‘Democrats lost the house. I’m less convinced that Republicans won it.’

Rep. Maxine Waters, D-Calif., right, and Rep. Patrick McHenry, R-N.C.
House Financial Services Committee chair Maxine Waters, D-Calif., will hand the committee gavel to current ranking member Patrick McHenry, R-N.C., in the next Congress.

Bloomberg News

JOHN HELTMAN: Welcome to the American Banker Podcast. I’m John Heltman. As you probably heard, we had an election a few weeks ago and as you also may have heard the outcome, at least in terms of which parties control which chambers of Congress has finally been determined, Democrats have retained control of the Senate and could even pick up a seat depending on the outcome of the runoff election in Georgia next month, Republicans retook control of the House of Representatives, albeit with a much narrower margin than was widely anticipated.

And coincidentally, just as the voting was taking place across the country, crypto exchange, FTX began its downward spiral towards bankruptcy, a development that has broad political implications for the next Congress and for regulators’ efforts to establish rules for the crypto verse to live by, to unpack the midterm elections and the policy trajectory going forward. I invited some of the smartest people I know to the National Press Club in Washington, DC last week: Karen Petrou, co-founder and managing director of Federal Financial Analytics; Aaron Klein, Miriam K. Carliner chair of Economic Studies and Senior Fellow of the Center on Regulation and Markets at the Brookings Institution; and Ed Mills, managing director and Washington policy analyst at Raymond James. We talked about the election, what to expect out the lame duck Congress, the long shadow of FTX and what all of this means for the next two years of the Biden administration.

HELTMAN: Hey everybody, thanks for waking up with us this morning and for coming to this panel about the midterms and what it means for Finreg and Washington in general. The brain trust here is intense. These are all my favorite people who know all sorts of great stuff. So let’s just get right into it. We had an election last week if you guys hadn’t heard <laugh> and it’s still going <laugh> as of whatever, 7:15 this morning. The house is still not called, but I expect by maybe 10:30 it might be. So now we have presumably a new Congress with Democrats in control of the Senate, Republicans in control of the house, albeit with slim majorities in both chambers. What does this do for, what’s the legislative outlook for the coming Congress? And I guess even before we get there, what is the legislative outlook for the lame duck session? I would start with Karen.

KAREN PETROU: Well, I think one of the rules I’ve learned about Washington over the years is that you can always count on Congress to think first and foremost about itself <laugh>. And so the lame duck will be preoccupied with positioning for the next session and finishing deciding how that affects the critical must pass bills, which are the omnibus continuing resolution to keep the government running, whether or not the Democrats decide to try to tackle the debt ceiling and the National Defense Authorization Act, which this year is increasingly become a locomotive for financial regulation. A couple of years ago it carried the beneficial ownership bills for anti-money laundering, and this year it may or may not carry the Durbin interchange fee restrictions for credit cards. Beyond that, where I think Congress this year and next is going to be especially influential is trying to pressure the regulators. We had yesterday’s hearing, which the Banker did its usual great job covering with the banking supervisors at Senate Banking <laugh> and you get to do it again today with HFSC. So I think that’s going to be mostly it for the lame duck. But, and Aaron and Ed follow this far close more closely than I.

AARON KLEIN: So I’ll start with the specific. I would add to Karen’s list of potential entities looking to ride the National Defense Act into law, the Say Banking Act, <affirmative> for cannabis, which I think would be very high on that <laugh> first part of the day. I do think that that is more of a shot than the Durbin bill. If I was going to do a Maslow’s hierarchy, I’m not sure either. Does also, I think there’ll be a big question as to whether or not the Senate tries to move the three FDIC noms. The White House …

PETROU: Yes. I forgot that. I think that’s a very good point

KLEIN: …moved to renominate acting chair Gruenberg and then move the two Republican noms, given that the Democrats should have, will have the majority. But let me just pause for a second and tie a little bit to the top of the line question, which is: I would only quibble with two comments. It looks like that the national vote will be won by the Republicans by 4% and that is, those figures can be discounted slightly because not all races were competitive and this or that. But it actually showed that there was … if you’d run the model beforehand and said Republicans win the popular vote by four for the house and you had a regression in a scatter plot, how many seats would they get? You would’ve been much higher than 220. And those scatter plots are particularly useful in elections that end with the number two because the redistrict has just happened and the map makers have gotten increasingly sophisticated — or we thought they did. Control of the house has been determined by a set of gerrymanders that did and didn’t work as anticipated.

