Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / The CARES Act, Inflation and Financial Regulation

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The CARES Act, Inflation and Financial Regulation · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> Jon Hartley: This is the capitalism and freedom in the 21st century podcast where
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we talk about economics, markets and public policy.
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I'm Jon Hartley, your host.
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Today I'm joined by Andrew Olmem, who is a partner in Mayer Brown's Washington,
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DC office and a member of their public policy,
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regulatory and political law practice.
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As deputy director of the White House National Economic Council in the Trump
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administration, working under both Larry Kudlow and Gary Cohn.
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Before that, he worked as chief counsel and
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deputy director of the Senate Banking Committee.
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Andrew is incredibly knowledgeable in all things regulatory and
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economic policy related and draws on years of experience in government.
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Welcome, Andrew.
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>> Andrew Olmem: Hi John. Thanks for having me today.
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>> Jon Hartley: So I want to start by your early career.
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So you did your undergrad and law school at Washington Elite.
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You spent a lot of your early career in Washington,
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DC in various congressional offices.
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You spent a couple years working at the Richmond fed as an associate economist
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before joining the Senate banking staff.
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How did you first get interested in economics and economic policy?
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>> Andrew Olmem: Well, I think I was that kid who was always interested in history.
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And so I kind of devoured history books as a kid,
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starting with somehow I got interested in, I think, the American Revolution
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as a young kid in the way that some kids fixated on certain things.
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That's what I got hooked on.
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And then just kind of American history, and it just kind of spread from there.
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And I kind of read voraciously as a kid.
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And then my parents took us to Washington, DC on one of those classic family trips.
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And I just had a blast exploring, learning about Congress and
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the White House and what the president did and Supreme Court.
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And so that kind of had a natural kind of evolution into understanding kind
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of how our government works.
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And then over time, I think that migrated in just how economic policy and
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helped explain how government policies are designed and
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which ones are successful, which ones are not.
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And this would have been the heyday of the Reagan years.
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And so I naturally ended up reading national review,
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something I got introduced early.
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A lot of people in my generation on the Republican side watching
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William F Buckley on the firing line as a kid.
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And so by the time I got and got to college,
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I knew I wanted to do something along the lines of politics or economics.
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I always had a little bit of a business interest, too, but
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those are kind of my main academic interests.
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And so I ended up working on the hill for a few years in college.
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I just had a great time with, and then went to noted the Richmond
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fed right out of undergrad, where I was an econ major and
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just had a great experience there and learned just a ton.
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>> Jon Hartley: That's great, and you grew up in the midwest, is that right?
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>> Andrew Olmem: Yep, I grew up in Minnesota, kind of northern Minnesota.
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>> Jon Hartley: Got it. So was it, were you a bit countercultural,
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I guess, reading National Review growing up, but
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were you sort of one of the few, sort of, I guess, conservatives in your class or.
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>> Andrew Olmem: It was a pretty democratic area?
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Yes, I guess I was a little bit, definitely the outlier.
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I had an uncle who was just a great influence on my reading and
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was very serious about what books I read.
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Not just necessarily conservative leaning, but
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just making sure I was reading really good stuff.
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And so I think that also helped fuel it.
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And then, like I said, I had this trip out to DC that just kind of really.
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I think I was ten at the time, really kind of triggered an excitement for it.
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And so even though my leanings, I think, were more on the conservative side,
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kind of free market, which we can talk a little bit more.
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I was just really interested in kind of government and
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understanding how the world works.
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So, yeah, I grew up in a place that was certainly very,
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very democratic, but I was always comfortable just being.
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Having my own views.
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>> Jon Hartley: Fantastic, many very well known economic policy hands banks
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sometime on the Senate Banking committee.
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I think a lot of people don't necessarily realize this,
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that a lot of people go on to serve on the Fed board or work in the NEC.
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Spend some of their early careers working on the Senate Banking committee.
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You worked within the Shelby office?
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Senator Richard Shelby's office, alongside many others who kind of went on to
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have very distinguished Senate policy careers,
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like Mark Calabria went on to lead the FHFA and many others.
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I'm curious, what was your time like as a congressional staff or
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working on the Senate Banking Committee?
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Can you explain sort of what some of the key responsibilities of
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the Senate Banking Committee are?
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>> Andrew Olmem: Yeah, I love working on the banking committee.
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It was just a great job for me.
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The team we had there was just superb.
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And it was also a unique time to be there because I got there kind of right
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at the ending of, they call the kind of GSE wars about fights about what to do
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about the regulation of Freddie and Fannie.
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And then that quickly moved into the financial crisis of 2008 and
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then the Dodd Frank negotiations and debate about the Dodd Frank bill.
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So it was probably the most active time in the committee since the new deal.
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And so we were right at the center of all that.
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Just kind of fortuitously.
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The banking committee is always an interesting place to work because it's
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the committee that's responsible for
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overseeing all the federal agencies related to financial services.
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Not only banking agencies, but HUD, the SEC, and
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also certain parts of treasury, export controls, flood insurance.
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Interestingly enough, and actually even has a piece in transportation because it
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oversees transit programs.
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So there's a pretty broad jurisdiction.
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And I got to work on a lot of different issues and
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ended up staying seven and a half years there, which is pretty long tenure.
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But I just, it was such an interesting place and we had such a good team.
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>> Jon Hartley: And what years would that have been?
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The seven years.
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>> Andrew Olmem: From 05' to 13.
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>> Jon Hartley: Got it. So you're there during the global
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financial crisis- >> Andrew Olmem: Yep.
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>> Jon Hartley: And Dodd Frank, sort of the whole aftermath,
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financial regulatory response.
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Wow, what a time to be there.
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And I guess, like, sort of looking back on it,
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any thoughts on sort of the legacy of Dodd Frank here now,
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like 12 years later, or a big sort of evolving thing?
