The Federal Reserve, better known as “the Fed,” has been in the spotlight quite a bit in recent weeks, following an apparent insider trading scandal embroiling several high-level officials at America’s central bank. And in the latest shoe to drop, disclosure documents made public in recent weeks reveal that the scandal of stock trading during the pandemic extends all the way up to the chair of the Fed himself—Jerome “Jay” Powell.
With Chairman Powell’s term ending in January 2022, a growing chorus of progressives, climate activists, advocates for racial justice, and economic heavyweights from Nobel Prize–winning economist Joseph Stiglitz to Massachusetts Senator Elizabeth Warren are calling on President Biden not to renominate Powell and instead to use what could be as many as four open seats on the Fed’s all-white, seven-member governing board to reshape the agency into an institutional force for racial, gender, climate, and economic progress—and bring some long-overdue racial and gender diversity to a critical institution that’s been run nearly exclusively by white men.
“Is the Biden administration going to fulfill what is at the heart of its agenda? Then it should not be Powell,” said Stiglitz in an interview with Reuters last month. The Biden White House has not yet announced what they plan to do when Powell’s term ends, though a decision is expected any day now.
With an historic debate brewing over what to do with the Federal Reserve, we at Off-Kilter thought it would be useful to pull together something of an explainer on the nation’s central bank, how it operates, and why it’s so important to economic and antipoverty policy—and to go inside the push to remake the Fed in the wake of the wave of recent scandals. So Rebecca sat down with Saqib Bhatti, co-executive director of the Action Center on Race and the Economy, better known as ACRE—and one of the groups leading the charge—to break it all down.
For lots more on this:
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REBECCA VALLAS (HOST): Welcome to Off-Kilter, the show about poverty, inequality, and everything they intersect with, powered by The Century Foundation. I’m Rebecca Vallas.
The Federal Reserve, better known as “the Fed,” has been in the spotlight quite a bit in recent weeks following an apparent insider trading scandal embroiling several high-level officials at America’s central bank. And in the latest shoe to drop, disclosure documents made public in recent weeks reveal that the scandal of stock trading during the pandemic extends all the way up to the chair of the Fed himself, Jerome, better known as “Jay” Powell.
With Chairman Powell’s term ending in January 2022, a growing chorus of progressives, climate activists, advocates for racial justice, and economic heavyweights from Nobel Prize-winning economist Joseph Stiglitz to Massachusetts Senator Elizabeth Warren are calling on President Biden not to renominate Powell in February and instead to use what could be as many as four open seats on the Fed’s all-white seven-member governing board to reshape the agency into an institutional force for racial, gender, climate, and economic progress, and to bring some long-overdue racial and gender diversity to a critical institution that’s been run nearly exclusively by white men.
“Is the Biden administration going to fulfill what’s at the heart of its agenda? Then it should not be Powell,” said Stiglitz in an interview with Reuters last month. The Biden White House has not yet announced what they plan to do when Powell’s term ends, though a decision is expected any day now.
With an historic debate brewing over what to do with the Federal Reserve, we at Off-Kilter thought it would be useful to pull together something of an explainer on the nation’s central bank, how it operates, and why it’s so important to economic and antipoverty policy, and to go inside the push to remake the Fed in the wake of the wave of recent scandals. So, I sat down with Saqib Bhatti, co-executive director of the Action Center on Race and the Economy, better known as ACRE, and one of the groups leading the charge to break it all down. He’s also one of the coauthors of a recent op ed with ACRE colleagues Brittnay Alston and Vesudha Desikan titled President Biden Must Appoint a New Fed Chair Who Is Serious About Racial Equity. Let’s take a listen.
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VALLAS: Saqib, thank you so much for taking the time to come on the show.
SAQIB BHATTI: It’s great to be here.
VALLAS: So, before we get into our main topic for this week and all things Federal Reserve, I’d love to give you an opportunity to talk a little bit about what is ACRE, this organization that you help to lead, the Action Center on Race and the Economy, and a little bit of how you come to this work.
BHATTI: So, at ACRE, we really work on campaigns that are around racial economic justice, but they have a real analysis around the role that corporations, particularly in the finance and tech sectors, play in causing harm to communities of color. My background is I come out of labor. I worked for labor unions for many years, and we did a lot of work in the aftermath of the 2008 financial crisis around Wall Street accountability issues, working with community organizations around the foreclosure crisis, around the fiscal impact of the financial crisis on state and local budgets.
And as part of that work, me and my other co-founder, we started really thinking about the fact that we were doing a lot of economic justice work in communities of color and that the way in which we talked about some of these issues was, “Well, bad things happen, and people of color are disparately impacted.” But we wouldn’t take the next step to why is it that communities of color are always disparately impacted? It’s not just a coincidence; it’s by design.
And that really ended up becoming sort of the bedrock principle of ACRE: that we need to actually examine the racial underpinnings of all the issues that we’re looking at, and that our campaigns that we’re running needs to really take an explicit approach to repairing past racialized harm and looking at the underlying causes within white supremacy and structural racism of the impacts our communities are feeling. But it’s not enough to say that bad things happen, and people of color are disparately impacted. We need to actually really examine the ways in which racism is baked into the system. And that the only way that we’re gonna actually be able to get to a racially equitable society is if we take it on head on and we have demands that explicitly name the racial harm and call for repairing that.