Obviously New York where the Republicans gained the most seats was a position of a court striking down a very aggressive gerrymandering. But I encourage you to look at Ohio where Republicans lost two seats despite having tried to gerrymander it the other way, or Colorado were also one of the seats — perhaps one of the most right-wing seats in the country — remains uncalled, as well as another open competitive seat that people thought Republicans would win. And so there’s a bit of a different … the voting blocks are shifting in ways that the politicians making the maps didn’t anticipate. This is a very different midterm than one that ends in an eight, where the districts are eight years old and people have self-sorted and shifted through the districts. We’re continuing to see the alignment from Trumpism and the turn of the Democratic party to the advanced degree group <affirmative>, the traditional college country club Republican movement and the white working class and increasingly people of color without college degrees shifting more in the Republican side and then we’re seeing geography that’s even more surprising.

On top of that, when I started seeing the election results outta Florida, I said, the Democrats are in a world of pain in Arizona and Nevada. <laugh> I … right? Nevada could have gone full red in all their congressional seats because the gerrymandering there was what most people — Jon Ralston from the Nevada Independent, who’s like the smartest guy in that world. So that was an aggressive move to try and snag all the seats. It could backfire and you could lose them all, right? And it turned out they narrowly squeak by each one. So it’s going to take time. I raise all of this because Congress is fundamentally, per Karen’s point … people have to understand who their constituency is, and when members see their constituency change underneath them, they spend a lot of time trying to rethink and figure out exactly where are my policies, who are my constituents, who are my supporters? Why did I lose people that previously voted for me? Sherrod Brown is going to spend a lot of time looking at that Ohio map <laugh> and trying to figure that out. And that then trickles through eventually into policy. May take a while, but I think eventually it does.

ED MILLS: Yeah, I mean we had said that the day after the election, one of our lines was that there was a red wave. It just crashed against the Florida-Georgia line <laugh>. It was, it was … early on, you look at, right, DeSantis winning Miami-Dade County. That’s not good as it relates to Nevada, Arizona otherwise. And then you start getting data and it’s like this is very different over the last decade, if you had a D+3 national vote, Democrats lost the House. So we, we’ll have to shift expectations. I am looking … because there are court orders, are we going to see another majority minority seat in Louisiana? Alabama, Georgia does. There was supposed to be four Republican seats in New York. There’s going to be 11 after this election. That’s a net of seven seats versus what the map the state legislature and the governor signed into law. Texas very famously back in 2006, redid their map.

So I think the question going forward is how much are we going to see a wave back and forth in the House? There was no change in house majority from 1954 to 1994. Since then we had a change in 2008, we had a change in 2010. It’s we’re changing house majorities faster. And so one thing that I look at is that people always ask me, why isn’t it the bipartisanship that we used to see? Why have we become so polarized when national elections switch sides this frequently, the incentive to work with the other side just no longer exists. You have an incentive to try to bring your position to the voters, but that’s against the narrative that arguably what one last Tuesday was a revenge or strike back from the middle that the more a strike back of normalcy.

And so if the fringes have been the reason parties have outperformed one way or another, especially through primaries, if what we saw last week, the message from voters is they supported folks that voted for the CHIPS act, that voted for the infrastructure bill that was able to show that DC can function. That could be a different policy environment. I’m not thinking everything breaks out, but in the lane duck, I agree with you, safe banking that has the best chance it has had ever. We have dealt with some of the social justice issues with the executive order that was pardoning people on a federal level. But there are questions of why are we solving this for the banks and not solving it for X, Y, and Z. Beyond that, tax extenders are really important. The R&D amortization going towards, a same-year provision, Secure Act 2.0, major changes to retirement savings … that’s a key priority. But beyond that, there’s a desire to do the electoral college act reform so there’s not another January 6th, there’s going to be likely codification of same-sex marriage in this country. I do think we get the defense bill, there are a lot of issues on abortion that still have to be worked out and what else goes on for as a rider. I do think I am slightly more optimistic on what you can get done legislatively because Democrats know they have the ability to confirm folks next year. The most precious commodity is time. And so if you’re not dedicating that time over the next two months exclusively on getting the last set of judges you’ll ever get as Democrats, that does shift things quite a bit. So I think we’re going to be a very active, and then next year the ability to hold things hostage, the ability to really have some of these drag out fights is reduced because of the split majority in the small majority in the House.