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>> Andrew Olmem: Yeah, I think the critiques' of Dodd Frank have largely
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proven to be right on mark, which was that it was, one,
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a big missed opportunity to do real reform of the financial system.
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Two, is it resulting in another layer of bureaucracy and unnecessary costs
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on the financial system that isn't necessarily making the system safer.
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And that we have a kind of risk now of really institutionalizing too big to fail,
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and that has a real danger in skewing our markets over the longer term?
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Certainly there are certain aspects of the financial system that certainly needed to
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be reformed post global financial crisis.
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The way capital was done was certainly really one of those areas.
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Derivatives reform.
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There are a lot of areas that I think there was bipartisan agreement that needed
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to be reformed.
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>> Jon Hartley: So like Basel three capital regulation in some respect,
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I mean, maybe not ideal in terms of- >> Andrew Olmem: We can talk about details
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of capital regulations,
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which has now recently gotten a little bit more complicated.
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But I think it was clear that the system was under capitalized going out into 2008.
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And that there were some regulatory problems in the housing finance system
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that hadn't been addressed and needed to be.
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But then there was, again, pretty strong bipartisan support for
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a lot of those provisions.
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But I think the controversy around the CFPB and
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in particular some of the credential regular authorities.
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And how institutions are regulated, still problems that we haven't
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really figured out how to get the right balance on.
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>> Jon Hartley: Absolutely. I mean,
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it's fascinating to see how the CFPB, the Financial Protection Bureau.
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Elizabeth Warren's so called brainchild, has kind of evolved over time and
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been used in different ways for a whole number of things.
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I can think of things like income share agreements are something that I think
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the Biden administration really doesn't like.
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And the CFPB has been suing a number of income share agreement providers.
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Yeah, it's very interesting how the legacy of Dodd Frank, and
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we'll get back into some of that later, banking regulation and reforms.
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I wanna now sort of fast forward to you joining the White House.
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You joined the White House National Economic Council in February 2017,
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right at the beginning of the Trump administration.
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And for those, I guess, that aren't aware, the NEC was created in the early 1990s.
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But sort of grew out of a few other predecessors as sort of handling
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economic policy coordination within the White House.
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Can you explain a little bit how the NEC works within the White House and how it's
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evolved with other economic policy bodies, like to the Treasury Department?
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And how did it function within the Trump administration in particular?
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Cuz I know sometimes these things can change from administration.
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>> Andrew Olmem: Yeah, they changed a little bit.
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But for the most part,
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the NEC has been pretty stable since it's created under the Clinton administration.
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And the purpose of the NEC is to serve as one, the coordinator
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of economic policy decision-making for the White House, right?
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Under Article 2, the president leads the executive branch.
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He's the one ultimately responsible for
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all decisions being made in the executive branch.
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And there needs to be a process for determining which decisions need to go up.
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And have the president formally be decided upon, which ones other senior officials
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can provide guidance, knowing already where the president's positions are.
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So there's a lot of meetings to making sure that there's coordinating
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kind of the president's policies throughout the administration.
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It also does a function in helping devise policy,
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in bringing the different officials together,
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relevant officials throughout the executive branch together,
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to determine what policies the administration should pursue.
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And that process usually requires a presidential sign off cuz usually
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the stuff that is in the White House are the kinda most important issues, right?
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There's only so many hours and
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a lot of decisions we made, you have to make sure it's the important ones.
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So there's a lot of meetings about what direction policy should go,
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making sure the president's informed on decisions, briefing the president.
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I spent a lot of my time briefing the director of the National Economic Council.
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And then also working with the other policy councils in the White House because
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there's some overlapping jurisdiction.
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The National Security Council is better known,
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serves very similar function for foreign policy.
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There's also the domestic policy council, who handles, again,
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this name [LAUGH] signifies the traditional domestic policies.
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So you spend a lot of time, particularly when I was deputy, kinda coordinating with
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the other policy councils to make sure everybody knows what's going on and
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where we're going and the appropriate sign offs are being obtained.
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So it's a very interesting place to do and
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just a fantastic place to do economic policy.
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>> Jon Hartley: That is fascinating and also what a fascinating time to be
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at the NEC and in particular in early 2020, the COVID pandemic hit.
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And you were very involved in the US economic policy response to COVID-19,
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the CARES Act, some subsequent economic policy response as well.
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Can you explain what your role was as deputy director?
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And also I wanna get into what you think some of the CARES Act's sort of biggest
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successes and failures were.
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But can you sort of explain, like, sort of take us into the room or some of the rooms
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that you were in in helping to set up and sort of get the CARES Act going?
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And can you explain maybe some of the details of the CARES Act as well?
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There are a lot of pieces from stimulus checks, unemployment insurance expansion.
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There was obviously all this small business oriented paycheck
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protection program grants or forgivable loans.
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Can you explain how did that all come together?
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And what was the thinking around that being the optimal policy
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response at the time?
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>> Andrew Olmem: Well, there's a lot there, John, so let me unpack it first,
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is the deputy director of the NEC handles the day to day management of the NEC.
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The NEC is a pretty small organization, and so
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each of its staff members have a pretty significant
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amount of authority over their issues.
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And the way we were structured, and I think similar for most White Houses.
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We had a special assistant to the president who handles tax policy,
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one who handed telecom, one who handled agriculture, one healthcare,
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financial services, infrastructure, transportation.
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You can see kinda the big sectors of the economy.
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And the deputy's job is to make sure each of them understand
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what each of them is doing.
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[LAUGH] And giving them direction on where the director and
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ultimately president want policy to move.
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And how they are supposed to help coordinate
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policy throughout the administration.
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Certainly, there's a lot of direction that comes from the White House.
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But there's also a lot of information that comes in from the executive branch to
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inform the White House of what's happening and also looking for guidance.
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There's a constant stream of information, and
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the deputy director's real job there is to help manage that flow.
