Monday Links - December 2, 2024

On bank supervision, Fed independence since 1935, debanking, and Sufjan Stevens' Christmas albums

Let’s get to it, what I am reading and thinking about this week.

Links

1. Making Sense of the Federal Reserve’s Report on Supervisory Developments, BPI, November 19, 2024

I talk about BPI a lot in these pages, usually in opposition to a lawsuit they have just filed or an interview a BPI official has just given. My opposition here isn’t partisan, to be clear, and neither are they. BPI is one of the most sophisticated lobbying groups in America, organized by and on behalf of the largest banks. They do a very good job defending their shareholders’ interests. It also means that anything any BPI official ever says about any subject besides what is in the interests of their shareholders should be taken with a salt mine in tow.

Reading the post linked above had me taking out the saltshaker again, but not dismissing their idea outright. The BPI post is about the Fed’s semiannual Supervision and Regulation report, which, as BPI notes, reaches two conclusions: “The banking system remains sound and resilient,” and that two-thirds of large financial institutions were rated less than satisfactory by their examiners along some dimension. BPI concludes: “how can the Fed possibly conclude that the banking system is sound and resilient” if the banks covering $26 trillion in assets are not satisfactorily managed?

BPI might be on to something. It is possible that the examiners at the Fed are hitting banks up with foot faults, or irrational conclusions based on nonsense metrics, or abusing their supervisory discretion in some systematic way. But other explanations are available to us, too. The soundness and resilience of the system is hardly a binary category. It is possible for the system to be sounder and more resilient than it is. And it is also possible that the soundness and resilience of the system has occurred in spite of bank managers, not because of those managers.

All to say that the dual conclusions of the Fed report are not incoherent. The truth is that we simply can’t know because so much of these critical determinations are wrapped in a thick barrier of secrecy. Confidential supervisory information helps in theory the banks themselves and the supervisors too. In practice, I fear that such laws and traditions of opacity end up hurting the rest of us. It certainly limits our ability to understand and evaluate what, in fact, is afoot with the supervision of our banking system. (For more from me on this, see here.)

2. Federal Reserve Independence and Congressional Intent: A Reappraisal of Marriner Eccles’ Role in the Reformulation of the Fed in 1935, by Gary Richardson and David Wilcox, NBER, November 2024.

This is a very fun paper by two great Fed scholars, Gary Richardson and David Wilcox. In the paper, the authors reevaluate the role of Marriner Eccles in redesigning the Federal Reserve System at what I have elsewhere called its “refounding” in 1935 with the passage of the Banking Act of 1935. It’s a story that needs wider telling. It came as part of a legislative package that was called, then as now, the “Second New Deal” and included such legislative juggernauts as the Wagner Act (creating the modern labor-relations framework), the Social Security Act, and much more. The Banking Act of 1935 was something of an afterthought.

An afterthought, perhaps, but Title II of that Act—not even the part that generated the most controversy at the time—completely recreated the Federal Reserve’s structure to de-emphasize the role of the Federal Reserve Banks and to create the institution of the modern Fed Chair.

What Richardson & Wilcox do so well is focus laser-like on one key and quirky aspect of Eccles’s view of Fed governance: he wanted to sync up the service of a Fed chair with the quadrennial presidential election so that Presidents could choose their central bankers. Here Congress resisted, and the legal mishmash that I have discussed elsewhere is the result.

The authors conclude that any fight between Trump and Powell in the coming months should learn from this history. I agree, to a point. It is certainly relevant that Congress never spoke definitively, despite invitations from people like Eccles to do so, on the status of removability for Fed leadership. The problem is that my read of the Supreme Court here is that such legislative history isn’t going to mean much in the actual litigation.

That said, the history here matters enormously for the hand that it gives Powell to play. It is a strong one. There is every indication that he will play it well.

3. Axios Explains: Debanking and tech founders, Ben Berkowitz, Axios, December 1, 2024

Banking policy land is all abuzz with discussions about Marc Andreesen’s recent appearance on Joe Rogan’s podcast, the four-hour episodes hosted by the guy who used to host Fear Factor and then became a UFC commentator and then, somehow and with no plausible explanation that I can muster, captured the beating heart of bro culture everywhere.

Andreesen makes the accusation that banks summarily fired a variety of tech founders for political reasons and that the Trump Administration is going to bring those banks (and their regulators) to justice.

I think the debanking debate is basically awful, top to bottom. Those who favor laws like the one in Florida argue, like Andreesen, that the banks are engaging in bias against political views that they don’t like. The problem with that argument outside of changes in law is that political status is not a protected class under laws like the Equal Credit Opportunity Act or the Civil Rights Act.

And how could they be? When is a potential bank customer acting like a risky idiot who won’t pay back his loans and when is a potential bank customer acting like a risky idiot who won’t pay back his loans in the name of some pet political cause? In America, politics is as politics does, so trying to determine which views are favored or disfavored because of “politics” is a fool’s errand.

What’s more, I just don’t believe the Andreesen version of events. I do believe that banks have derisked (the preferred term over “debanked”) certain clients or categories, as is their right as a private institution. That regulators are systematically going after political enemies through bank derisking is such a delicious bit of conspiracy theorizing in part because it wildly overstates how well-organized bank supervision is.

Anyway, I think the right answer for these ostensible market types when they find themselves fired by their bank is to find another of the almost 9,000 other depository institutions who would love to have their business. These so-called “fair banking” laws should be repealed where they exist and left to wither in committee where they have only been proposed. I am on a podcast making this argument recently here.

4. Sufjan Stevens, Songs for Christmas and Silver and Gold, 2001-2012.

Nikki, my wife, has finally lifted the ban on early Christmas music, so we are blasting it with abandon. For something a little different from either Bing or Mariah, try Sufjan Stevens. Stevens is the GOAT of indie music: Illinoise and Carrie and Lowell are two of the finest pieces of music ever recorded. I also loved his 2023 Javelin. His Christmas albums are just sensational. Put them on repeat and let me know what you think.