quantity on monetary policy. I'm guessing vote wise, she'll probably go along with the votes, 'cause governors rarely descent on FOMC decisions. On regulation, she is a community banker, which is why she's in that seat, 'cause that seat is reserved for somebody who has community banking experience. And she said in her testimony before the Senate that one of the toughest things that she did at the community bank was having to make sure that it was in compliance with post-crisis rules. So, I think that she's definitely gonna be a sympathetic ear for community banks when it comes to regulatory issues. And she also ... She was Kansas state banking commissioner, so she also, I guess understands the state regulatory perspective, which I'm sure the state regulators are happy about. They're currently in the middle of a fight with the Office of the Comptroller of the Currency related to federal state jurisdiction. So, I think having a friendly face will be nice for them too.

David: Yeah. So, it'd be interesting to see what Governor Bowman brings to the table. Okay. The last two and they're ... These two individuals have been nominated, but not confirmed by the Senate, Marvin Goodfriend, we've talked about earlier and Nellie Liang. Any hope for them?

Victoria Guida: Yeah. So, with Chairman Crapo staying at the helm of the banking committee, I think that the chances for Nellie Liang are better than they would be under, it could've been a Chairman Toomey, who has explicitly expressed concern with her nomination. Chairman Crapo doesn't really ever seem inclined to block nominees, so it's possible that she could move through. If she comes to a vote in the committee and on the floor, I'm pretty sure she'll pass easily given that she would get a lot of Democratic support. But, the whole question is, well, if she has some Republican opposition, does that change the calculus of whether to actually bring her up for a vote and I think that's an open question. On more Marvin Goodfriend, his chances I think improved when John Kyle took over John McCain seat, because that put it back into a position where Rand Paul couldn't himself block it as the only Republican no vote.

Victoria Guida: But, I don't know if Goodfriend is out of the woods yet, because, the question is whether any Republicans other than Rand Paul might vote no so you think maybe like a Ted Cruz or a Mike Lee. And then of course there's a question of would someone like Joe Manchin vote for him, because as I said earlier, none of the moderate Democrats, Jon Tester, Heidi Heitkamp, Joe Donnelly, none of them voted for Goodfriend in committee. So, it was gonna be really tight for him if he comes to the floor, but he could still get through.

David: So, it remains to be seen if Marvin Goodfriend comes from his hovering and Fed purgatory to actual confirmation by Senate. Well, our time is up today. Our guest has been Victoria Guida. Victoria, thank you so much for coming on the show.

Victoria Guida: Yeah, I enjoyed it.

David: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast APP. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.