Sheila Bair, one of the few American regulators to sound the alarm about the collapse of subprime mortgages, told CNN that Powell had led a disturbing rollback of the rules put in place to prevent the 2008 financial crisis from recurring.
“His real weakness is in financial regulation,” said Bair, who ran the Federal Deposit Insurance Corporation from 2006-2011. “Supervision has been weaker since Janet Yellen left. It’s easy.”
Bair, an appointee of President George W. Bush, also said the Powell-led Fed has not done enough to fight climate change. She called for a more structured consideration of the climate risk in banking supervision and in stress tests.
“The banking system is exposed to very real financial risks because of the climate,” said Bair.
Biden’s big decision
The comments come as President Joe Biden contemplates reappointing Powell for another four-year term at the helm of the world’s most powerful central bank. Progressives, led by New York MP Alexandria Ocasio-Cortez, have called on Biden to replace Powell as chairman when his term expires in February.
A White House official previously told CNN that Biden would be nominating candidates for the Fed who he believed would be “the most effective in executing monetary policy.”
Powell has been praised by some economists for responding to the biggest test of his tenure: the global pandemic.
In March 2020, the Fed quickly cut rates to zero and announced unprecedented programs aimed at re-freezing credit markets. Some economists argue that these contingency measures prevented the Covid recession from turning into a full blown depression.
Bair said Powell earned “high marks for acting quickly and decisively” on the March 2020 pandemic and for publicly communicating the Fed’s mission.
“Everything is weak”
However, the former FDIC chief argues that prior to the arrival of Covid, the Fed and other agencies should have tightened financial regulations to stifle asset bubbles and force banks to build capital buffers ahead of a possible storm.
“They did the opposite. They loosened up and loosened up, even if the economy grew well under Trump,” said Bair, who has long been resolute in advocating stricter regulation. “It definitely disregards an important lesson from the financial crisis.”
The Financial Crisis Inquiry Commission, which spent more than a year investigating the root causes of the financial crisis, found that regulatory failures contributed to the 2008 meltdown.
“The widespread failures in financial regulation and supervision have proven devastating to the stability of the country’s financial markets,” the Commission concluded. Today Bair serves on various boards, including Fannie Mae, where she is the chairman. Bair is also energizing her career as a children’s author by bringing out a series of books called Money Tales, which focus on financial education. Most of the 2010 Financial Reform Act known as Dodd-Frank is still in force today. Still, Bair worries that these safeguards are constantly falling away. She pointed out a number of changes made during the Powell era, including changing bank stress test assumptions, reforming the controversial Volcker rule, and removing a margin requirement for derivatives transactions.
With each of these regulatory adjustments, proponents have cited a desire to “modernize” traffic rules. Bair rejects this feeling.
“I don’t know how modernization is. Everything is weaker, pointing the way,” she said. “If they want to modernize, it would be nice to see them get off the ground on cryptocurrency. That was a very slow move.”
(Bair sits on the board of directors at Paxos, a PayPal-backed fintech company that calls itself the first regulated blockchain infrastructure platform.)
Powell defends regulatory records
Anthony Scaramucci, founder and managing partner of the investment firm SkyBridge Capital, defended Powell’s tenure at the Fed and asked who would be a better candidate.
“Jerome Powell did a very good job overall,” Scaramucci told CNN. “If you want to replace it for visual reasons, go ahead. But I think it would be a mistake.”
In response to Bair’s criticism, the Federal Reserve declined to comment.
Despite Bair’s comments, the Powell-led Fed has taken steps to address the climate crisis.
Late last year, the central bank joined an international network of global financial regulators focused on climate change. In June Powell said the climate crisis posed “profound challenges to the global economy and certainly the financial system.” He argued that the rigor of the stress tests was “very much maintained” and that capital requirements for the largest banks were effectively increased. Powell also noted that last year the Fed suspended share buybacks for banks and capped dividends, which drove their capital levels even higher.
“By and large, our financial institutions are well capitalized,” said Powell. “They managed to get through the recent pandemic and acute phase of it and recovery and do their job in the meantime.”
Banks survived that time
The Fed announced last month that big banks would need to hold around $ 1 trillion in high quality capital – “enough to weather a severe recession and continue to lend households and businesses.”
Bair agrees that banks are certainly better capitalized than they were during the last crisis, when the Lehman Brothers implosion threatened to weaken the entire financial system.
However, Bair pointed out that the big banks benefited massively from the unprecedented intervention by the Fed in March 2020, including its promise to buy junk bonds and other corporate bonds.
“I don’t think they have much to brag about,” Bair said of the big banks. “I’m glad they didn’t fail. But I think many of them would have if the Fed hadn’t intervened in time to save the entire economy.”