HELTMAN: If I can just ask a specific point, which is debt ceiling, what’s the likelihood you think that Democrats get something through in this la duck on the dead ceiling and take that tool away from Republicans in the coming Congress?

MILLS: I’ll give a 40% because that’s what a policy analyst does. So whenever you get a policy analyst that gives you a 40%, that’s it is I’m going to give a high enough thing that if it happens, I’m going to be really smart <laugh> that I gave it 40%. But if it doesn’t happen, I never told you it was going to happen. I never gave you about 50% odds. So I think it is rising up the agenda. Mitch McConnell yesterday said he doesn’t think it’s going to happen. I think it really just comes down to his leadership race. He can’t come out and say that he’s going to deal with this. We spent 8 trillion over the last three years above trend on fiscal policy. So Republicans absolutely want to have a fight on fiscal spending and entitlements. But I think it’s a question for Republicans that when they’ve had those fights, they haven’t been rewarded politically. And so does McConnell want to take this off the table? Can he get a couple of the retiring senators, some of the middle of the road senators who can agree to get this off the table if it does? That’s a huge market positive because that’s one of the biggest issues out there with investors that I talk to just because, especially after the fiscal mistakes of the UK government and the how that went through the bond market in England. So I’m more optimistic now but I don’t think it’s above that 50% level.

KLEIN: So there seems to be a divide a bit between the treasury and the White House where the Treasury Department seems to be wanting to prioritize solving this sooner and perhaps more permanently. <affirmative> and the White House seems to be lowering it as a priority. <affirmative>, and I’m not quite sure why. You made a comment about Republicans winning the house. I’m confident that the election outcome looks pretty confident. I should say that Democrats have lost the house <affirmative>. I’m less confident that Republicans have won it <laugh> because to win it you have to be able to control it and to control it means you have to have 218 votes, right? Congress is about the votes. If you have the votes then you have leverage. If you don’t have the votes, you don’t have it.

You need 218 <affirmative> and just because you have 220 people in the same party, particularly given what we saw last night, which is going to be the candidacy of Donald Trump reigning over everything in the Republican situation, Ed made the comment that what politicians saw in the general election was a reward for having delivered. I could make the same argument that what Republicans saw in the primary was a reward for having loyalty to Trump. You look at the West Virginia seat that my friend from Maryland, Frederick County Maryland, Alex Moony who’s now reinvented himself as a West Virginian <laugh>, Alex was a state senator, is elected official from Maryland. Now Maryland’s succeed has been deeply gerrymandered, right? It’s owned by a guy who lives in my congressional district, <laugh> congressional district date owns total wine, barely won in a squeaker. Yeah, but he moved out to West Virginia cause he wanted to be in Congress and now he is Mr. Trump and he knocked off a West Virginian who, and if there’s one thing to know about West Virginia, they like their federal dollars and they got it for a real long time. Drive around, you’ll see a lot of things with the word bird on it, <laugh>. And so how many of these seats in the toss up you may be right, but within the Republican caucus, can you get to 218 on a consistent and stable basis to govern the house over the next two years? That’s a TBD in my book.

PETROU: I just wanted, I think these are absolutely right, but particularly to Ed’s comment and in a way, Aaron, yours as well, just a very weird early indicator of a potential sign of hope for a functional congress in the, I dunno about the lame duck, but next year some of you may know that on a my firm does no lobbying, no advocacy. But we big picture issues like these who I read the American banker to find out, we really focus on financial regulation. We’re deep into the capital rules merger we’re working on in m and a right now. Lots of things like that in where Congress matters a great deal. So we follow it a lot. But in my pro bono life, my great husband and I have worked for some time with a group of biomedical philanthropies to create a new financial instrument to speed medical treatments and cures called bonds in a sense they’re like green bonds but for the S in ESG for a critical social welfare issue. And we have pro bono lobbyists it, I hope a sophisticated effort, but it is without the powerhouse that one needs to have. And we had the bill introduced in the house HR 3437, and we had a democratic senator ready to go willing and able to introduce the bill if we could get a Republican lead. Cause she felt it was critical. And what happened yesterday, one of the pro bono team got a call from the Democratic senator staff saying the senator was ready to go, the Republican.