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And then also, again, as I mentioned earlier, help coordinate with the other
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policy councils on issues that have overlapping interest amongst the councils.
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So that's generally the structure.
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The COVID presented a particularly unique and
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challenging policy area or
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policy response to put together,
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because it involved first and foremost a health crisis.
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And normally when you think about the most recent economic crises,
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they involve something within the financial sector.
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2008, put it simply, you had a lot of bad mortgages that were basically
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throughout the financial system and had to be addressed in some way.
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You can have an inflation scare,
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you can have a trade dispute, a recession, right?
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These are things that kinda the traditional economic problems or
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crises, generally, we have a playbook.
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And also are things that are largely handled within the financial,
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regulatory, economic policy realm.
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With COVID though, the front lines on addressing the core problem are outside,
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it's the public health officials.
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And so for us, we knew that it was pretty clear early
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on there was going to be an economic impact.
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But it was also we were not the ones who would be on the front lines of addressing
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the root cause, right.
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Which is how do you figure out how to get vaccines,
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understand how to prevent transmission,
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those sorts of really important public health response.
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What we had to do instead was think about what are the secondary effects and
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what areas of the economy are going to be impacted the most
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which workers are likely to be impacted the most.
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And think about what type of response would be needed to mitigate some of
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these adverse effects that were about to hit the economy because of the pandemic.
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There was just a great team that I work with on a lot of these
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issues on the economic side certainly team at the White House,
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at Treasury, the Small Business Administration.
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Commerce Department all had certain areas,
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ideas and certain authorities that they
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could utilize to help respond to the crisis.
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And then also I think the US Senate
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did a great job in helping come up with a means for
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Congress to quickly consider legislative response.
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And one thing that's really striking,
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and I think I'm quite proud of about the CARES Act, is that that piece
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of legislation was passed before really the data had even come out.
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Showing how significant an impact the COVID was having on the economy.
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And as you know, if you look at the data, historical data,
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now for most economic series, there's a sharp drop in
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2020 that really skews all data on the charts, right?
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>> Jon Hartley: Absolutely.
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>> Andrew Olmem: On the employment side.
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>> Jon Hartley: Absolutely.
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>> Andrew Olmem: How significant it was and
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the fact that we were able to be proactive is pretty remarkable.
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The, we often talk about an economic policy.
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I remember still in my econ class is the idea that you want policy to be
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looking ahead.
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And attempting to be providing support as it's needed and
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not passing legislation after the crisis has already occurred.
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And you end up wasting a lot of money that way and not being effective.
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Unfortunately, that happens too much in any go on policy because it just takes too
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long to formulate and events move fast.
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But in this case, we were able to get it out early.
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And I think I take a lot of comfort in the fact that there are millions
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of people who really benefited and were able to get help.
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That legislation helped bridge the real economic storm
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that we went through and kind of emerge the other side.
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And help the economy really emerge on the other side a lot more robust than
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it otherwise would have been.
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>> Jon Hartley: Absolutely, it's fascinating just to think.
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I remember in March of 2020, so many service sector part
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time retail restaurant workers lost their jobs instantly.
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And it's incredible just how high the unemployment rate went very quickly.
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And of course, it came back down very quickly as well.
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But so much happening in such a short span of time,
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it's really amazing how quickly a coordinated
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policy response was able to be put together.
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And I think that's maybe something that people don't quite appreciate as much.
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So I know there's some stories, I think, of how,
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I guess, PPP came together, and I know that was in part
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that was using the small business administration.
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There were a lot of, I guess, on the top of coordination and
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getting things out the door.
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You had the CARES Act was passed in late March of 2020.
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But then there were sort of a number of questions about how quickly could you
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actually get that economic relief out to people.
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And there were certain things like whether the stimulus checks
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could be paid out through direct deposit versus sent in the mail.
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And the direct deposit would be much faster in using, for example,
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people's banking information from their tax returns.
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And obviously PPP took some period of time to get out through the banking system,
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which is how the small business administered those.
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I'm curious what you think about the implementation side
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of the CARES Act and where were you sitting amidst all of that?
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>> Andrew Olmem: Yeah, so one thing I really learned about working in
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the White House, which is the White House does not do implementation.
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That's what you leave the departments and agencies for.
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And there are times in US history where the White House has sought
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to manage particular programs, and usually it doesn't work out well because
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the personnel involved and expertise is nothing in house.
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Right, it's someplace else.
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So it's very hard to do.
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So I think where we saw it is we had really good teams on SBA and
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Treasury who were very capable in getting these programs up and running.
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There's a lot of work, as you point out,
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there's a lot of technical difficulties in doing some of these programs so quickly.
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Some worked faster than expected, others took more time.
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Some of that is just the nature of responding to a very unexpected crisis.
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And certainly as I look back, there are lots of areas where I probably
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have things changed and modified and things you would do differently.
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One doesn't have the time, and it's very easy to look back retrospectively and
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say, we would have done things differently.
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But I think overall the team did a pretty good job of taking these programs and
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getting the legislation passed and then getting them up and running as you want.
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PPP, I think, was a good example, figuring out how to handle the increased and
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unemployment benefits with another complicated program to actually set up.
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But ultimately these programs were, within a reasonable amount of time,
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were up and running.
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>> Jon Hartley: That's fascinating.
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I do want to talk a little bit more about both, not only the successes, but
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also some of the failures, potential failures here, too.
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Or maybe how you think things may have been done differently,
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knowing what we know now and the whole experience that was had.
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In particular, I want to talk a little bit about inflation as well,
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since it's in 2022 and 2023, very front and center issue.
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Now in late 2023, we're seeing inflation finally receding, but over
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the past few years, we've seen some of the highest inflation rates since the 1980s.
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I'm curious, to what degree do you think that government stimulus,
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ranging from the CARES Act, the $400 a week of the pandemic
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unemployment insurance supplement on top of replace wages.
