Sarah Raskin’s Systemic Risk at the Federal Reserve

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Sarah Bloom Raskin, a nominee to be the Federal Reserve’s Board of Governors vice chair for supervision, speaks during the Senate Banking, Housing and Urban Affairs Committee confirmation hearing in Washington, D.C., Feb. 3.



Photo:

Bill Clark/Associated Press

Markets and businesses have many risks to consider, but President

Biden

is giving them another:

Sarah Bloom Raskin.

His nominee for the Federal Reserve’s bank supervision job wants to use regulation to politically allocate credit in a way that would create political and systemic financial risks.

At her Senate confirmation hearing on Thursday, Ms. Raskin tried to walk back her public statements supporting climate financial regulation. “It is inappropriate for the Fed to make credit decisions and allocations based on choosing winners and losers,” she told the Banking Committee. Her denial isn’t credible given her long-time views.

In May 2020 she criticized the Fed in the

New York Times

for not excluding fossil-fuel companies from its emergency pandemic lending facilities. The Fed had opened its corporate bond-buying facilities to virtually all comers that had an investment grade rating before March 22.

“The decision to bring oil and gas into the Fed’s investment portfolio not only misdirects limited recovery resources but also sends a false price signal to investors about where capital needs to be allocated,” she wrote. The Fed in her view shouldn’t help fossil-fuel companies because they spent a decade “expanding production even as they failed to turn a profit.”

But the purpose of the Fed programs was to cushion businesses and markets to avoid an economic depression. Ms. Raskin was so politically blinkered that she wanted to use a five-alarm financial emergency to punish her enemies. Had the Fed followed her advice, many more workers would have lost jobs and energy prices would be even higher today.

Her statements underline her distorted view of the Fed’s mandate, which is to maintain stable prices and aim for full employment. She thinks it should include the political allocation of credit steered by regulatory policy and even emergency financial tools.

She elaborated on her views in a Project Syndicate op-ed in September. Financial regulators, she wrote, should consider how “regulatory changes relating to disclosure, access to credit, and pricing of risk support a rapid and just green transition.” Regulators must steer this transition, she added, because “market discipline and private-sector initiative” won’t on their own. She praised other central banks for “actively working to repurpose instruments like stress tests, living wills, and risk-based capital standards—all within their existing mandates” to drive the anti-carbon agenda.

Ms. Raskin tried to whitewash her views at the Senate hearing by saying the Fed supervisory position “does not involve directing banks to make loans only to specific sectors, or to avoid making loans to particular sectors.” Well, sure, the Fed doesn’t literally dictate bank loans. But it can use the prudential regulations she described to guide bank credit allocation.

Ms. Raskin justifies punishing fossil fuels by saying she’s trying to reduce systemic financial risk. But the regulation she’s urging could be a leading cause of such risk. It would force banks to write down and liquidate fossil-fuel assets. It would starve companies of capital, which would increase the risk that they and their creditors fail. And it would push banks to make riskier green-energy investments so they could hold less capital and pay out higher dividends.

Recall how banks piled into mortgage-backed securities and sovereign debt because central banks deemed them low-risk. The housing and European sovereign debt crises are a reminder that financial regulation can itself create systemic risk.

As head of supervision, Ms. Raskin wouldn’t merely be another Fed governor. She would have more power than the Fed chairman on bank regulation, capital rules and stress tests. She said at her hearing that she won’t force financial regulation on her own, but she will have a progressive Fed majority as allies.

The timing couldn’t be worse. The Fed has to fix the inflation mess it created and needs political support to do it. Ms. Raskin’s political regulation will invite opposition the Fed doesn’t need as it raises rates, which won’t be popular. She will also likely be a voice for easy money, adding to the risk that inflation stays high.

The Senate should send Mr. Biden a message that it doesn’t want a Fed that punishes industries employing millions of Americans because they’re unpopular on the left. Ms. Raskin is a danger to the economy and the Fed itself.

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the February 4, 2022, print edition as ‘Sarah Raskin’s Systemic Risk.’

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