And I think this is because this is a bipartisan bill, it’s a social welfare bill, we got it scored. It scores extremely well. It’s because it’s a guarantee. So it’s from a fiscal perspective, it’s a highly efficient way to do something. Constituents are anybody who’s ever been up on the hill, you see all the patient groups going from office to office. It gives every office a some, here’s what we’re doing to help you. And that’s been true the last two congresses when the bill was introduced. But I’m really hopeful now in this new mood we might get it enacted. I’ve never had an office call us and say we’re ready to go. And maybe it’s because they’re looking to govern, at least this week.

HELTMAN: I feel like there’s a lot of people in this room that want to talk about crypto. And so let’s, without further ado, let’s talk crypto. Now, there has been a stablecoin bill being drafted in the House Financial Services Committee even before the election under, I would say, surprisingly constructive terms between current chair Waters and ranking member, soon to be chair McHenry again dealing with stablecoins. Then there’s this thing called FTX that spontaneously combusted over the course of the last week. And that’s a big player and that has Sam Bankman freed being the sort face of crypto’s presence in Washington to some extent now apparently I’ll say allegedly involved in wrongdoing, it is being investigated. What does this do for crypto’s prospects in the coming context? I wrote a column yesterday saying that I think this makes the imperative of not just a stablecoin bill but something more ambitious. All the more likely, indeed, all the more politically necessary and be unlike dod Frank where Democrats held both houses. If Republicans have the gavel in the house, anything that comes out of this is going to have to have some Republican. Am I wrong, <laugh> or I guess

KLEIN: I think so. Look, if you think about the substance of crypto for a second, which right, it’s a debatable proposition. I think what you find is a center position, which is maybe there’s some stuff here, there’s an awful lot of money at stake. We need to protect investors and things that have a little bit of prudential regulation are useful. And capital liquidity, risk management oversight, that’s a good thing. And we should put regulators in charge and stable coins could be involved in future payments. The Fed should regulate all payments cause it’s done a fantastic job. Look at how much faster all of your money moves today than it does anywhere else in the rest of the world. So let’s give the Fed stable coins. And crypto is very eager to get the CFTC to have more re thing a little more a teeny, we need a little more. And the far left was saying, wait a second, I’m not sure this thing has any merit. And regulators seem unable to let things fail on their watch. And if this thing has no merit, why should we bring it into the regulated financial system and potentially subject it to large bailouts? And then on the right, it’s the spirit of crypto is no <affirmative>. Now if you look at the implosion of ftx, you the first thing, well FTX has to strengthen the center’s case. A lot of people lost a lot of money and my heart goes out to the people that saw Tom Brady and thought this was good for me

HELTMAN: Or Matt Damon.

KLEIN: My heart does not go out to the teachers pension fund in Canada that has a lot of very wealthy, sophisticated investors or to BlackRock or to any of the other venture capitalists who failed to do their due diligence and got fraudulently put in by a guy whose hair I aspire to <laugh>. And so there’s a difference. But take a step back and hear what the left and are saying. The left is saying, see I told you right, this is all junk. And when you looked at Brown and you looked at Warren and the rest of the folks, they said, wow, we’re really lucky this didn’t get into our banking system. And then look at what the folks on the right are saying, which is, see, FTX wasn’t in the spirit of crypto, it was a centralized exchange. Defi, the fear is centralization. If you give your money to a centralized exchange, they can steal it.

If you keep it on a Defi off chain, whatever, it’s safe. And their takeaway, when you start going through crypto Twitter, which is a scary place, any sub part of Twitter, you start to see that they’re actually taking a different point of view in here. And to me that scrambles the politics even more because per your comment, you know, could be in a situation, GSE reform is a version of this where there’s like a center position where you can see bipartisanship but the left and the right together can’t get bought in and there isn’t a stable majority, right?

MILLS: Yeah. Well my standard view on any legislation, I always look, I ask myself, is there a crisis? Is there a deadline? And you need at least one. So we have had a crisis. So that moves it up. There’s no necessary deadline here. I do think that there’s going to be at the House Financial Services Committee next year more hearings on this. I wonder on stablecoin like does one of the first questions that it gets asked, or if you were to have passed this bill, would anything have been different? I don’t think the answer to that is yes. So why is this the solution that we’re proposing? I do think that if something develops, it has to be a more robust response. I think there’s a general sense that there ought to be a law, but when we’re in that there ought to be a law phase that usually takes longer to get the law.