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That PPP to stimulus checks to and subsequent top ups,
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American rescue plan, the ARP stimulus that was
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continued throughout the Biden administration.
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I'm curious, to what degree do you think that maybe government stimulus overdid it?
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And to what degree do you think that the inflation that we've been experiencing
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over the past few years, something to do with government policy?
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And there's others, there are some people that take the view that it's largely
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a supply chain issue and that government stimulus had very little to do with it.
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So maybe it's not a monocausal answer and it's multiple things, but
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I'm curious what your view is on this.
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>> Andrew Olmem: Yeah, so I would say, well, a couple observations.
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First, this just shows on how difficult it is to finally tune the US economy.
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When we think of an academic settings where you think about,
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well, if only we had policymakers were able to increase,
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reduce taxes by x percent and increase government spending by 4%.
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That will get the economy to a perfectly adjusted equilibrium and
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we'll have full employment and low inflation.
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And this is something that policymakers have tools to do.
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I think this experience to me just reinforced the belief
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that it is very hard to do, that the economy is just too dynamic,
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healthy even under the best of situations, will involve some delays.
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And here we are about as fast as could be expected, but certainly more time
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would have probably helped us improve the calibration of the programs.
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It's just the realities of the world that it's very hard to calibrate
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these programs correctly.
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Second is the coordination is also very challenging and it puts policymakers,
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I think, forces policymakers to make some really tough decisions.
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And you can look at where the Fed was sitting and they saw,
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certainly saw this huge increase in government spending,
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deficit expanded pretty unprecedented levels.
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You have to go back to World War II to see these debt levels.
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So you had a lot of government debt going out, a lot of spending, but
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you also had the economy collapsing too, so you'd think rates would be going down.
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But the response proved to be very successful, probably
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more successful than people expected at getting the economy up and running again.
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As you noted, economic growth jumped back very quickly the following quarter,
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and suddenly the economy starts to get back on track faster than expected.
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But you still have this large increase in government spending and
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debt issuance, which by itself is a very inflationary impact.
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But the Fed at the same time has to figure out, to make the judgment call
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with an incredible amount of uncertainty about where the economy is,
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given that this pandemic is still going on.
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And so it's not surprising to me that through all of that, very simply,
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big increases in money supply, suddenly big increases in demand, right?
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Whether you're a keysy or monetis, there are reasons to see that inflation coming,
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but it's also in real time, hard to react fast enough to know which to do.
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So it's not surprising that it would do that.
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Certainly, I think the Fed was too slow to respond, and
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that's probably the big reason why we got the inflation bout that we did.
27:53
I do think one of the lessons I learned both in 08 and
27:57
in the 20, is really the value of inflation expectations and
28:02
having anchored expectations by the American public.
28:07
If you look back in 08, there was a lot of expectations or
28:10
concerns that inflation was gonna surge in the same way.
28:14
But it turned out inflation expectations were so
28:17
anchored that the inflation rate was a lot stickier and the us government had a lot
28:22
more flexibility to respond without creating an inflation problem.
28:26
Or at least having to respond to one at the same time than was expected.
28:30
I think in 20 it was the same case, and that people had confidence
28:35
that even after zero eight, inflation didn't surge.
28:39
And that meant the federal government could take a big response here the Fed
28:43
could be more aggressive on lowering rates to respond without sparking an inflation
28:47
problem.
28:47
And that certainly helped policy.
28:49
The fact that then we suddenly did see this bout of inflation, I think,
28:54
shows to me that the potential for inflation was always there, and
28:58
once those expectations got kind of unlocked, right?
29:02
That they can change pretty, a little bit faster than we expected, and that
29:06
is made policymaking over the last couple of years very, very challenging, right?
29:11
You have a large jump in inflation that the Fed now has to respond to,
29:15
while you also have a large fiscal deficit.
29:18
These are in Congress really should be starting to think about how to get
29:22
its finances under control at the same time, not an optimal situation.
29:26
So it's a little bit of a long, little rambling answer on it.
29:28
But certainly the Fed needed to get more, should have been more aggressive,
29:33
and probably got a little lax because of the success in 2008 and
29:38
up till then, 2020, and that no inflation had emerged.
29:42
>> Jon Hartley: Absolutely.
29:43
And I think there's a number of former Fed governors like Randy Quarles,
29:48
who were on the acts with the Fed board at the time, and even they would say now.
29:53
And have said publicly that the Fed should have started
29:57
raising rates earlier, as early as the autumn of 2021,
30:02
when it became clear that the uptick in inflation was not just a story
30:08
about used car prices going up due to supply chain supply constraints.
30:13
But you started to see rents and
30:16
other items in the price basket really start to surge.
30:21
And that was really the key moment when the Fed should have
30:26
started to raise interest rates not six months later in the first quarter of 2023.
30:34
I wanna now pivot to financial regulation, specifically banking regulation, I kinda
30:38
wanna get back to that and talk a little bit more about the legacy of Dodd-Frank.
30:42
You spent a lot of time on Senate banking and have a lot of expertise in this,
30:49
and I think also having a legal background, I think also just brings so
30:55
much expertise to the realm of regulation, which is wonderful.
31:01
So there was a lot of momentum, I feel like throughout the 2010s on
31:06
the republican side, a lot of momentum in the repeal, Dodd-Frank or
31:11
certain elements of Dodd-Frank.
31:13
While some, like capital rules for banks, banks were over levered in 2008,
31:20
a lot of sort of bipartisan sort of agreement on that.
31:24
These other parts that were like the Volcker rule,
31:29
some of the implementation of the Dodd-Frank Act, CFPP.
31:35
And there's also a lot of scrutiny about the impact on regulatory costs
31:40
on smaller banks, there weren't any new de novo banks created for
31:44
quite a few years, in part due to the regulatory constraints.