VALLAS: I wanna give a shoutout to a couple of your colleagues, Maurice BP-Weeks and political director Vesudha Desikan as well, who actually helped to put together this week’s episode. You guys have a pretty amazing team over there, and you occupy a kind of an important but maybe somewhat different space in the ecosystem in that you all often serve as something of a bridge between the kind of D.C.-New York think tank world and the grassroots as well.
BHATTI: Yeah, one of our core principles with this work was that we’re interested in, you know, we think that if we want to be able to change things in this country, we need to be working with folks that are doing work on the ground, right? So, we work in close partnership with base-building organizations, community organizations that are organizing at the grassroots level, labor unions that are working with members on the ground. We want to work with these grassroots organizations that are actually building membership and moving people into action. Because we think that at the end of the day, the only way that we actually overcome the organized money that is working against us is by really, is by organizing people around some real political analysis around what’s happening in our country and about the role that both corporations are playing and about the role that structural racism and white supremacy are playing in these problems. And so, our key goal is, yes, we are a national organization. We work in partnership with many other national organizations, but we wanna make sure that all of the work we’re doing is in service of campaigns that are being run by folks on the ground in cities and states across the country.
VALLAS: And one of the things that you all do, and I am really grateful to you all for playing this role again and again, is you take topics that might be somewhat inscrutable to the broader public because they’re always talked about in really wonky ways, or they’re kind of kept in the shadows—topics that have to do with economic justice like the one we’re gonna get into this week—and you pull back the curtain, you demystify, you translate, and you say, hang on. We can’t just not talk about something like the Federal Reserve and who serves on it and how it operates, because hey, it’s a bunch of people behind a curtain, and it’s never made sense to anyone. We have to understand it. We have to explain it to quote-unquote “Main Street,” so that it can be the subject of the larger progressive agenda that, if it misses these kinds of often wonky, often behind-the-curtain types of elements, we’ll never achieve the goals that you and the broader movement are seeking to achieve.
So, I feel like this is actually a great segue into this week’s main topic, which has to do with the Federal Reserve, often called “the Fed.” So, before we get into anything that’s kind of too much on the wonky side—and you’re gonna be doing a lot of translating for us this week, and I really appreciate that—what is the Federal Reserve? What is the Fed, and what was it set up to do?
BHATTI: So, the Federal Reserve is the central bank of the United States, right? So, really, it is supposed to be, it is the people’s bank. It is supposed to be the bank, it is the bank of the United States. And there are some particular functions it has, like it prints money, but there’s a few other roles it has as well, right? So, there’s a regulatory role it has. It has a role in what we call monetary policy, which has to do with sort of monitoring inflation. It has a role in terms of employment and job creation. And so, the key thing about the Federal Reserve is that it has a lot more power than it is traditionally seen as having. Or it has a lot more power than we generally think because the Fed itself has largely been captured by the industry, Wall Street, over the past, sort of for the past several decades.
And so, just breaking into of some of these rules. So, people will often say that the Federal Reserve has a dual mandate, has two mandates that are at odds with each other. One of those mandates is that it’s supposed to fight inflation, which generally means keeping interest rates or raising interest rates, and the other mandate it has is supporting full employment, which usually means lowering interest rates, and that those two things are at odds with each other. And that’s usually where most people have the conversation about the fact that those are its key roles. This tension between do we raise the interest rates, or do we lower interest rates?
But that’s missing a big part of the picture, right? Because the Federal Reserve is also one of the biggest regulators of major banks, and not just banks, but also systemically important financial institutions across the country. It is also a major investor itself because many of the Fed’s programs, particularly its bailout programs that it undertook last year in light of COVID, it undertook in the aftermath of the 2008 financial crash, a lot of those programs involve actually buying up assets and buying up, you know, actually investing in the economy. And so, it is a major investor.
It is one of the most powerful economic institutions in the world, and it is one that unfortunately, we largely ignore because it’s a black box to us, right? It’s one that we often, those of us on the left, we don’t think that much about it. But this is the economic policymaking institution that has a tremendous impact on our lives. And there are many different ways in which both it wields its power, and it could wield its power for good if we pushed it to.
VALLAS: And we’re gonna get into a lot of this in greater depth because this really is intended to be something of an explainer episode on the Fed, but also not just what it is today and what it has done in the past, but what it could be as an agent for progressive change. I wanna note as well, “black box” as it often seems, and as I said, “a bunch of dudes behind a curtain,” that is actually quite literally how it is sort of set up. It’s got several layers. It’s governed by a presidentially appointed Board of Governors, the Federal Reserve Board. And then tell me if I’ve got this right. There are 12 regional Federal Reserve banks that are in cities across the country. And so, this is sort of the setup. And generally—and we’re gonna come back to this later on in this conversation—it’s people who have been sort of Fed insiders who end up rising in the ranks and ending up in those coveted spots. Am I getting that right as we sort of finish out our what is the Fed before we get a little bit more into the policy here?
BHATTI: Absolutely. And what’s interesting is that when you look at the regional Fed Boards, as you mentioned, this 12 across the country, the regional Fed Boards’ banks within the region actually get to elect some number of those Board members. And so, it’s not just that it seems like it’s an insider’s game. Literally, it is actually built into the system that banks have an outsized role in deciding what the Federal Reserve does. Which is interesting because of course, it is one of the big regulators of banks, and so there’s that potential conflict there.