Something that I’m always focused on is that, you know, mentioned both the senate banking committee, house financial services committee, then you’re talking about the cftc, well that’s the agriculture committee <affirmative>. And so even just figuring out who is going to have jurisdiction and members of the agriculture committee are forever interested in preserving their little fiefdom and having lobbyists for the crypto industry, pay attention to them and to settle out if this is going to the SEC or CFTC or within the federal banking regulators, if you sit on the banking committee, you’re going to want it to go to your guys. If you’re on the agriculture committee, you’re going to want to go to the CFTC. That fight alone I think argues for longer. So until we have some level of a deadline or additional crisis, I think we’re going to be talking about this a lot. Think we’ll look at the president’s working group. We’ll have incremental reforms. It’s Cynthia Lummis yesterday, Senator Lummis talking about updates to, are there other things with the existing infrastructure we do it, but I don’t think this in and of itself is going to give you near term a big crypto bill.

PETROU: Can I just add, I think also as just I completely agree with what everything Aaron and Ed said, I think it’s really important as we talk about what Congress does to remember how it affects what the regulators do. And I think we’re going to have a very, very busy year next year. Because one of the lessons, you heard this from Michael Barr yesterday, which is had FTX been interconnected in the financial system, well we could well have had a systemic event. So you will see, I think finally we’ll get through some of the international warfare among between the Fed, the OCC and the FDIC and we’ll start to see the rules that really strictly, they’ll address whether banks can do custody and they’ll deal with both the couple of natural use cases for digital finance like stable coins and contain in unnatural uses like speculation. But it’ll, there’ll be a lot of rule. I agree with both Aaron and I’m not so sure about law, but I’m pretty sure there’ll be rule.

KLEIN: So on that point, I’m just to toot my own horn for a sec. We, we’ve just done three big events at Brookings on crypto. We had the chair of the CFTC, we had the acting chair of the FDIC and the New York State banking commissioner who did a victory lap because FTX wasn’t allowed in New York. They didn’t get a bit license, you couldn’t trade FTT. That’s pretty impressive <laugh> when you consider everywhere else. And in point of fact there was somewhat agreement that maybe their rules should be the national standard. But one thing chairman groom acting chairman Gruenberg said was that the FDIC was much less comfortable with permissionless blockchain than permission.

PETROU: Yes. And that’s true for the Fed and the OCC as well.

KLEIN: … and that is a very important and very technical distinction as it gets to the reg writing because those are two, that’s like a fork in the road — and that’s a crypto pun <laugh> — as to what types of crypto technology the regulators are comfortable with. And again, to the extent there are use cases for distributed ledger technology, which is a different question than cryptocurrency. A permission chain system is a very different world of this type of technology than a permission list system. And if that’s where the regulators are going by rule and congress would either have to step in to make a different change or you’re going to start to see that lay a strong predicate for how crypto and distributed ledger technology and digital assets more broadly are integrated into the system, right?

HELTMAN: This being a American banker production, I have to ask the question: So some banks were trying to get into crypto or get into custody for quite some time because their customers are buying crypto from somebody else and they’re like, hey let’s get, can we do it too? Does FTX … and I’ll also make the point that just because FTX blew up doesn’t mean that somebody else won’t blow up later. So we don’t know that we’re actually at the bottom of wherever crypto’s going to lead us. Does this give banks, does this give banks cold feet and shouldn’t like should banks, if we’re going to do all these rules for how banks can get into the crypto space, does anyone even want it anymore? Do that

MILLS: You think It depends upon how the ranks are done. I mean it seems like right now, even if you can custody it because you have to keep it on balance sheet and there’s capital standards, liquidity requirements, yeah, it’s like I tell my kids they can do certain things but I’m not really telling them they can do certain things. My wife tells me I can do certain things, <laugh> not really telling me I can do certain things. So it’s like it depends on how these regs are ultimately developed on whether or not banks will make a determination on whether it’s financially feasible or worthwhile.

