Glenn and Donald Kohn on the Report of the Task Force on Financial Stability

   Glenn co-chairs the Task Force on Financial Stability with Donald Kohn, now a fellow at the Brookings Institution and formerly vice-chair of the Board of Governors of the Federal Reserve. The Task Force on Financial Stability was formed by the Initiative on Global Markets at the University of Chicago and the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution to make recommendations intended to increase the stability of the U.S. financial system.

On June 29, 2021, the Task Force issued a report, which can be found HERE. Glenn and Donald Kohn discuss the reports findings in an opinion column published on bloomberg. com.

The Federal Reserve building in Washington, D.C.

Our Financial Early Warning System Is Broken

The U.S. financial system emerged from the reforms that followed the 2008 global crisis stronger than it had been going in. But the onset of the pandemic in March 2020 demonstrated how much was left undone: Although banks weathered the storm well, financial disruptions elsewhere — in money market funds, in the Treasury market — necessitated extraordinary measures to prevent an even greater economic disaster.

A group that we co-chair, the Task Force on Financial Stability, has just released a report on how to make the system more resilient. Among other things, we see the need for a structural change: Overhaul the agencies tasked with identifying and addressing threats outside traditional banks.

The Dodd-Frank financial reform of 2010 created two new entities focused on systemic risk. The Financial Stability Oversight Council, which included the Treasury Secretary and the heads of all the major financial regulatory agencies, was supposed to foster collaboration in finding and fixing dangerous buildups, wherever they might arise. And the Office of Financial Research, formed within Treasury and equipped with subpoena power, was supposed to provide the FSOC with the data and analysis needed to do the job well.

This financial early warning system didn’t operate as intended. The FSOC’s efforts to impose special scrutiny on certain systemically important non-bank institutions, such as insurance companies, ran into legal and political headwinds. Its member agencies often proved reluctant to encroach on one another’s turf, and the FSOC lacked the power to compel action. The OFR never subpoenaed anything, for fear of making enemies. Ultimately, the Trump administration deemphasized and defunded the whole apparatus.

As a result, the U.S. was much less prepared for the shock of the pandemic than it could have been. A rush to cash triggered runs on certain money-market mutual funds, threatened the flow of credit to everyone from homebuyers to municipalities, and — in a troubling departure from the usual “flight to quality” — caused the prices of Treasury securities to fall sharply. The Treasury and the Federal Reserve had to go to extreme lengths and pledge trillions of dollars to restore stability.

Regulators’ objective should not be merely to put out fires once they see smoke, but to prevent the dangerous accumulation of combustible material. New threats will emerge in unexpected ways; solutions will prompt unanticipated responses. So regulation must be dynamic, requiring an ongoing assessment process, not just periodic changes. To meet that challenge, we urge a restructuring of the FSOC and the OFR.

  1. Congress should give each FSOC member agency an explicit financial stability mandate, and require each to establish a similarly focused office to inform its rule making. This would force agencies such as the Securities and Exchange Commission, the Commodities Futures Trading Commission, and the Consumer Financial Protection Bureau to consider systemic-risk issues that they can otherwise too often neglect.
  2. Only the Treasury Secretary should issue the FSOC’s annual report, avoiding the consensus-building process among member agencies that can weaken identification of risks and accountability for dealing with them. While each agency would write a separate appendix, the Secretary would bear ultimate responsibility. The report should include a look back at what risks were missed, why, and how they will be addressed. To ensure the subject gets adequate attention, a new under-secretary for financial stability should act as the secretary’s point person.
  3. The OFR should receive a clear new mandate to gather the data that policymakers need (and, today, often lack). To underscore its importance, it should be renamed the Comptroller for Data and Resilience — echoing the stature of the Comptroller of the Currency — and its head should have a voting seat at the FSOC, a level of authority that would help the government recruit talent and experience to the post.

As the pandemic begins to recede, concern over financial stability should not. We don’t know what major shock will next hit the economy and financial system. But a process to scan for risks and adapt to them should be front and center.

NEW! – 04/16/21 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss monetary policy and the tools available to the Federal Reserve.

Authors Glenn Hubbard and Tony O’Brien follow up on last week’s fiscal policy podcast by discussing monetary policy in today’s world. The Fed’s role has changed significantly since it was first introduced. They keep an eye on inflation and employment but aren’t clear on which is their priority. The tools and models used by economists even a decade ago seem outdated in a world where these concepts of a previous generation may be outdated. But, are they? LIsten to Glenn & Tony discuss these issues in some depth as we navigate our way through a difficult financial time.

Just search Hubbard O’Brien Economics on Apple iTunes or any other Podcast provider and subscribe! Today’s episode is appropriate for Principles of Economics and/or Money & Banking!

Please listen & share!