31:49
I'm curious, there's also some changes to 13-3 that some people didn't like,
31:53
the lender of last resort lending that sort of put more power
31:56
in the hands of Congress.
31:57
Some people, I think even, On the left didn't really like that.
32:01
So we have Trump then elected amidst this 2010s momentum to repeal certain
32:06
elements of Dodd Frank.
32:08
Trump gets elected in 2016, a Republican House and
32:10
Senate is also elected that year.
32:12
And I'm curious, in that time period where there are two years
32:17
of Republican White House and full congressional control,
32:22
the biggest thing that came out of that in terms of financial
32:27
regulatory reform or some form of deregulation was really just
32:31
changing the CFI threshold to exempt some firms.
32:35
I'm curious if you could sort of maybe speak a little bit about what that push
32:41
which was led by and then House financial services chair Debling.
32:47
I'm curious, to me that it seems like.
32:50
[INAUDIBLE] >> Jon Hartley: Yes, of course and
32:51
Senator Kraper on the bank.
32:53
I'm curious, what happened to all that momentum and why did so
32:57
little get done to peel back some elements of Dodd Frank, like Republicans have
33:01
promised for so long in the 2010s after they actually got into power.
33:06
>> Andrew Olmem: Yeah, so, I mean, one word is the filibuster, right?
33:10
In the Senate, you have to have 60 votes to move legislation.
33:13
And when the Democrats passed Dodd Frank,
33:16
they had the 60 votes and they passed it largely on a partisan
33:20
basis that way Republicans during that time period didn't.
33:24
And therefore, there had to.
33:27
So if anything, the expectation probably really was
33:30
that nothing was gonna happen because there was no way Republicans and
33:34
Democrats would get a deal together to get the 60 votes to move legislation.
33:38
But I think we were able to get a bill through for a couple of reasons.
33:43
One is we focused on the area, one of the areas that needed the most attention and
33:48
one that I think even supporters of Dodd Frank realized needed to be reformed,
33:54
which was how regulations were tailored.
33:57
These new enhanced prudential regulations were tailored based on size,
34:02
so that you don't have a $2 trillion bank being regulated
34:06
the same way as a $300 billion bank.
34:09
Certainly billions in dollars was a lot, but
34:11
there's a big magnitude [LAUGH] Between those two types of institutions and
34:15
the types of activities that they engage in, where they conduct their activities.
34:20
It's a very, there's a lot of differences there.
34:23
And the danger that I think has been well recognized is that if you wanna have
34:27
a diverse banking system where you have large banks, small banks,
34:31
intermediate banks, banks with a lot of different business models,
34:34
which I think is really important for an economy like the United States,
34:38
as large it is and as dynamic it is.
34:40
We can't have a cookie cutter approach that banks,
34:43
where they all kind of look alike, they have the same kind of products,
34:47
same business models is gonna result in certain segments of the economy not
34:51
getting the credit they need and also not as efficient management of risk.
34:55
There's an element of having diversity in business models and risk management that
34:59
provides some resiliency to the system, and that Dodd Frank, even the original
35:03
Dodd Frank, recognized this problem, that there's some language in there, but
35:07
it needed to be, the implementation needed to be improved.
35:10
And Congress had to clarify more what it wanted to see on this so
35:13
that we didn't suddenly have the financial system completely barbelled,
35:17
where you have, say, 6 really big financial institutions and
35:20
then a whole bunch of really, really small institutions and nothing in between.
35:25
It also, there's a competitive element is that these banks, from, say,
35:29
50 billion up to 700, 800 billion, provide a lot of competition for the system.
35:34
Certainly that means small banks can grow and become, that are successful,
35:38
can grow and then compete with these banks.
35:41
But they also, those banks also compete with the large G-SIBs and
35:44
can potentially grow to challenge them.
35:47
And so it really brings a really healthy competitive element to our system.
35:51
And I think members of both parties recognized that there wasn't sufficient
35:55
tailoring to account for these differences in business models and banks.
35:59
Again, there's common interest in making sure all these banks are well regulated,
36:03
well capitalized and appropriately regulated,
36:05
just trying to make sure that they're appropriately regulated based on the types
36:08
of activities that they engaged in.
36:10
And as a result we were able to get a package together that it was 17
36:14
Democrats ended up voting for.
36:17
So we had a really strong bipartisan coalition.
36:20
I think it's a good lesson too, is that financial regulation, in my experience,
36:24
usually the bipartisan legislation is one that turns out to be more durable.
36:29
If you look at Dodd Frank, the areas that were most controversial,
36:32
a lot of them no longer exist because subsequent congresses came back and
36:36
changed the law or they were declared unconstitutional by the courts.
36:40
There were a lot of changes to Dodd Frank based on the approach it was passed.
36:45
And the 21 55 bill, I think,
36:47
is endured pretty well because it had such a bipartisan approach.
36:51
And it was also just simply common sense that we wanna make sure regulations
36:56
appropriate based on the nature of the banking activities a bank is engaged in,
37:00
as opposed to some kind of cookie cutter.
37:03
Here's a whole list of what every bank thinks that every bank needs to comply,
37:07
regardless of the activities that it's actually engaged with, right?
37:11
For a period of time [LAUGH] banks had to prove that they were in compliance with
37:15
the Volcker rule, even if they weren't engaged in any proprietary trading
37:18
right it was, doesn't make any sense.
37:21
>> Jon Hartley: Absolutely.
37:21
>> Andrew Olmem: So I think it's a good lesson and again, our system,
37:24
here's a bigger point, too, on this, is that our system is designed not
37:28
to have kind of radical changes, particularly Congress to Congress.
37:33
It's designed to have change over time based on successive legislative congresses
37:38
with different majorities and that that brings a lot of stability to our system.
37:43
It makes sure that when things are passed, they've been usually pretty well vetted.
37:47
It also means that there's a broad geographic support for legislation.