VALLAS: Now you started getting into this a little bit as you were describing what the traditional charges are or mandates are that people usually think of when it comes to interest rates, when it comes to full employment. And we’re gonna dewonkify and demystify some of this, but what’s your elevator speech to—say you meet an advocate or an activist, somebody who really doesn’t know much about the Fed, but they’re already part of other progressive activism, especially around the economy—what’s your elevator speech for why the Fed is so important to economic policy and in particular so important to economic policy that addresses poverty as well as inequality?
BHATTI: So, we know that, in the system that we currently in, Wall Street has an outsized role. Because as many financial needs that we have just as a matter of functioning to a society, you need to be able to have some basic financial services. Right now, we rely on Wall Street for that and the private sector. The truth is what we need is a robust public infrastructure so that we don’t need to rely on Wall Street, and the Fed can provide that. I think that’s the biggest thing, is that if we think about public banking, we actually have a public bank in the U.S. We certainly have the Bank of North Dakota, but we actually have a federal public bank. It’s just that that federal public bank right now thinks that its main interest, or that its main focus, should be helping Wall Street, not helping Main Street.
And so, I would say that one of the biggest reasons why progressives should care about the Federal Reserve is because it has broad, sweeping powers to remake our banking system, to remake our economy just based on the power that’s invested there. And it is something that we need to figure out how to use those levers more strategically and to really push the Federal Reserve to become more responsive to us. Because right now, we’re leaving a lot of things on the table, and we’re basically letting Wall Street dominate this incredibly important and powerful financial institution.
VALLAS: So, I wanna turn to some of the recent events that have the Fed in the news. A wave of recent scandals has spurred calls to use this moment to remake the Fed, which you were just talking about, something that’s not a new idea, something that actually some progressives really deserve credit for having called for, for quite some time. But this kind of scandal brewing moment has a lot of folks saying, hey, actually, this is something that really is an imperative. Three senior Fed officials have faced really, really serious criticism for making stock trades during the pandemic. Some have had actually said that it is insider trading. Those are Dallas Fed President Robert Kaplan, Boston Fed President Eric Rosengren. They were actually compelled to take early retirements, resignations really, as a result of the disclosure of their trades. We also saw another Fed official, one of the Fed vice chairs, Richard Clarida, also came under fire for stock trading, possibly insider stock trading.
But just in the past several days, now we’ve got new what’s called disclosure documents that have come to light that have revealed that the scandal of stock trading during the pandemic actually extends to the chair of the Federal Reserve himself, someone we’re gonna be talking a lot about and who is very much in the news right now. And that is someone named Jerome Powell, Federal Reserve Chair Jerome Powell, the 16th chair of the Federal Reserve. Talk a little bit about these scandals that have the Fed in the news and some of what we know about what many are calling insider trading during the pandemic.
BHATTI: Yeah, I mean, it really is unconscionable that during the pandemic, as all of us are trying to figure out how to survive amidst the shutdowns that were very much needed to ensure our safety, that we had the Federal Reserve, some of the top folks from the Federal Reserve, both in D.C. and, as you said, across the country, trying to figure out how to self-deal and how to actually improve their bottom line. And what it really speaks to is the moral bankruptcy of the current leadership of the Federal Reserve. As you said, Jerome Powell, also goes by Jay Powell, as the chair of the Federal Reserve, he’s ultimately accountable for this.
And it’s not a surprise that when you have former Wall Street folks in these top positions of both vice chairs—I just said, one of the vice chairs actually just stepped down from that position—but at the time, both vice chairs, Randy Quarles as well as Clarida and Powell himself, Kaplan and Rosengren, they all come out of Wall Street, right? And they’re all very wealthy white men. And it’s not a surprise because during this moment, they look to see how they could benefit themselves because we know that that is a Wall Street mentality: How do you actually make sure that you can use a crisis in order to profit off of it?
And so, what we’ve seen is that while the Federal Reserve was making policies that was impacting various markets, whether it’s the municipal bond market, the real estate market, other markets, that we had these Fed presidents and chairs and vice chairs trading in those assets that were directly affected by those markets. So, for example, Jay Powell made investments into funds actively that were investing in the municipal bond market last year at the same time that the Federal Reserve had introduced a program that was gonna backstop the municipal liquidity market, right? So, basically, what he is saying is he’s making investments in an asset that the Federal Reserve is saying that if this assets sours, we’ll have its back. And so, there’s benefit that he is getting from the program that he himself is helping lift up and put into place.
And what’s interesting—and we can talk about this a little bit later—that that particular program, the Municipal Liquidity Facility, it was supposed to be designed to help cities and states get access to cheap loans. And Jay Powell actually sabotaged that part of the program because he did not think the Federal Reserve should be making loans to cities and states. And so, he really restricted how beneficial that program could be to taxpayers. But he did himself ensure that that program was beneficial to him because it was backstopping some of the very investments that he decided to make interest just as the crisis was unfolding.
VALLAS: And if I’ve read the news right, it gets even worse than that. That he was not only making investments that he knew would be protected, but he also, it appears, sold somewhere between $1 million and $5 million worth of stock, The American Prospect has reported, from his personal account in October 2020. And this was right before a major, major drop occurred in the Dow Jones Industrial Average, something he knew was likely to occur. So, just really not good optics here. Although we should note, right, that lots of investigation’s still going on, so all of these are allegations that we’re offering and putting out there for folks’ awareness.
