Financial regulation should encourage narrow deposit-taking and equity-financed banking. I think a wide range of financial institutions should have access to something that looks like reserves.
Honest stablecoins are just an implementation of a narrow bank or money market fund, so it looks like we may finally have a workaround to these harmful regulations. But why work around what can easily be fixed?
Treasury markets, dominated by dealer banks, have experienced turmoil. Do you think reforms to liquidity and capital regulation will solve the problem?
Will you allow or require exchange trading of Treasurys, and allow other investors access?
Channeling my Stanford colleague Darrell Duffie here: The dealer banks got a monopoly in exchange for providing liquidity. They didn’t provide liquidity. Time to end the monopoly.
Will you end bailouts, and if so, how? Can you define “financial stability” and “systemically important” in ways that don’t mean “nobody loses money”?
If I were Fed chair, there would soon be a speech announcing the end of bailouts, and a narrow and precise definition of “systemic” as a systemic run only. Financial institutions: Get your ducks in order, issue a lot of equity, and get your liquidity ready for fire sales (er, buying opportunities). The Fed won’t front-run those next time.
Defining the Fed’s role
Should the Fed aim for “inclusive employment,” worry about left-behind areas, or include other distributional goals?
Should it view its mandate as a directive not to worry about anything else, or a starting point from which to explore other goals?
I favor a narrow approach, meaning that the Fed should not pay attention to goals not mentioned in its mandate. I also favor Fed independence. Mission creep into contentious political areas will undercut independence.
How will you improve the Fed’s decision-making processes? How will you restructure the Fed’s operations, including staff size and scope, diversity programs, and research?
I don’t want to give a full reorganization plan here, in part because I don’t have one. The question really asks: Do you think such a reorganization and review is necessary, and my answer is yes.
Should the Fed be formally accountable for its inflation performance, fulfillment of its mandate, or actions that exceed its mandate?
One could say that via regular reports to Congress, and periodic reappointments of its members, the Fed is already accountable. Congress is certainly free to grill Powell now on questions such as “How did you interpret ‘price stability’ to mean 2 percent inflation?” But a bit more formal accountability would all in all be a good thing.
Higher interest rates raise interest costs on the debt. Inflation wipes out federal debt. Should the Fed think about these budgetary implications? Should it work with the Treasury to coordinate policy?
The Fed studiously avoids fiscal policy, but we can’t avoid the fact that the inflation of 2021–23 had fiscal roots. Without $5 trillion of unfunded deficits, there would have been no inflation. With those deficits, the Fed had limited—but some—ability to control inflation.
Monetary and fiscal policy are intertwined. We should acknowledge that if the Fed can affect real rates of interest, it can affect interest costs on the debt, at least until inflation erupts. And if higher interest rates soften the economy, it results in deficits.
Separation of monetary and fiscal policy only works with small debts or with governments that adapt tax receipts and spending to monetary policy. For everyone else, some coordination is necessary, and every country with budget problems has a public debate between central bank and fiscal authorities. We really can’t avoid it. I would prefer, of course, tighter fiscal rules to control inflation rather than a subjugation of monetary policy to finance deficits.
Should financial regulation be integrated with or separated from monetary policy?
Relative to its monetary policymaking, should the Fed’s role in financial regulation be less independent of Congress and the administration, as other regulators are?
I’m torn on this one. The essential argument for independence—“time consistency,” that the government wants to precommit to low inflation that it may not want later—doesn’t really apply to financial regulation.
Monetary policy and bank regulation are somewhat intertwined, which suggests that if an independent institution does one, it should do the other. But perhaps they are less intertwined than we think: The Fed maintains a lot of separation between the two functions.
Yet the more accountable regulators (such as the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission) don’t seem to do a tremendously better job than the Fed. We must admit that for all its faults, the Fed has been a lot more successful than most government agencies.
I’m for much better financial regulation, and would listen to arguments both ways.
These questions are the tip of the iceberg. The financial and monetary systems have evolved past the current Fed, and a wise Fed chair will need answers. Obviously, anyone giving these answers wouldn’t make it past the first round of interviews. Frankly, I doubt anyone giving clear answers to these questions would.
John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and was previously a professor of finance at Chicago Booth. This essay is adapted from a post on his Substack, The Grumpy Economist.