37:53
I think overall that approach has really served the United States well.
37:57
The filibuster is pretty much key to that continuing going forward.
38:01
And I think really on the conservative side, I know there's
38:06
always frustration about why didn't we achieve bigger successes, right?
38:13
And I fully understand that, but at core, it's,
38:16
you have to get the legislative majorities to do that.
38:20
And Democrats have been very successful over the last, again,
38:24
70 years of having several occasions where they
38:27
were able to actually have the 60 votes needed to do some pretty big bills.
38:31
And it's been well beyond anybody's current lifetime since Republicans had
38:35
those kind of majorities.
38:37
>> Jon Hartley: Absolutely, and I mean, it is fascinating, too,
38:40
to think also some of the bipartisan legislation that's been passed,
38:43
particularly more so on the spending side whether it's some appropriation bills or
38:48
bipartisan infrastructure bill.
38:49
Just how many piece of legislation has actually drawn quite a few Republicans to
38:54
get to 60 votes?
38:55
This is under the Biden administration, of course, filibuster is changing a bit,
39:00
too, in terms of what things need to filibuster and don't.
39:04
>> Andrew Olmem: What point just to know like this is where the filibuster right
39:08
now is, the movement on the left to undo the filibuster and
39:11
we may see that in our lifetime here term actually come to pass.
39:16
I think overall it will not be good for policy
39:19
because it'll mean policy will shift a lot more from Congress to Congress.
39:24
But from a republican perspective,
39:26
there are things that wouldn't be doable with the filibuster.
39:30
And so this is where I actually think folks on the left sometimes should think
39:33
about what does it mean when they're not in power?
39:35
And the reverse is also true.
39:36
So it's a more complicated issue than I think most people who have kind of debated
39:40
that issue, assuming, have really thought.
39:42
And I think banking regulation is a very good example if the filibuster goes,
39:47
you will likely see Congress be much more active and
39:51
prescriptive with passing legislation on how institutions should be regulated.
39:56
And there's probably pros and cons to that.
39:58
>> Jon Hartley: Absolutely.
39:59
Just a little bit to regional banks and
40:02
it's been several months since Silicon Valley Bank and
40:05
Signature Bank were taken to receivership by the FDIC in March of 2023.
40:11
First Republic bank was troubled as well, ended up being acquired by JP Morgan.
40:15
But it's now several months later and
40:18
it seems like the regional bank apocalypse that many were predicting did not happen.
40:24
And I'm curious, what is your diagnosis of this whole situation?
40:28
There's obviously Silicon Valley Bank had a large fraction of uninsured deposits.
40:34
There was also some very serious issues around maturity mismatch,
40:38
significant amounts of interest rate risk that Silicon Valley Bank was taking,
40:43
this is sort of classic finance 101 mistake.
40:45
The duration of your assets should equal the liabilities unless you wanna make
40:50
some big bet on interest rates.
40:52
And it seemed like they had a lot of duration risk, the fed was raising rates.
40:56
But I'm curious, is your take that SVP and a couple others were
41:01
just a couple of cases of gross mismanagement and incompetence?
41:06
Or do you buy into this that there is some bigger regulatory issue at play?
41:12
And I think still there's some big questions that need to be addressed,
41:17
which is somewhat along the lines of the lender of last resort role here, but
41:22
also how should deposit insurance be reformed going forward?
41:26
I'm curious what your thoughts are.
41:27
>> Andrew Olmem: [CROSSTALK] Lender of last resort after this, because I think,
41:30
I'm happy to talk about 13 three, because I think there's some interesting stuff
41:33
which you've mentioned, I wanna explain a little bit more.
41:35
But on what happened with Silicon Valley Bank, if you read the Geo
41:39
reports about it, it reads very much like a lot of bank failures.
41:44
Particularly if you go back to the SNL crisis where you had a rising
41:48
interest rate environment and a lot of banks misread it or mismanaged it.
41:52
So it's not surprising that we've had bank failures when the federal
41:57
funds rate goes from zero to 5% in the course of a year.
42:01
What is a little surprising, reading it though,
42:05
is that the supervisory process, it looks like they caught it, but
42:10
was not forceful enough to get any one of the bank to address it and take actions.
42:16
So it seems like it's pretty clearly a supervisory problem here,
42:19
when you have a country of 5,000 banks, that happens.
42:23
And this is why I've always been a believer in having strong resolution
42:27
mechanisms.
42:27
Banks are gonna fail as part of our capitalistic system works.
42:32
Sometimes bets don't pan out and you have losses and bank goes belly up.
42:39
It's impossible to avoid a healthy financial system from time to time,
42:43
a bank failing.
42:44
But what you need to have is really the capabilities to make sure that the failure
42:48
of one institution doesn't kinda bring down the whole system.
42:52
And that they can't hold the federal government hostage for
42:55
a bailout because of the concerns about the wider impact on the economy.
42:59
And I think what you saw in Silicon Valley Bank was that there are some pretty strong
43:03
authorities the regulators have, and we've been doing bank failures for
43:06
a long time in this country.
43:07
They've been a problem since almost day one.
43:10
Going back to the early republic, I think since the Great Depression,
43:14
we've gotten a lot better how to resolve banks without them,
43:18
their failures spreading and having serial bank failures and bank runs.
43:22
And I think what you saw here was the regulators using the authorities they had
43:27
to make sure that these institutions were resolved.
43:30
There was some market discipline exercise.
43:32
You saw unsecured creditors and shareholders take losses, and it for
43:36
the most part, stabilized the banking system and prevented it spreading.
43:41
Now there's issue about how unsecured creditors are treated, but
43:44
that's a more technical issue we can talk about if you want.
43:47
But overall, my take is that the response there was
43:51
exactly how Congress anticipated the agencies to respond,
43:56
and I think we should look at that as kind of a good thing.