But backing up just a little bit from some of these scandals, who is Jay Powell? He’s the current chair of the Federal Reserve, as we noted, the 16th chair of that agency. He’s been there since February 2018. But who is Jay Powell? And talk a little bit about his background, how he got to that role before we get into some of the pretty broad and sweeping critiques that are being levied against how he has run the Fed during his tenure.
BHATTI: Jay Powell is, at his heart, he’s a private equity manager, right? So, Jay Powell comes out of the Carlyle Group, which is one of the largest private equity firms in the world. Private equity firms, the quick explainer on them, basically, they’re investment firms that are for, they exclusively cater to extremely wealthy folks, folks with a very large amount of assets. So, either institutional investors or very wealthy folks and what are considered sophisticated investors. That’s who they cater to.
Private equity firms, their basic business model is vulture capitalism. It’s basically figuring out how to either go into a healthy company that you identify, and you think this company could be, that it could be more profitable if broken up into many different pieces. So, you take over the company, you break it up into many different pieces, and extract the money from it. Or you look at a company and you say, well, this company, it’s doing okay, but we think that if we load it up with debt and take all the value out of it, that we can make more money that way. And so, what we’ve seen, the strategy that private equity firms often use is to deliberately load up companies with debt and drive them into bankruptcy in order to extract money for themselves.
So, Toys”R”Us, Sears, Linens ‘N Things, there has just been a spate of retail bankruptcies over the past decade or so. The “retail apocalypse” as folks are calling it has really been driven by private equity firms making investments into these corporations, taking out all of the value, and using that to pay dividends to their shareholders—on which they actually don’t pay their fair share of taxes, by the way—and then basically leaving the workers, the companies, the customers all to fend for themselves, right? So, that is the private equity business model. It is fundamentally anti-worker. It is fundamentally anti-Main Street. That is what Jay Powell comes out of. And so, I think that’s an important thing to understand about Jay Powell.
Powell was first appointed to the Federal Reserve under Barack Obama as part of there were multiple terms that were up at the same, time multiple seats that were open at the same time. And so, one of the things that traditionally many presidents have done is appoint, if there’s multiple seats up at the same time, have a package of candidates from both parties so you can get the votes to get them through confirmation more easily. And so, he was a Republican that Obama first put on the Fed board. Trump elevated him to Fed chair in 2018.
And so, what’s interesting is he’s very much brought the private equity mentality into the Federal Reserve. He’s been all about deregulating Wall Street, and he’s, yeah, been just a massive, massive proponent of rolling back a lot of the regulations that were put into place after the 2008 financial crisis. He’s also been completely hands-off, and actually, not just hands-off, he’s been atrocious an obstacle to having meaningful climate financial national regulation.
One of the things that we often overlook is that the Federal Reserve actually can play a key role in stopping climate change, because at the end of the day, banks are invested in all sorts of climate-destroying infrastructure, fossil fuel infrastructure. And by actually forcing banks to meaningfully account for the financial risk of climate change within their portfolios, central banks and banking regulators can actually incentivize banks to stop investing in fossil fuels. Central banks from around the country, I mean, from around the world in other countries and in Europe have done this. The U.S. lags behind. The U.S. is very much an outlier in ignoring climate financial regulation, and Jay Powell is a really big part of that. Not only are we—
BHATTI: Sorry, go ahead.
VALLAS: No, and I wanna get into all of this. I wanna get into climate and some of the other critiques as well. But I just wanna throw in as well, just in terms of the personal portrait of who is Jay Powell, it also feels relevant to note that he is also a very wealthy individual himself. He has a net worth of somewhere between $20 million and $50 million, according to disclosure documents, which offer what ends up being ranges. It’s why we don’t have the exact number. But that is what most recent documents seem to suggest. So, also, not just someone who comes out of private equity, but someone who himself is very, very, very wealthy as an individual as well.
And Saqib, I wanna move on to some of the critiques ‘cause you’ve already started to go there. And this, I think, is just really important to lay out here, right? We’re not here to assail an individual. We’re not here to make this all just about Jay Powell as a person. But let’s take a look at what his leadership of the Federal Reserve has actually brought. And most recently, the pandemic response, the Fed has been a critical agency in first the Trump administration, then the Biden administration’s pandemic response.
And actually, Chair Powell has received some level of praise for his pandemic response. But increasingly, we’ve actually seen, you all at ACRE, as well as Liberation in a Generation and other progressive groups joined by the likes of Joseph Stiglitz and Senator Elizabeth Warren and really a growing chorus of progressives who care about economic policy and who care about putting people over Wall Street critiquing the Powell Fed’s response to the pandemic. And I’d love if you would break some of that down in English because a lot of this gets really, really wonky fast. But you all have really argued that Powell’s Fed has been all about trickle down instead of actually helping low-income and in particular communities of color in how the pandemic response has actually been approached. What have we seen under Powell’s leadership when it comes to what the Fed has prioritized in the realm of responding to the pandemic?
BHATTI: Yeah, what we’ve seen from a Powell Fed is, at the end of the day, programs that benefited corporate America and Wall Street, and that largely left Main Street out in the dark, right? And so, Powell’s approach very much has been rooted in trickledown economics, right? The idea that if you give money to major corporations and the wealthy that they are the job creators, and they will then trickle that money down onto working-class folks, poor folks, and that helps everybody. And that was sort of one the key bedrocks of Reaganomics. And we’ve seen over and over again that that just does not happen, that when you shower money on wealthy folks and major corporations, they use it to enrich themselves, and they don’t actually pass it on to the rest of us.
