Monday links

Thoughts on banks suing their regulators, open banking, Fed independence, 0% aspirational inflation, and fallibilism.

1. Trade groups challenge CFPB’s open banking rule on Day 1, Banking Dive, October 23, 2024

   Another rule, another lawsuit from the Bank Policy Institute. Jamie Dimon, CEO of banking juggernaut JP Morgan Chase, seems excited for the change in posture toward banking regulators: banks and their lobbyists are now in the business of fighting battles lost through the political process (including through regulation) now in the courts.

   The lawsuit against the CFPB on its “open banking rule” may simply be the paroxysmal reaction to a regulation that cuts into profit margins, in which case I say to the regulators: battle it out, win lawsuits, and then strengthen these rules further. Don’t negotiate with yourselves in anticipation of potential lawsuits. We are no longer in the world of potential lawsuits.

   That said, there remains the possibility that, in the “sue first, ask questions later” approach that the banks are taking that they could raise colorable legal issues. The question in open banking that intrigues me most is what happens when a customer clicks “share my information” with a third-party app that turns out to be the AI fever dream of some offshore scammer. Is the bank liable? The rule doesn’t say, the banks raised the concern, and now they want some clarity. Question is whether that lack of clarity is in fact illegal.

2. Private Credit’s Banking Romance May Turn Sour, Paul Davies, Bloomberg, October 29, 2024

   The rise of private credit—technically, a closed-end pooled investment from non-bank lenders to privately held companies—has been a fascinating phenomenon in markets that raises a lot of questions. Is it an arbitrage? Is it systemically important? Is it a solution to problems of capital-constrained banks? Are we reliving the heady days of the early 2000s?

   Perhaps the most intriguing aspect of the rise of private credit is the fact that many of these non-bank lenders—insurance companies and private equity firms, among others—are partnering with banks that are, in principle at least, engaged in the same business. The largest banks have mostly welcomed the collaboration from private credit, for reasons that are not crystal clear to me. Sure, there is a fee-based business to it all and banks can clear their balance sheet of certain kinds of risks by finding third parties to whom they can shift that risk. But shouldn’t the banks be in the business of using their own balance sheets to lend in precisely this way? Isn’t that the conceit of modern banking, that banks receive all kinds of public commitments so that they can make these kinds of loans? More questions than answers at this point, although I did attend a conference last week where my co-author Michael Ohlrogge at NYU presented some preliminary data and analysis that describes starkly the risks and rewards associated with private credit. A phenomenon to watch closely, no doubt.

3. Trump’s former pick to join the Federal Reserve has proposed a radical solution to solve inflation, CNN, October 31, 2024

   Judy Shelton was one of the most audacious Fed nominees in recent history. She did not represent the mainstream of either party and contorted her vision of interest rates to suit the needs of her political sponsor, the very decision-making posture those who defend Fed independence most fear. Shelton is now advocating in favor of “zero inflation,” a classic desired policy goal (and outcome) associated with the fiercest of gold-standard enthusiasts (of which Shelton may well have become once again).

   As Mark Zandi points out in the linked article, an inflation target (at 2% or anywhere else above zero) exists to permit the inevitable measurement error. Without it, undershooting the target at zero percent leads to a deflationary economy. Inflationary economies, as we are currently observing, are extremely unpopular. Deflationary economies, however, are another animal altogether. Deflation is what made the Great Depression “great”. Returning to a world where central banks engineer cyclical deflation is not a sign of policy health.

4. In a 2nd Trump term, Fed independence would go “out the window,” economist says, Marketplace, October 28, 2024

   It might surprise readers who just read my dismissal of right-wing fringe monetary policy that I found this Marketplace report about the end of Fed independence should Donald Trump win tomorrow a little underwhelming. (I should note that one of the experts quoted is Alan Blinder, one of my doctoral advisers, so I’m treading with due care here). The problem with this report is this. We have no idea what a Trump election will mean for Fed independence. We know, of course, that Trump—by word and deed—does not abide by what I called the Rubin Rule, or practice adopted in the Clinton Administration of presidential abstention from Fed critique. And we can expect some use of the bully pulpit to harass the Fed.

   But commenting on economic policy by a president seems…like a politically risky proposition that any president is likely to lose as much as win in the eyes of an angry electorate. My colleague Brian Feinstein has argued, with evidence, that voters really don’t like it when presidents meddle with independent agencies. It is not obvious to me that Trump won his last battle over Fed independence in 2018. I have profound doubts about whether he would win in 2025 (or whenever else it might occur).

   There’s another aspect of this debate that bothers me. I am completing a book on the political history of the Fed that argues that the Fed’s central bankers are among the most proficient and effective political actors in our nation’s history. Their longevity and ability to expand their portfolio of policy is unmatched even by the US military. Put to the side whether that’s a good thing or a bad thing—that depends in part on how you evaluate technocracy over populism, among other debates—but I think it is past time to recognize that, in a political fight, the Fed is not the underdog.

5. Fallibilism can break America’s political fever, Kwame Anthony Appiah, Washington Post, November 4, 2024

   I read this piece this morning from Appiah, my favorite living philosopher, with great interest. It connects deeply with my essay from Friday on “radical uncertainty.” His point about pluralism and religions (plural) is especially important: the very idea of “religion”—not a word or concept in Judeo-Christian-Islamic scripture—implies an appreciation that people who believe very differently from you may have come to their conclusions following morally and structurally identical paths. That should invite some epistemic humility in the way we approach our own sense of selves, what Appiah calls “fallibilism” and “thinking in the third person.” I recommend the whole piece (and all of Appiah’s work); I expect I will assign this in my next business ethics class, which starts in the New Year.