44:00
Now, I think that the resolution of institutions is an area that always has to
44:05
be constantly being examined, make sure that our regulatory system doesn't become
44:10
outdated by changes in the marketplace, particularly for larger institutions.
44:15
And I think we've seen, and
44:16
that was certainly one of the efforts of Dodd-Frank,
44:18
where there was a lot of bipartisan support.
44:20
Is thinking about how we resolve institutions while preserving market
44:23
discipline and avoiding bailouts, but also making sure there's an orderly resolution.
44:27
I think that's an area that I still think deserves more work.
44:30
But I was glad to see that in the case of Silicon Valley Bank and Signature,
44:34
that the existing authorities work pretty well because after all,
44:37
these were real traditional banks, almost all the assets were in the bank.
44:41
So they're not like kinda large financial institutions that have significant assets
44:44
outside of the bank.
44:45
Those are much more complicated or as large as you saw with the GSEs and
44:49
have special government charter missions.
44:51
And that gets a whole other complicated area as well.
44:54
So it looks like, again, we know how to resolve these types of institutions, and
44:58
they did appropriately.
45:00
>> Jon Hartley: It's a fascinating take on regional banks.
45:02
One last question, section 13(3), a very famous topic.
45:07
Effectively, the legislation that enables lender of
45:11
last resort powers on the part of the Fed.
45:14
So I believe 13(3) the Federal Reserve Act, it's changed over time a bit.
45:18
And I'm curious, I mean, we're in this world where it seems
45:23
like there is this de facto too big to fail issue,
45:26
where anytime there's a big financial institution that goes down.
45:32
Or even in this case with a regional bank like Silicon Valley Bank,
45:37
that there are some sort of issues that potential for
45:41
spread of contagion, that there needs to be some sort of a backstop.
45:46
And there's all these issues, things like Bagehot's rule, which is, I think,
45:52
lend generously in these sorts of times, but have some sort of a penalty rate.
45:58
I'm curious, what do you think about the evolution of 13(3) lender of last resort,
46:03
too big to fail?
46:04
Because I do think it is a somewhat recent phenomenon in the sense that I don't
46:09
think there were as many big bank bailouts, historically speaking.
46:13
There haven't been crises that we've seen at least since the Great Depression.
46:18
But I'm curious what you think that evolution,
46:20
whether it's been a positive development, a negative development, and I know there's
46:24
been some sort of reform proposals that have been debated for decades now.
46:28
I'm curious what your take is on 13(3).
46:30
>> Andrew Olmem: A couple of observations, first is, you're right,
46:33
13(3) is a Great Depression era statute that was largely not used,
46:38
was really not used since the Great Depression until 2008.
46:42
And there was used very aggressively to provide assistance to banks, but
46:46
also to non-banks, and that's the authority that allows.
46:50
And then it was used again during the pandemic, response to the pandemic.
46:56
And then we saw lucid with Silicon Valley Bank.
46:58
So we now have three episodes on where it's been used, and
47:01
that's supposed to be the emergency authority for the Fed.
47:03
But you're right to say what's going on here?
47:05
Are we seeing an evolution?
47:07
Well, one is certainly 2008 and
47:08
2020 are the kinda cases where you would think if you're ever gonna use 13(3).
47:13
I think the more recent case of Silicon Valley Bank is a more interesting case,
47:17
and the question is better focused there.
47:20
And I think that the answer of what's really going on
47:24
is that we don't have as active a discount window as we should.
47:28
Remember, the fed was established to provide liquidity to the financial
47:33
system when you had a banking panic or to help with seasonal needs, right?
47:37
That goes all the way back to the founding.
47:40
Since the federal government controls the currency, they wanted to have that elastic
47:44
currency to make sure that when banks had needs for money, they were able to get it.
47:47
And they would pledge collateral to help them get over short-term liquidity crisis.
47:54
For a variety of reasons, discount window has not worked as planned, and
47:59
that means The Fed sometimes feels has become concerned.
48:03
And this is what you first saw in 2008, that there wasn't enough liquidity.
48:06
Now, in 2008, it wasn't just banks who needed liquidity,
48:09
it was a lot of non banks.
48:11
So 13-3 seemed appropriate.
48:13
There was some of that recently with Silicon Valley bank, but
48:16
the real target were other banks.
48:18
And so it's appropriate question to say, why are we using 13-3 and
48:22
not having a better discount window?
48:25
And I think this is an area that needs a lot more thought and attention, I think,
48:29
by the academic community and
48:31
by policymakers to think of how we can make it work.
48:34
Right now, going to the discount window is viewed negatively.
48:38
There's concerns about stigma by banks that use it both from
48:42
a supervisory perspective and also kind of reputational by clients,
48:46
other banks, public sentiment in general.
48:50
And so there's a real reluctance to use in these types of crises.
48:54
So I think this is an area that, I think that there's more tension.
48:58
>> Jon Hartley: It's so
48:58
fascinating that this idea that there's this sort of lender of last resort tool,
49:03
this discount window there, that exists, but banks are too afraid to use it
49:08
because it'll be perceived as some sort of act of desperation.
49:12
And that could make their troubles even worse,
49:15
even though it's supposed to be a lifeline.
49:17
And so instead, banks are opting for these secretly negotiated
49:22
bailouts that get announced sort of at the 11th hour.
49:26
>> Andrew Olmem: And remember,
49:27
disco window is not inherently like a bailout, right?
49:30
You have good collateral, you're providing the government is not taking really any
49:35
credit, ideally not taking any substantial credit risk.
49:38
The thing about 13-3 that really has to be recognized is that when 13-3 is used
49:43
the way it has been, particularly in 20 and 08, is that's a form of credit policy.
49:47
We're like Fed's moving away from monetary policy to allocating credit in the US
49:52
economy.
49:53
And that is the responsibility historically of Congress favoring which
49:57
industry and institutions get public money.