And so, really, the idea of trickle down is this idea that you have benevolent wealthy folks. And it’s, as you said, Powell himself is a very wealthy person, so you can understand why he might believe the myth of the benevolent wealthy person, but the rest of us know better. And so, unfortunately, his policies have been very, very much along those lines. For instance, he’s devoted just a lot of capital actually making zero or making very low-interest-rate loans available to major corporations. The idea being that, oh, if we give them cash flow, then they’ll be able to survive the economic downturn that happened in the immediate aftermath of the shutdowns. But yeah, what we saw was that we had some of the wealthiest corporations in the world like Apple and Verizon that end up getting huge, huge investments from the Federal Reserve, huge bailouts. But at the same time, he had very limited bailouts available for Main Street, right? We know that at the end of the— Go ahead.
VALLAS: No, I was gonna say you started to get into one of the most glaring of these earlier, and I wanted to let you get into a little more detail on that. That was something called the Municipal Lending Facility.
BHATTI: Yeah. So, I mean, we know of what we’ve seen historically over and over again that if you want to create jobs and support jobs, the best way to do that is through direct government programs because we actually, corporations from the private sector cannot actually be trusted, major corporations, to go through and trickle down economics. And so, the two best places, actually, small businesses are an exception. Putting money into small businesses does spur local job creation, and putting money directly into government programs. And so, as a result of that, one of the big things that was passed as part of the CARES Act was this package to institute a Municipal Liquidity Facility, which would let the Federal Reserve make loans directly to city and state and municipal borrowers, which is about 50,000 or so state and local, territorial, tribal governments, government agencies across the country that are considered municipal borrowers. It’s basically, yeah, like sub-government agencies under the federal government.
And so, the idea with this was that we knew that across the country, public budgets were gonna be hit hard by the pandemic, by the reduction in income taxes, by people’s inability to pay their property taxes and income tax, various other things that we knew that, yeah, that we would have cities and states really sort of suffering from the fiscal impact of the pandemic. Which is also what happened after the financial crisis, that we have cities and states really suffering the fiscal impact of the financial crisis in 2008. And so, as a result of that, the MLF, the Municipal Liquidity Facility, was put into place to make cheap financing available to municipal borrowers. Jay Powell did not want to do this. Jay Powell and his Fed have not been fans of actually lending directly to cities and states. And so, he sabotaged the program in a couple of different ways.
First, the initial criteria for who was eligible was extremely restrictive. It was only the 50 states, D.C., the 15 largest cities in the country, and the 10 largest counties in the country. Sorry. I’m gonna flip that around. The 10 largest cities and the 15 largest counties. That was it. That’s only who was eligible because it set population criteria that were really, really high. And as a result, among other things, you had that none of the 35 largest African-American cities were actually eligible to receive these loans. And so, that criteria was extremely restrictive. Eventually, they faced a lot of pushback, especially from the Congressional Black Caucus and from folks that were raising the critique about the fact that this program was entirely leaving out Black cities. And as a result of that, they expanded the criteria, but they still left the pricing really high.
They basically set it up so that you add it up. There was a report by Fed Up, an organization that does a lot of work around the Fed. They found that for 97 percent of municipal borrowers in the country, they could get cheaper interest rates on the open market than they could get through the Federal Reserve. Now compare that to what the Federal Reserve was offering to major corporations, which was interest rates as low as half a percentage point, a quarter of a percentage point and loans for up to 10 years. And here they’re instead offering cities and states penalty interest rates, had loans that were only three years in term.
And so, what that means is that if you take out a loan of, say, a few billion dollars, the state of Illinois where I live, we took out a four-and-a-half billion-dollar loan from the Federal Reserve, we have to pay that back within three years. But we know that the pandemic is gonna have a long impact. And to say that we have to pay back a four-and-a-half billion-dollar loan in three years creates a fiscal cliff for us because suddenly, in three years, we need to find a way to come up with this money. And the terms were so egregious that you only had two borrowers take up the Federal Reserve on the LMF, right? To the state of Illinois and the New York MTA, the Metropolitan Transportation Authority, the transit agency in New York. Those are the only two borrowers, public borrowers, that tapped the LMF because the terms were so problematic.
VALLAS: So, this stuff gets really wonky. But basically, what you’re saying is like, here’s this program that’s intended to actually help particularly low-income communities and communities of color, right, the pass-through being state and local governments, many of whom were already struggling and facing real budget issues even before the COVID pandemic. But I’m gonna quote from a piece that you wrote with a couple of your colleagues on Medium that really kind of demystifies and breaks down a lot of this. You write, “The Feds’ MLF, the Municipal Liquidity Facility, which was supposed to help cities and states get through the pandemic was so useless that,” as you just noted, “only two borrowers accessed it. The first iteration virtually locked out majority-Black cities.” You cited that Brookings statistic that none of the 35 most African-American cities in the U.S. even met the Fed’s criteria for direct assistance. But here’s where I feel like you really just kind of sum it up nicely. “The predatory terms that Powell’s Fed offered through this program were deliberately designed to force cities to turn to Wall Street for loans. And instead of aiding BIPOC cities with the MLF, this program like Congress had intended as part of the CARES Act, Powell threw them to the sharks.” So, that’s really just a pretty damning critique as you get a little bit beneath the veneer of what often has been praised as the Fed’s pandemic response here.
