Tuesday Links - February 25, 2025
On debanking, Trump & the Fed, Musk & the Fed, DEI, and Bill Gates (and I guess Bill Clinton)
Here is some of what I am reading and thinking about this week.
Where Debanking Didn’t Happen, Steven Kelly, Without Warning, February 23, 2025
Regular readers will know I have a bee in my socks about the so-called debanking debate.
For the uninitiated, there is a claim that big nasty banks and their big nasty regulators acted ultra vires to exclude safe, virtuous clients from the banking sector because those safe, virtuous clients were not from the right part of the political spectrum.
I have long viewed these claims with profound skepticism, but not because I doubt that some (many?) bank clients have been “fired” by their banks. The skepticism is whether this is or ought to be illegal. It mostly isn’t illegal. Some in Congress, however, want to make it so. I hope their legislation fails.
This isn’t a partisan argument on my part. Indeed, some of the very types of clients—crypto-affiliated companies, for example—that cry the loudest foul here I have defended in other related contexts.
The problem is that we want banks to practice good risk management, and overexposure—including any exposure—to volatile businesses or sectors can run afoul of those practices. It depends on the bank, depends on the risk, depends on the exposure, depends on the regulator.
As my friend Steven Kelly notes in the linked article, it is astonishing where debanking did not happen. Circle, the company that sponsors the US Dollar stablecoin USDC, had enormous banking exposures to…wait for it…Silvergate, Signature, and SVB, three banks that failed or should have failed, wiping out billions in uninsured deposits. Indeed, in the last instance, Circle was the largest depositor and the largest recipient of government largesse, to the tune of $3.3 billion.
It would have been so much better for our financial system had regulators stepped in during 2022 to require those banks to fire Circle, whose own risk management practices appeared at that time to gamble on bailouts (which, to their credit, did in fact happen).
Anyway, this is one of the worst debates in banking. I hope it ends soon with banks and regulators still able to practice co-management of financial risk as they have done for almost 160 years.
Elon Musk wants to audit the Fed. Is that a good idea? Bryan Mena, CNN, February 22, 2025
No.
Trump’s plan to rein in agencies sparks alarm for the Fed, Victoria Guida, Politico, February 21, 2025
As it should. The executive order on its face seeks to shield the Fed’s monetary policy from this attempt at subordination, but this is conceptually and practically impossible.
Conceptually, let’s do a little central banking pop quiz.
Which of the following is NOT part of the Fed’s monetary policy apparatus:
A. Discount Window Policy
B. Master Account access and management
C. The Standing Repo Facility
D. Management of International Swap Lines
E. Emergency Lending Facilities
F. Bank supervision
G. The Board’s annual Financial Stability Report
H. Personnel decisions regarding hiring and promotion of its own proprietary Federal Reserve Police Force.
I. Basel III endgame regulatory finalization.
J. None of the above because the question is conceptually incoherent.
The answer is “J”. There is no clean cleavage between the Fed’s monetary policy decisions and everything else it does. Some will say that surely “bank supervision” is not part of the monetary policy equation, since the FDIC, OCC, and CFPB each do supervision but none does monetary policy. That premise is certainly true—there is federal institutional disarray at the federal level, a major theme in my new book on supervision’s history.
But the conclusion doesn’t follow. The Fed uses supervisory resources and information to inform monetary policy all the time, in virtually every meeting. Indeed, in the some 30 instances where Congress or presidents attempted to consolidate supervision, the key argument against removing such authority from the Fed (or in favor of consolidating the authority inside the Fed) all came to the same point: supervision is vital for the way the Fed does monetary policy. This argument seems especially real in our ample reserves system, where supervised bank reserves constitute the mechanism for monetary policy.
Practically, how would this even be done? The Fed’s research team supports all of its functions, its buildings house all of its functions, its budget funds all of its functions, its personnel manage all of its functions (hence my cheeky option “H” above).
As the saying goes, you pick up one end of the stick, you pick up the other.
The Fed is a single stick.
Democrats Need Their Own DEI Purge, Josh Barro, Very Serious, February 20, 2025
In my business ethics class this week, we are going to have a barn burner of a debate about (1) what constitutes a DEI policy in a corporation and (2) whether, in the context of the current zeitgeist, such policy should be discontinued. We started it a bit last week but we had more heads of steam to blow than we were able to blow.
My students know that in my class we only debate hard questions where people in good faith disagree with intellectual rigor and integrity. The (dis)continuation of DEI policies that emerged in the last five years in corporate America is a perfect grist for this particular mill. We read together the Costco policy, which defends the continuation of their initiatives, and the Meta policy, which announced a discontinuation of theirs.
It’s going to get spicy. And, as always, I commit in my Socratic dialogue to disagree forcefully and with a torrent of premise-challenging questions with everything each student says, giving them a chance to understand what exactly they believe, and why.
The linked article does a good job in the political context to make the case that the Democrats have not yet understood the nature of their 2024 defeat, how “DEI”—by which Barro mostly means race-based affirmative action, but not only—was their downfall, and how their party needs to change course lest 2026 (and beyond) simply entrench the existing coalition.
Source Code, Bill Gates, 2025
I am a business school professor, I read a lot, and I like thinking about the relationship between childhood contexts and adult choices. When Bill Gates published his memoir about his childhood, then, I was a sitting duck.
Truth is, though, I think most memoirs by prominent people are pretty weak tea. A simulacrum of real reflection. What I want to know is how it came to be, this great success on the world? What I usually learn is some variation of: “Inevitably”.
Gates has written one of the best reflections on childhood and personality I can recall having read. So full of useful detail, so much willingness to frankly expose points of departure, fissures of tension, extraordinary (and decisive) support from family and community, genuine displays of genius of a peculiar variety.
The memoir it brought most to mind was its antithesis, Bill Clinton’s My Life. That miserable book was about the worst offender in this genre. It is an oleaginous goop, sententious drivel. I remember reading it in 2005 when it came out and scaring my wife because I kept throwing it across the room, arising such a clatter (angry at myself I suppose for buying it in the first place).
Gates’s book has a beating heart and left me asking all kinds of questions about how to parent bright kids who challenge me in unexpected ways. I loved it. I am surprised by how much.