PETROU: I can tell you mean the projects that our clients are bringing us because the distinction Aaron is drawn between permission and permission list is building out there. This is public knowledge is the JPM coin, which is a very powerful wholesale settlement instrument. There’s a lot of work going on in all sorts of ways to make the digital ledger technology functional on payment settlement and querying and lots of exciting use cases there. The custody issue is a very big one. We’re not hearing a lot out of the banks in terms of anything that brings in capital or liquidity regulations because if it’s an exchange, if it’s any sort of trading that isn’t completely client driven and firewall and even then maybe not I from a larger bank perspective, they didn’t wanna do it when they could do it <laugh>. I mean you could see that and they really don’t wanna do it now, but there’s a lot they want to do and I think you’ll see the rules set the parameters for that, including with regard to custody where there’s a lot of interest and that’ll start to happen next year.

KLEIN: So because you guys are the exclusive subscribers and this is an exclusive event, I’m going to do something you’re never supposed to do <laugh>, which is admit when my prognostications would’ve been wrong that I didn’t give. <laugh> So when Covid hit, the first thing I thought was going to happen was subprime auto was going to implode <affirmative> because the old joke was people protected their car because you can sleep in your car but you can’t drive your house to work <laugh>. And I was like, there’s nowhere to drive to. And turns out for the first time in recorded history of the value of my 2007 Accord rose sharply over the next two years. <laugh> So much for my belief that subprime auto is going to take, which would’ve tanked quite, that would’ve had huge ramifications to the bound sheet of multiple institutions who may have been over levered in the subprime …

HELTMAN: Including credit unions. But I digress.

KLEIN: <laugh>. So second, if we’d had this conversation a month ago and you said, Aaron, there’s going to be a crypto implosion, what’s going to go? I would say, well tether, I would’ve put that way above FTX now, right? There’s a question everybody says is FTX Bear or Lehman where you’re going to see this contagion and domino … I think that’s a bit the wrong question. I think the question is more is this Enron, which by the way wasn’t the big one. The big one was six blocks that way and something that used to be called the MCI Center that was much larger as corporate bankruptcy and actually changed the politics of what became Sarbanes Oxley. Or is this MF Global, right, which is just a broker-dealer that took their customers money and made speculative bets, bright-line fraud? Or Bernie Madoff, right? Which not somebody unknown to the SEC who’s running a big Ponzi scheme? We don’t know the answer yet, but Bernie Madoff and MF Global didn’t spawn a bill. So that is very much influences my thinking in where this is going to go.

HELTMAN: I mean the other thing with contagion is that perceived contagion can also be just as infectious as actual contagion. So if people think that oh FTX went down, then that must mean I should get my money out of Binance. That can have the same implication as if there, so if it turns out to be an MF Global, people thought it was a Lehman Brothers, the Lehman Brothers wins, we have a Lehman Brothers-like effect, even if it’s only a MF global statement of facts.

KLEIN: Well, but I mean mind Lehman depressed the market value of an instrument and part of what FTX did, if you get into the substance of it was take customers money and do stuff with it, you just can’t. Right? That story ends the same way every time. Another part was this shady accounting thing about creating these coins and to marketing versus value in their wholesale and then that’s more akin to looking under the hood as to what a lot of corporate accounting scandals were going. People forget that the equity markets fell sharply during that corporate accounting scandal as they did during the 2008 crisis. If you chart the value of the Dow, and it was because of a different type of contagion, which is I didn’t trust your books. And that’s a very different type of contagion and how walled off is the crypto space is. The thing about accounting is everyone does it.

HELTMAN: Right. Being cognizant of time. And it looks like my question about the Astros and Phillies World Series may not make the cut in the end, but I do want to talk about the Fed and the is the sort of future hold for the Federal Reserve and its status in Washington as the sort of independent arbiter and higher mind of finance. I realized that that’s getting grimaces from many of the panelists here. I guess are we going to see more open warfare on the Federal Reserve or does it depend on how the market or whether we go into recession in the next three to five months?

PETROU: Wow. As an author of a highly critical book on the Fed <laugh> me grimacing more than a little bit in terms of the idea of the Fed is this higher power. But I think if one — yippee! — inflation modulated a little bit, if you look at the United States, as I do, from a distributional economic equality basis and the Fed loves aggregate and average data. So it looking at things like the unemployment rate — woo, 3.5%, 3.7& — if you don’t look at it, it weighs like labor participation. You don’t look at inflation from the numbers, look at it and how many families live paycheck to paycheck and how hard it is for all. But the top 15% of Americans right now to make it through every week without incurring still more, now higher cost, even higher cost debt. Unless the landing is incredibly soft and the White House decides to sacrifice its political credibility defending the Fed, which I think would be foolish, I think is going to be a very tough year, akin in a way to what happened to the Fed in the 1980s when, for different reasons, the Fed under Volker … we had inflation, we had recession and there was a huge move to reform the Fed.