50:00
That's something that we've decided would be determined through
50:03
the democratic process.
50:04
So it's been, Congress has extended that authority to the Fed for emergency uses.
50:10
But as you read the language, it's very clear that this is a break the glass.
50:14
We really don't want you to be using this because your job is not credit allocation.
50:18
And Fed shares, particularly since Bernanke,
50:22
have all kind of recognized that and have been very careful to
50:27
closely consult Congress on how these programs are established
50:32
because they are moving outside of their traditional realm.
50:36
And the real issue there is that for
50:38
the Fed is that once the Fed starts picking winners and losers.
50:41
It's moving from a technocrat type agency to a very political one.
50:46
And that can result in questions of legitimacy and
50:50
politicization of the Fed that in its worst case, come back and
50:54
punt it for the credibility on its monetary policy, right?
50:59
So that's why I think one of the better reforms of Dodd Frank was you have to
51:04
have the treasury secretary sign off on those loans.
51:07
That way you have someone who's directly accountable to the president,
51:11
somebody who's elected by the entire country,
51:14
at least have some accountability for how that money is spent.
51:17
Because remember, when you're using 13-3, even though it's supposed to be on good
51:21
collateral, not, you're still taking some credit risk.
51:24
And as we saw in 2008, there's some real risk of losses there.
51:30
So it's very appropriate, in my view, to have that democratic accountability.
51:35
That's a reasonable balance.
51:36
It is hard for
51:37
Congress to quickly allocate money in the way that the Fed can do through 13-3.
51:42
So having that emergency authority there can be very useful.
51:46
But it's also the risks that come along with using that, particularly from
51:50
a democratic perspective, being democratic principles is really important.
51:55
Plus is kind of going to the issues you talk about we're talking about,
51:59
which is it creates expectations of bailouts and
52:01
creates moral hazard in the economy that's also there.
52:04
So it's use like a lot of big policy decisions certainly has, can have some
52:09
benefits, but they don't come without real costs that have to be recognized.
52:13
>> Jon Hartley: Absolutely, and
52:15
I know some folks have criticized that 13-3 change that at some level might
52:19
impede the lender of last resort sort of function to act as quickly as it
52:24
might need to in a banking crisis if it happens super quickly.
52:27
But again, I guess it's a trade off.
52:31
How much accountability?
52:32
>> Andrew Olmem: Yeah, my experience.
52:33
It's actually the reverse, which is the treasury secretary then can
52:37
take the political accountability for the use of that money.
52:41
And when Congress calls up, wants to understand what happened, it allows for
52:46
somebody who's getting directly accountable to the president to come
52:50
before the country and explain how the money is being used.
52:54
Again, as much as the economic profession really focuses a lot on the Fed, and
52:58
there's a little bit of the cult of the Fed in a crisis it's actually not the Fed
53:03
chair who's the center.
53:04
It's the treasury secretary, right?
53:07
That is the leader of the executive branch in responding to crises.
53:11
And that's the person who should be in terms of what we talked before,
53:16
the center of executing the response of the federal government.
53:21
That's the appropriate official who should be leading those leading efforts.
53:26
Again, because this is public money that's on the line and
53:30
you want to have democratically accountable officials responsible.
53:35
It also, I think, is a nice division of labor because it allows the Fed to still
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continue to focus on monetary policy, which we talked about earlier,
53:41
really important to continue to get right.
53:44
And it's very technical policy making there that Congress has been very
53:49
clear about what the goals are and how the Fed's supposed to operate.
53:54
That continues to focus on getting monetary policy right while then
53:59
supporting the treasury secretary as the secretary formulates
54:04
the response of the administration.
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>> Jon Hartley: Those are some excellent points truly.
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>> Andrew Olmem: Division of labor turns out to be good not only in theory,
54:13
in economics, but also in practice when responding to financial crises.
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>> Jon Hartley: Absolutely, yes.
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>> Andrew Olmem: Our system works, too now there's one last kind of point on that is
54:22
then you have the FDIC, which largely has the resolution authorities.
54:27
So I think one of the other reforms, I would say it's been good from 2008
54:32
was that rather than having the Fed try and manage restructuring entities.
54:37
Those entities now under the new title two will go to the FDIC, and
54:41
that will be the federal government's resolution expert, right?
54:45
And that means it will have, can make sure it has on staff the best experts in how
54:51
to resolve complicated financial institutions all in one place.
54:57
It also, again, gets it away from the Fed and the treasury.
55:01
Those are very intensive work that again,
55:07
helps divide the labor up of how to respond.
55:14
Treasury comes out, figures out how to respond, which who has to get money.
55:17
The Fed makes your monetary policy going in the right direction,
55:21
lender of last resort functions working, and then the FDIC is dealing
55:26
with the institutions that have failed or near failing.
55:30
That's not a bad way to work it out, and
55:32
particularly if we're going to have a financial system that has so
55:35
many regulators, which I think is still a problem.
55:38
But at least here we've taken one of the problems of our systems and
55:41
turned it into a little bit of virtue.
55:42
>> Jon Hartley: Absolutely, now such a great point on all those fronts,
55:46
divisional labor, clear objectives for various regulators.
55:51
I couldn't agree more.
55:52
Such an interesting conversation, Andrew.
55:54
It's been a real honor to have you on here,
55:57
talking about your experience and thoughts on all these
56:00
really important matters across economic policy to banking regulation.
56:05
Thank you so much for joining us today.
56:07
>> Andrew Olmem: Thanks for having me.
56:08
>> Jon Hartley: Today our guest was Andrew Olmem,
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who's a partner in Mayer Brown's Washington, DC office and
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a member of their public policy, regulatory and political law practice.
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He previously served as deputy director of the White House National Economic Council.
56:20
This is the capitalism and freedom in the 21st century podcast where we talk
56:24
about economics, markets and public policy.
56:26
Thanks so much for joining us.
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