Christopher Waller Confirmed by Senate as Federal Reserve Governor

Christopher Waller

On Thursday, December 3, Christopher Waller, executive vice president and research director at the Federal Reserve Bank of St. Louis, was confirmed by the Senate as a member of the Federal Reserve’s Board of Governors.  The Board of Governors has seven members and, under the Federal Reserve Act, is responsible for the monetary policy of the United States and for overseeing the operation of the Federal Reserve System.

Board members are appointed by the president and confirmed by the Senate to 14-year nonrenewable terms. The terms are staggered so that one expires every other January 31. Members frequently leave the Board before their terms expire to return to their previous occupations or to accept other positions in the government. The following table shows the current Board members, when their terms will expire, and which president appointed them.  Note that one seat on the Board is vacant. President Trump nominated Judy Shelton to fill this seat but it appears unlikely that she will be confirmed by the Senate before the change in administration takes place on January 20.

NameYear Term EndsAppointed to the Board by
Jerome Powell, ChairAs Chair: 2022
As Board member: 2028
As Chair: President Trump
As Board member: President Obama
Richard Clarida, Vice ChairAs Vice Chair and as Board member: 2022President Trump
Randal Quarles, Vice Chair for SupervisionAs Vice Chair for Supervision: 2021; As Board member: 2032President Trump
Michelle Bowman2034President Trump
Lael Brainard2026President Obama
Christopher Waller2030President Trump
Vacant

Information on the history and structure of the Board of Governors and on the backgrounds of current members can be found HERE on the Fed’s website.  An announcement of Waller’s confirmation can be found HERE on the website of the St. Louis Fed. A news story discussing Waller’s confirmation and the likely outcome of Shelton’s nomination, as well as some of the politics involved with current Fed nominations can be found HERE (those with a subscription to the Wall Street Journal may also want to read the article HERE).

Attend the Federal Reserve’s session on “Exploring Careers in Economics – Fall 2020” on Wednesday, 11/17/20, at 1:00 PM EST – federalreserve.gov, Twitter, or Facebook Live

Federal Reserve Board and Federal Reserve Education (FRE) will welcome students nationwide via webcast to discuss career opportunities and diversity in economics and to learn about career paths within the Federal Reserve System. Opening Remarks by Governor Lael Brainard, administrative governor of the US Federal Reserve.

The event takes place beginning at 1 p.m. ET on Tuesday November 17, 2020.

Watch the online webcast of the event at http://www.federalreserve.gov/ and YouTube. Twitter and Facebook users can follow the Federal Reserve Board’s feed, @FederalReserve, and www.facebook.com/federalreserve/ and join the discussion about the event by using the hashtag: #FedEconJobs

9/11/20 Podcast – Authors Glenn Hubbard & Tony O’Brien cover current events, Micro, and Macro! They discuss 9/11, the rising stock market, the challenges facing restaurants, as well as shifts in strategy for the Fed!

Authors Glenn Hubbard and Tony O’Brien continue their weekly discussion about the effects of the Pandemic on the US Economy. They discuss the disconnect between stock market performance and the overall economy. Also, they look at the decision of restaurants to stay open despite struggling to breakeven due to limitations on indoor seating. The Fed’s pivot on the dual-mandate is also discussed as they announce more of their monetary policy focus will be on unemployment rather than inflation.

Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.

Just search Hubbard O’Brien Economics on Apple iTunes and subscribe!

Please listen & share!

4/17/20 Podcast – Glenn Hubbard & Tony O’Brien discuss the Federal Reserve response and toilet paper shortages.

On April 17th, Glenn Hubbard and Tony O’Brien continued their podcast series by spending just under 30 minutes discuss varied topics such as the Federal Reserve’s monetary response, record unemployment numbers, panic buying of toilet paper as compared to bank runs, as well as recent books they’ve been reading with increased downtime from the pandemic.

4/9/20 – UNWRITTEN Pearson Webinar with Glenn Hubbard and Jaylen Brown, Pearson Campus Ambassador.

During the initial UNWRITTEN webinar from Pearson, Glenn Hubbard had a conversation with Jaylen Brown, a Pearson Campus Ambassador as well as a student at University of Central Florida -also Glenn’s undergrad alma mater!

Over the 30-minute broadcast, they discussed topics of relevance to all students – real world outlook on jobs, supply and demand, and the policies aimed at relief. Glenn talks of recovery shaped like a Nike swoosh with a sharp decline and a slightly longer climb back to normalcy. Check out the full episode now posted on YouTube!

4/10/20 Podcast – Glenn Hubbard & Tony O’Brien discuss the economic impacts of the pandemic.

On April 10th Glenn Hubbard and Tony O’Brien sat down together to discuss some of the larger impacts of the pandemic.

In these 18 minutes, Glenn and Tony discuss the fiscal & monetary response, the future relationship of the US Treasury and the Federal Reserve System, as well as several other topics.