I wanna also give you an opportunity to talk a little bit about a point that you made before, which comes far before the pandemic became part of our lives in 2020. Roll the clock back just a little bit more to before the pandemic, and you actually see a pretty damning history of what’s been going on at the Fed well before the pandemic, when it comes to broad, sweeping economic deregulation. And this is another big part of your and many other progressives’ critiques of the way that Powell has been running the Fed.
BHATTI: Yeah. I mean, Powell has very much been pushing, as you said, deregulation. We know that there were serious and systematic failures and gaps, regulatory gaps, that brought us the 2008 financial crisis. Dodd-Frank, the big financial reform package that was passed in the aftermath of the financial crisis, sought to fix some of those holes. It was not perfect. It fell very short of where it needed to be, but it was definitely a big step in the right direction. Powell has systematically rolled back a lot of the different regulations. For example, there are supposed to be these banking stress tests. Basically, the major banks have to show that they’re not taking on too much risk. And so, they literally, they face tests at regular intervals that the Federal Reserve basically tries to see could they withstand another crisis. And Powell basically effectively shares the criteria of the test with them in advance so that they know how to game the system to make themselves appear healthier.
He’s also been an advocate of weakening down the Volcker Rule, right? So, the Volcker Rule was named for Paul Volcker. The idea behind it is that banks should have to separate out their investment and depository activities. To just boil that down more, it means that banks should not be able to gamble with our money. We put our money in our checking and savings accounts into banks. The banks hold those deposits that they should not be able to then be trading in investment activity with that money, because that’s a risk to us, right? Because if they lose all that, they go out and lose all that money, that’s part of money that they’ve lost. And so, the Volcker Rule was to force them to separate out their investment activities from the depository activities. That was the case until the ‘90s. And then under Bill Clinton there was deregulation that weakened that role. And so, the idea was to bring that back. And Powell once again has weakened it, right? He basically has watered that down.
Compare that to Sarah Bloom Raskin, who is a former Federal Reserve Governor who we think would make a great vice chair of supervision, who’s been an advocate of having a much stronger Volcker Rule. In fact, she voted against the Volcker Rule when it came up because it wasn’t strong enough, right? And so, we need someone like Raskin who will really go in there and take financial regulation seriously instead of someone like Jay Powell, who it’s all about financial deregulation because he comes from finance.
VALLAS: Another organization that also has been very vocal about this dangerous deregulatory agenda that we’ve seen under the Powell Fed breaks it down, I think, pretty nicely in English, that kind of, well, what does all of what you’re saying really matter when it comes to real kitchen table family experiences of what this means for the economy? They note all these actions boosted bank profitability, already at quite high levels before this deregulatory spree, at the expense of the resilience of the financial system. So, this all is just to remind us of the Great Recession and some of what we learned from, or should’ve learned from, that experience economically. All of this stuff conspires to end up making us less secure and making our institutions less resilient in ways that put the entire economic system at risk. And that’s a big part of the dangers that you and many other advocates have all been really calling out and identifying Chair Powell for not only supporting but actually seeing through to completion, even when there was dissension in the ranks from less conservative, less Wall Street-focused members of the Fed.
You mentioned climate before, and I wanna come back to it if we have time, as a big part of why many progressive advocates, a growing chorus really, of progressive advocates are calling for remaking the Fed. But I wanna first turn next to one of the critiques that has actually gotten some of the least attention, and that is of the Powell Fed when it comes to racial justice. And this is summed up nicely by a pretty damning quote that you all identify in that Medium piece that I referenced before: “When asked about the Federal Reserve Bank’s role in combating racial economic disparities in July 2020, Fed Chair Jay Powell responded,” and here are his words, “‘Well, we don’t really have tools that can address disparate distributional outcomes’.” And that sounds kind of wonky there. But to put that in English, he was basically saying, I don’t know that the Fed really has anything we can do when it comes to racial economic disparities!
You have responded, and your colleagues have responded, by calling this a lack of imagination that’s on-brand for the white Republicans who are leading the Fed and others as well, like Mehrsa Baradaran, an important and trusted progressive voice also calling for remaking the Fed. She notes, “Over a weekend, the Fed infused trillions of dollars into the repo markets and into the economy. We don’t have limits of resources. We have limits of empathy and imagination.” Talk a little bit about the Fed’s record under Powell, which I think we know the answer is it’s somewhat non-existent, when it comes to racial justice and why you and others are arguing, actually, there is a lot that the Fed can do when it comes to reducing racial gaps in wages and employment, etc., etc. if we move beyond the current race-blind approach.
BHATTI: Yeah. So, I mean, I’ll start to answer that. So, I’m going back a little bit. I mentioned earlier that the Fed has a dual mandate of the Fed, right? This conflict between are you trying to raise interest rates to fight inflation, or are you trying to keep interest rates low to achieve full employment? So, a lot of folks, there’s a chorus of liberal economists who’ve come out and said, well, he kept interest rates low, and he kept interest rates low in order to achieve full employment or to push full employment. And so, that means that he was on the right track. He’s no better than previous Fed chairs.
And so, to that, I’d say like, okay. Well, one, being better than previous Fed chairs is not a high bar. And that is the case especially because what he did left behind Black and brown communities, right? So, it’s true that he kept interest rates low, and that has helped us. There’s now some debate of whether we’ve actually reached full employment. But one of the key things to note is that full employment, the way it’s defined in economics is actually, there still is unemployment, right? So, it’s an unemployment rate, I forget the exact figure, but of around 4 percent or so. And it is actually completely possible to achieve full employment without having any meaningful impact on the economic circumstances of Black and brown folks in the U.S. And that’s what’s happened under Jay Powell.