We got the Federal Reserve Act early into this with the new mandate that had maximum employment. We’re going to revisit the role of the Federal Reserve banks for sure because Republicans and Democrats agree on the need for greater fed accountability. But I think we’re really going to look at the Fed and because the emperor’s clothes are not fully off, but a bit of pudge is showing. <laugh>.

KLEIN: So I highly recommend Karen’s book, it’s elucidating, it’s factual …

PETROU: It’s out of date.

KLEIN: <laugh> at some level it’s infuriating because you see what’s happened and then you see the reality, which is in the 20+ years I’ve been in this, the Fed always wins.

PETROU: Yes. That I think is a …

KLEIN: Really, so …

PETROU: After 2008, I mean look at that. They could not have screwed up more and what would they got?

KLEIN: <laugh> More power. So, but the one thing is I don’t see the signs of the hopefulness that I wish I’d seen. What I do know for a fact is that two Federal Reserve Board governors conducted a series of trades that were blessed as being ethical by the Fed. And when exposed year later by a random reporter, inquiry generated so much controversy that the people had to resign in a cloud of suspicion. And the Fed has refused to release the dates of those trades other than to reassure us that they satisfied the rules, but they can’t tell us when it is. Right? Because I don’t know how many congressional hearings did we get on those scandals? Zero in Richmond, the district of the Federal Reserve that rules the great state of Maryland, their director leaked information that was never uncovered by seven different investigations by the Fed, but quickly uncovered by the FBI.

How many congressional hearings did we get on that? Zero. So now three of the 12 Federal Reserve Board districts have resigned under either illegal investigations by law enforcement were the result of unethical actions that had been blessed as being ethical. All three of these cases had been thoroughly investigated by the Fed and deemed to be appropriate and all three of them were forced to resign when they saw the light of day. How many congressional hearings? Zero. Where does this the sheen come off? If you want to take a look. And I would recommend almost within the same week a while ago, president Biden gave two op-eds, one in the New York Times on the Russia invasion and Ukraine and one in the Wall Street Journal on inflation. I think it would’ve been fair to say at the time, and even now, those are the top two issues confronting America in the global perspective and the economic perspective compare and contrast those op-eds with what a career for a senator whose career was formed on as chairman of the Foreign Relations Committee versus the Federal Reserve where the number one issue on inflation was that’s the Fed’s job and we’re going to let the Fed do its job. That’s not … rarely do you hear a president say, I know the single biggest problem in America. It’s not my job to fix that.

MILLS: <laugh>. Right. Well he because he has a Treasury Secretary as a former Fed chair that can do all of the intermediary kind of action. I do think a severe recession or anything that is more than a mild recession, arguably is the single largest threat to the Fed’s power that they have faced at leases. The financial crisis. I do think that the knives will come out. I think Republicans will have concerns, especially on these trading scandals shared by Democrats. I think as the Fed balance sheet starts losing money versus making money for the United States government, that’s an issue. And I think when unemployment ticks up, that’s a real issue. So the Fed got it wrong in the financial crisis. The Fed got it wrong with inflation. If they get it wrong, once again, that’s a real problem. I always think that anyone with power wants to keep power.

The pivot we haven’t talked about is the pivot by power that he wanted a second term and I think delayed any sort of tightening until he got his appointment to the second term. A week later he was in front of the Senate banking committee and became hawkish Powell. And the market was like, where did this guy come from? <laugh>? And it’s like, oh, this is the guy who just got his second term. They, they’ve Randy Quarles kinda stepped aside so that Democrats could have four of the seven governor seats. So from a lens of how do they keep power, I think that what we have seen is the second that they knew that they maintained their power structure as is. They started aggressively accumulating ammunition through faster than expected rate hikes. I think it is fascinating this debate that we have on whether or not the Fed’s forecasts are even correct.

