Priorities for the Next Federal Reserve Chair: Putting People over Corporations
August 16, 2021
By Emily DiVito, Ivan Cazarin
The Federal Reserve (the Fed) is a pivotal player in addressing the multiple crises the US faces as we continue to battle the COVID-19 pandemic and accompanying economic crisis. As we address these and future challenges, the American public deserves a Fed that uses all of its authority and leverage to prioritize the well-being of workers and families over corporations.
While much of the public debate focuses on the Fed’s dual mandate to stabilize prices and achieve full employment, the Fed also plays a crucial role in achieving the equitable economy that we deserve—by providing banking services, regulating the nation’s banking system, and maintaining the stability of financial markets. As we look to the next four-year Fed chair term, we need a Fed that adheres to principles and policies that prioritize people over corporations: strong banking regulations, corporate governance reform, readily available state and local financing, and a more inclusive banking system.
Strong Banking Regulations
In the wake of the Great Recession and accompanying economic collapse, Congress introduced legislative reforms to address the financial sector’s predatory behavior and the spread of systemic risk. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act broadened the Fed’s role in enforcing regulations in the banking sector, introducing common-sense reforms to reduce financial speculation and expanding the Fed’s regulatory ability and guidelines to prevent similar crises from occurring in the future. However, in 2018, with public support from Fed Chair Jerome Powell, new legislation rolled back critical components of Dodd-Frank—including those that outlined data reporting requirements for lending, instituted liquidity requirements, and prohibited banks from trading in their own self-interest. The rollback bill’s passage enabled riskier trading, denied regulators crucial information about lending behavior, and made banking transactions more opaque—allowing massive financial institutions to continue profiting off of discriminatory lending practices. These practices predominantly harm Black and brown Americans, who have historically been excluded from the banking system and access to equal lending due to decades of racist policies.
Though legislation would be needed to thoroughly undo the deregulation of recent years, in its next term the Fed should prioritize equity and accessibility in its lending practices, such as through using its existing authority to bolster the Consumer Financial Protection Bureau (the entity responsible for consumer protection in the financial sector, housed within the Federal Reserve system), establish race-forward lending requirements for banks and mortgage providers, and strengthen data reporting requirements and oversight.
Corporate Governance Reform
The dominant corporate governance model of “shareholder primacy” prioritizes short-term profit maximization for corporate executives and shareholders over shared prosperity for workers and consumers. In recent years, this has led to skyrocketing executive stock compensation and shareholder payouts in dividends and stock buybacks, at the expense of innovation and workers, whose wages have stagnated despite record-high productivity.
Last year, the Fed had an opportunity to disincentivize risky and extractive corporate behavior when Congress gave it broad discretion over implementation of the pandemic relief credit facilities. However, the Fed primarily bought corporate debt on the secondary market, which had no eligibility conditions requiring companies whose debt it bought to save jobs or limit executive or shareholder payments; many of the large companies that had corporate debt bought by the Fed—like Boeing and Raytheon— then laid off workers and paid dividends to shareholders.
The facilities used to buy this corporate debt have since shuttered, though the Fed ultimately deemed them successful in maintaining credit availability for businesses during the beginning of the pandemic. But if future relief efforts are required, we need a Fed that takes every opportunity to prioritize and protect workers and families over corporate executives and shareholders—especially in times of crisis.
Aggressive State and Local Financing
Because of balanced budget requirements, when states and localities face revenue shortfalls—as many have since the COVID-19 pandemic began and millions of people lost their jobs—they have to make steep cuts to programs and personnel. A similar scenario occurred during the Great Recession: Millions lost their jobs, revenues fell, and states and municipalities cut services and laid off workers. At the time, under the leadership of then-Chair Ben Bernanke, the Fed saw it as the responsibility of Congress to safeguard state and municipal borrowing, and so resisted actions to help states and localities finance their way through the recession. The resultant budget cuts that states and localities had to make kneecapped the country’s ability to rebound and delayed recovery by up to four years.
Current Fed Chair Powell learned from the Great Recession, and has acknowledged the need for a stronger Fed role in state and municipal financing, telling the House Financial Services Committee in June 2020, “It will hold back the economic recovery if [states and localities] continue to lay people off, and if they can continue to cut essential services . . . And in fact, that’s kind of what happened post the global financial crisis.”
However, the Municipal Liquidity Facility, the vehicle through which the Fed lent directly to state and local governments, was woefully underused and shut down (under the direction of then-Treasury Secretary Steve Mnuchin) at the end of 2020. Under the next chair, we need a critical examination of why the Municipal Liquidity Facility failed to make more loans, and an exploration into long-standing Fed authority—including Sections 13(3) and 14(2)(b) of the Federal Reserve Act—to find alternative ways the Fed can directly backstop state and local financing in future economic crises.
A Banking System Open to All
The US banking system is tiered—the wealthy and those with steady incomes have access to dependable banking services, but low-income Americans are often forced to turn to exploitative financial services like predatory check cashers and payday lenders. As a recent example, when Congress approved pandemic relief checks to all individuals, “unbanked” and “underbanked” Americans—typically low-income and Black, Indigenous, and people of color (BIPOC)—faced difficulty and delays receiving the funds.
The Fed can help fix this banking inequity by advocating for and implementing postal banking through FedAccounts, a system of banking services through the United States Postal Service (USPS) executed on the backend by the Fed. This system, which would entitle all US citizens and residents to open a bank account with the Fed, would essentially function as a public option for basic banking services. Running this system through USPS would ensure that an in-person retail experience is widely available, as there is a staffed post office in nearly every community in the country. And, because of Fed implementation, such a system would be free of the duplicitous, profit-driven practices common in commercial banking—it would have no interchange or other hidden fees, no minimum balance requirements, and instant clearing.
While this reform would need an act of Congress, strong Fed support—something that Chair Powell has not been eager to provide in the past—would go a long way in securing eventual passage. Having a truly inclusive, accessible banking option would help remedy long-standing systemic problems in financial services that have disproportionately burdened low-income communities.
The Fed wields a lot of influence—both explicitly in its direct authority and via the pressure it can leverage on Congress and the public through the policy priorities it adopts—to ensure our financial system is well-regulated, equitable, and accessible to all Americans. The next Fed chair should adhere to these principles and should promote Fed policies that prioritize people over corporations.