Because you still have, Black unemployment has barely budged under Jay Powell. You still have a severe problem with underemployment, right, folks who are working many minimum-wage jobs try to make ends meet, who are not employed at the levels at which they would like to be employed. You have the issue of what’s considered discouraged workers, basically folks who’ve been trying to find jobs, unable to find jobs, and are no longer looking at the moment. There’s many things that full employment leaves out.
And the thing is that his approach has really been a colorblind approach, right? It’s almost, and I’ve said before, it’s like an All Lives Matter approach to full employment. That well, if we just lower interest rates, that helps everyone. Well, it doesn’t. What we’ve seen over and over again is that you need to have targeted investments in Black and brown employment if you want to have an impact there. And so, yeah. So, if Powell were to say, “Well, we don’t have any tools at our disposal to address racial equity,” it’s very much a lack of his imagination. And more than that, it’s a lack of his commitment to racial justice. Because the truth is that the Federal Reserve has been endlessly creative in finding ways to make sure the bailout programs help corporate America. And help, as we were saying, not only in making sure that they help corporate America, but in making sure they have the Fed leaders’ own personal investment portfolios, it seems, right?
But if Powell wanted to prioritize racial equity, there are many, many things he could’ve done. So, as I mentioned earlier, two big engines of good jobs for BIPOC folks, one is state and local government. And secondly, it’s BIPOC-owned small businesses, right? So, if Powell had wanted to prioritize racial equity, he could’ve made long-term zero-cost loans available to all state, territorial, tribal, and local governments and public agencies so they could invest and expand the social safety net in their communities while also creating good jobs. He actually still can do that, right? So, at ACRE, we have a campaign called Cancel Wall Street, which is calling on the Fed to do this so that we can actually cancel our interest payments to Wall Street and save $160 billion a year that could, instead of going to Wall Street, could instead go towards investing in our communities and creating good jobs, especially in Black and brown communities. And we know already that the public sector is one of the largest sources for good jobs in the Black community in particular.
Secondly, just as the Fed opened up lending facilities to prioritize investment and lending to major corporations, they also could’ve opened lending facilities to support BIPOC-owned small businesses, right? So, they could have made zero-cost loans or loans at like a quarter percent interest available to Black-owned businesses, to immigrant-owned businesses to help them weather the storm. Because we also know that especially because of racial segregation in our cities, that Black-owned businesses, BIPOC-owned businesses more broadly, are some of the major engines of employment within local economies. And then if you actually put that money into businesses within the segregated communities, for example, you will end up having a ripple effect throughout the neighborhood more broadly, right?
Prioritizing racial equity also means addressing climate change, right? Because we know that climate change is very much a, it has racialized impacts. Yes, it impacts everybody, but we know who’s on the frontlines of climate change. It is the communities that live in, that because of, they live in so-called sacrifice zones, which is basically because of environmental discrimination. We know that coal power plants tend to be based in and around communities that are Black and brown. We know that communities like Cancer Alley in St. James Parish in Louisiana, which is majority Black was hit really, really hard by the hurricanes there. We know that Puerto Rico’s been devastated by Hurricane Maria and Irma a few years ago. We know that whenever we’re talking about climate change and the disasters that hit, it’s poor, BIPOC communities that are hit the hardest and that end up being left to fend for themselves for a variety of reasons. And so, if we want to take racial equity seriously, we do need to take action on climate, which is something, as you mentioned, is definitely a pipeline to other climate organizations and pushing a lot.
So, there are many, many things that Powell could have done if he actually wanted to prioritize race. Other areas just on housing, we know that one of the big things that the Federal Reserve has refused to do is really take action to reduce private equity investments and other investments into our housing stock, right? We’re seeing this explosion of rents in cities across the country, which is largely driven by Wall Street investors going and buying up rental stock and raising the rents or turning it into condo conversion and selling it off. And basically, that’s having an impact on really displacing Black and brown folks from their communities that they’ve been living in for generations.
So, one of the big issues we’re really facing right now is an affordable housing crisis going on in cities across the country where, as rents are going up, which is largely driven by the actions of Wall Street investors that are coming in and taking up housing stock, that Black and brown folks who’ve lived in communities for generations are being displaced. The Federal Reserve could do a couple of things here that would go a long way.
The first, through a program like a Municipal Liquidity Facility, they could make loans available to public housing agencies to actually buy up vacant housing stock instead of letting it go to Wall Street investors, right? So, as homes go into, as buildings go into, if they become vacant, that public housing agencies could actually, if they had the money from federal programs or could get them, they could buy up that land, they could buy up those units, and then turn them into good public housing that would prioritize in residents who already live in those communities to stay in those communities. And that would go a long way towards ensuring that we’re not seeing the rapid gentrification of Black and brown cities.
And the other thing they can do, the Federal Reserve could do, is also invest in Black and brown homeownership, right? So, we know that there are many communities that were historically redlined and where banks would just not let Black folks in particular move into homes in certain neighborhoods.