One of the big questions, Dr. Lisa Cook, when she came in, how much was she going to be a pressure on the board? Aaron has always taught me this, that the board likes to assimilate. So they pushed her out and saying, Hey, we actually don’t know if our forecast are accurate. So we have to go faster at the beginning and then wait and see if the forecasts are accurate. Yesterday, bill Dudley had a very interesting op-ed on are the Fed forecast even accurate? So we’re in this world of we can’t stop because we don’t know if anything we’re doing is actually the right thing. And so we have to do things faster than pause and then wait to see if what we thought was going to happen actually happens. And then I do think that gives them some ammunition going into the 2024 election to make sure that they are having as good of an economy as possible if they can create that because they cannot be a big part of this 24 election or they lose potentially a lot of the power that they have.

HELTMAN: If I can throw in one more lightning round question. I believe Aaron, who is here under duress, I should say the early hour, I promised him a beat on money market funds. And I’ll tee it up this way by saying just in a general way, I personally have been very surprised at how lackadaisical this administration has been with regard to addressing or developing a game plan for rules regarding non-bank banking act or bank non-bank activities with the possible exception of crypto and stable coins. What’s up with that? And is that a matter of they’ll waiting for the right time, but it’s like money market funds have been bailed out every time it’s the most bail outed <laugh> like market there and there doesn’t seem to be much impetus to change that dynamic. Is that changing why

KLEIN: It’s not changing Money market funds are owned by old wealthy white people who benefit repeatedly from government intervention and without populous backlash against that, why would somebody asked to explain to me the difference between money market mutual funds and stable coins in a way in which it doesn’t come out to the fact that, oh, if lots of old moneyed interests own it, it’s systemically important and the government should bail it out. And if it’s owned by young and heavily minority people … and I don’t see any signs of any change on that. They’re regulatory turf issues between the SEC, the CFTC. But it reminds me a bit of the view on Uber, which was if we seek regulatory permission to run a taxi cab service, we’re going to come into a bazillion little fiefdoms that are going to knock us down. You know, wanna find a corrupt cab service, come to Montgomery County Maryland, <laugh>,

And I’ll introduce you to Lee. And it’s straight out of a quite fascinating old story. But then they got so big that and so popular that fundamentally you couldn’t get rid of ’em. Right? Cause people get pissed, right? Right. Imagine if we actually said money market mutual funds investors, you can lose up to 2% of your, you could break a buck. Oh my God. Systemic risk. Systemic risk, systemic risk. So I don’t see a path to do that other than a rethinking of the financial system in which deep moneyed interests and investors can lose money. Which last time I saw, if you bought a junk bond in a failing company, well because of Covid, the Fed was going to bail out your position and you know, want to go, wanna look at who owns corporate debt. I really encourage you to look at the Federal Reserve survey of consumer finance.

This gets to Karen’s point of view. Look at who owns corporate debt as a standalone instrument. Anybody want to, the answer is about 1.3% of white people with an a median value of ownership of about $200,000, but an average of about a million. That’s how skewed it’s number of African Americans who are in corporate debt 0.0. The Fed couldn’t find anybody in two of the last three surveys <laugh> how skewed these type of asset accumulation has been. And it is deeply relevant as you look at terms of the bailout. And I don’t see the politics of that or the substance of that changing because the goal of financial stability runs very intention with the goal of investors having losses. And somehow I feel like a very strong leftist liberal saying investors should lose money is a sign of a healthy capital market. And everybody else saying, you’re crazy, man.

MILLS: I was glad you brought up stablecoin because so much of crypto is we’re going to do something that should be heavily regulated or historically been regulated, but we’re going to call it something else and then we can do whatever we want. And even, I know we’ve talked about this with Elon Musk through Twitter is going to all of a sudden offer financial services. You don’t get to do that in this country. There is a reason why there’s a whole infrastructure around there. There’s a lot of systemic risk, a lot of individual loss. It is just amazing to me when I talk to people who don’t have any sort of grounding in what DC does or how it works, where they think that they can do things outside of the regulatory sphere and are shocked when the regulators try to take them in. And so yes, I mean, stable coins are unregulated money market funds and should have enforcement actions against them.

HELTMAN: Well, given that we are out of time, I’m going to call it there, but I want to ask you all to thank our panelists and thank you all also for coming and joining us and we’ll do it again soon.

HELTMAN: Thank you for listening to the American Banker Podcast. I produced this episode with audio production from Kelly Malone. Special thanks this week to the Brookings Institution, Raymond James and Federal Financial Analytics. Rate us, review us and subscribe to our content at www.american.com/subscribe. From American Banker, I’m John Heltman and thanks for listening.


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