The Powell Memo to the Biden Administration


President Donald Trump nominates Jerome Powell to chair the Federal Reserve in November 2017

Joe Biden’s presidency is building its foundation upon the revitalization of America’s working and middle classes, and the reversal of the growing power of the wealthy and big business. The fate of the Biden administration, the Democratic Party itself, and I daresay America -- in a time when democracy is under attack -- hinges on this.


Biden’s Build Back Better agenda taxes millionaires, billionaires, and big business in order to make major investments in low and middle-income families. His bipartisan infrastructure plan focuses on rebuilding America’s roads, bridges, railroads, schools, and water systems. He has become the most vocal and aggressive advocate for the labor movement an American president has been since FDR. And his set of appointees in economic and regulatory policy have been the toughest on Wall Street, Big Tech, and monopolistic big business in at least three generations.


The president has made a big bet: that he and the Democratic Party can reverse the decline in fortunes for so many families by working for them instead of Wall Street and Big Business. The passing of the president’s budget and economic plan is the single most important thing that needs to happen for that bet to pay off.


Second in importance to winning that legislative fight, though, is his next major appointment: the Federal Reserve Chair. The Fed Chair is the second most powerful job in the American economic system, second only to the presidency itself. The Fed Chair not only is the prime mover on questions of interest rates and how hard to push for full employment, but is the most powerful regulator of the financial industry, which shapes the rest of our economy.


I was in the Clinton White House when President Clinton had to decide whether to reappoint Alan Greenspan as Fed Chair. I remember well the debate inside the White House in those days. Greenspan had been appointed initially by Reagan, and he was a follower of Ayn Rand’s hyper-libertarian, pro-Wall Street philosophy, but he had been helpful to us getting our big 1993 budget package passed. The Clinton officials close to Wall Street loved working with him, so Clinton reappointed him. That decision, along with the financial industry deregulation bill passed in 1999, left President Clinton’s legacy with much of the blame for the financial collapse in 2008.


Joe Biden has already made clear he wants a different kind of legacy.


To be fair, Powell is not a hard right libertarian the way Greenspan was. He has some pluses in his favor, especially for standing up to Trump’s pressure on some key issues. He’s not panicking about the short-term inflation spike, though his record suggests he’ll tighten monetary policy faster than necessary (more on that below). But Powell is every bit the pro-Wall Street deregulator that Greenspan was, which goes in the exact opposite direction that the Biden administration has shown they want to go with their other appointees.


There is no reason to think Powell won’t turn on a dime on other policies once reappointed: Brad DeLong, an economist who was for a long time sympathetic to Wall Street-y Democrats, has warned forcefully that Republicans like Powell will do exactly that, and that Biden should appoint Lael Brainard instead. DeLong noted:


Without Trump in office, and without the fear that tight money will erode vote margins in the short run, Republicans are about to unite overwhelmingly behind the talking point that monetary policy needs to be substantially tightened immediately. Powell, being a Republican worthy, will listen and toe this line.

Kevin McCarthy, the House Republican leader, is already out in front here with his inflation scaremongering. This will continue through November 2022 at least. If McCarthy is speaker of the House by 2023, it will only fortify Republican determination to push for monetary policy that would squeeze the Biden economy. Under these circumstances, would a newly reappointed Powell sway with the wind, or hedge his bets?


Simon Johnson, a former IMF chief economist and MIT professor, argues that Powell’s roots as a dove aren’t exactly deep. Back when he was on the Fed board just after the Great Recession, Powell belonged to the flock of hawks that wanted to start tightening policy, which then-chair Ben Bernanke managed to forestall.


Powell’s attitude toward the intersection between Fed policy and racial justice is also a damning reveal about how willing he is to tighten monetary policy. In the summer of 2020, with the nation having a more honest conversation about structural racism in the wake of the murder of George Floyd, Powell gave a statement in St. Louis that seemed to move the Fed toward a commitment to help address racial inequality, one that would be central to any easy-money policy under the Fed.


Historically, the Black unemployment rate has consistently been double the white unemployment rate. When the Fed makes decisions based on aggregate metrics of unemployment, it risks raising interest rates before marginalized communities have fully recovered. The Fed needs to be open to innovative ideas, including a particular focus on the Black unemployment rate, for commitments to easy money to be credible.


Powell’s 2020 statement now looks like a head fake. In a recent interview, Powell invoked the “famously broad and blunt tools” notion – the idea that all the Fed has is interest rates, which is wrong – to beg off responsibility for addressing racial disparities. That line could have come from Alan Greenspan himself 25 years ago.


Additionally, Powell has presided over a growing scandal at the Fed involving high ranking officials, including himself, making stock trades that sure look like they violate the spirit of the Fed’s stated goal of avoiding “the appearance of impropriety.” Add to that the fact that he’s a multi-millionaire former private equity executive with The Carlyle Group (a symbol of Wall Street and Washington collusion if there ever was one), and it will all make for a very messy confirmation fight.


One very bad idea floating around has been to put a good regulator at the Fed as vice-chair for supervision and give Powell another term. But this would not solve the fundamental dynamics at play. First, Powell, the chair, presided over and voted for the deregulation that the now-ex vice-chair of supervision, Randall Quarles, spearheaded. Second, there is a Republican majority on the Federal Reserve Board, and one of them is Quarles, who gets to stay because his term as Fed governor is not up, even though his time as vice-chair is. If Powell is there, Quarles can lock arms with him to prevent a repair of the damage of the Trump years.


In 2022 and 2024, the Democratic Party will hopefully be able to run on having creating millions of good paying jobs, increasing wages, and stopping Big Business from screwing over working families.The Fed Chair has way too much power over the economy to risk reappointing a conservative like Jerome Powell, with a long history of deregulating Wall Street. Memo to the Biden administration: Powell threatens the success and viability of your agenda.

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