VALLAS: So, there’s clearly no shortage of things that the Fed could be doing to advance racial equity, if not for a lack of imagination. But there’s a broader critique here as well, and that is of the Fed’s utter lack of diversity. And this extends not just to the lily-white Board of Governors, but also to the staff. As of January of this year, of the 417 staff at the Federal Reserve, you have pointed out only two were Black and 318 were white. Personnel is policy, as it’s often said. So, this is another incredibly important dimension to progressives’ call on Biden to remake the Federal Reserve as an institution that puts working families ahead of Wall Street, and that sees, for example, closing racial economic gaps as part of its charge.
As we’re speaking, a decision is expected any day now from the Biden White House about what they will be doing when Chairman Powell’s term ends in February. Talk a little bit about where things go from here and some of the names that you all and other progressives have been putting out there for consideration, including women, and importantly, women of color who could usher in a new era of leadership at the Fed. They include Lael Brainard, the only woman currently serving on the Fed’s Board of Governors, as well as economist Lisa Cook and law professor Sarah Bloom Raskin, whom you mentioned before.
BHATTI: Yeah. I mean, so, as you mentioned, we have the diversity problem at the Fed is, as you said, completely all across the board. And it’s most, most pronounced within the Fed leadership itself, right? You have an all-white Federal Reserve Board that has only one woman on it, Lael Brainard. And she’s also the only Democrat, so everyone else is a Republican white man. And so, President Biden has the opportunity right now to reshape the Fed with a number of openings. There’s potentially up to four seats that will become, either are open or will become open over the next year. And he needs to appoint the right folks in all of them to actually hook the Fed, right?
And so, we really believe that the right folks for these positions— So, Lael Brainard, who is currently a Federal Reserve Governor, we think she would make an excellent Fed chair. And she has just a long history of pursuing full employment before Powell was doing it. Powell started doing it once it became the popular thing to do. Brainard has always been pushing for that. She’s been pushing for racial equity to be baked into the work the Fed has been doing from the start. She also is just responsive to movements.
We think Lisa Cook would make an excellent vice chair, a replacement for Richard Clarida, as you pointed out, is sort of mired in scandal right now. Lisa Cook is a distinguished labor market economist whose commitment to racial economic justice is just stellar, and as she has unparalleled expertise on sort of the racial disparities and how financial regulation can actually help impact that. And she’s also, speaking to the point about the Federal Reserve more broadly and its lack of diversity, she’s been a champion in her career for other budding Black women economists and has directly increased the diversity of the Federal Reserve’s research assistant program already. And so, we think that she would be excellent in that role.
And then finally, Sarah Bloom Raskin, we think, would be a great vice chair of supervision to replace Randy Quarels, who also is mired in scandal at the moment. And so, Sarah Bloom Raskin is a former Fed Board Governor, and she just has a long and deep history as a reform advocate. As I mentioned earlier, she actually voted against the Volcker Rule back when she was on the Federal Reserve because she thought that it didn’t go far enough, right? So, unlike compare that to Jay Powell who’s trying to weaken the rule, she’s always been for making it even stronger. And she also has just a strong record of fighting for racial justice as Maryland’s chief financial regulator, where she took on payday lenders and cracked down on high-interest-rate lending and predatory lending more broadly.
And so, we think that the three of them—Lael Brainard, Lisa Cook, and Sarah Bloom Raskin—that’s the leadership we need to make the Fed work for us. That right now, Jay Powell and his vice chairs have consistently put the interests of Wall Street ahead of Main Street, and we need President Biden to really bring in this new leadership. And again, you really need all of those positions and then to make sure that the fourth position has also someone who is equally as good so that they can get to a majority on the bank board. If you leave any of the current leadership in, it makes it really hard to do. That’s why we’re really calling on President Biden to replace all three of them—Powell, Clarida, and Quarels—with Brainard, Cook, and Raskin.
VALLAS: And as I mentioned, you are not alone in making this call. And while folks are waiting for a decision that could come from the White House any day now—it was actually even expected before this episode is going live but has been delayed somewhat because a few other things are going on in Washington right now—a number of progressive economic heavyweights have been calling in turn for new leadership at the Fed and really for Biden to seize this moment to remake the Fed in the image that you have and others have been outlining. Joseph Stiglitz, Nobel Prize-winning economist, has said, “People have given Powell a lot of kudos because he’s supported the economy through the pandemic. On the one hand, I agree with that,” he says, “but on the other hand, that’s a bare minimum for qualification. Almost anybody reasonable would’ve done something similar.” And he has many of the same critiques of Powell that you’ve walked through.
And Senator Elizabeth Warren, progressive stalwart who has not been shy in recent days about why we all need to be prioritizing the Fed and why Biden needs to not make the mistake of just taking the path of least resistance and renominating Jay Powell, she said in a widely noted speech earlier this month that Jay Powell had tolerated what she called, “a culture of corruption at the central bank.” She called him, “a go-along to get along leader who doesn’t know or doesn’t care when, on his watch, people with great responsibility advance their own interests over those of our nation or,” she continues, “someone who drags his feet in dealing with problems that shake the public confidence in the institution he leads.” So, not exactly mincing words there, as Elizabeth Warren joined the growing ranks of folks coming out against Powell’s reappointment as Fed chair when his term expires early next year.
We’re gonna have to leave it there, but there’s so much more in our show notes this week for listeners to dig into from you all at ACRE, from your colleagues at Liberation in a Generation, as well as Americans for Financial Reform, and others who have been leading the charge calling on President Biden to seize this moment when there could be as many as four open seats on the body’s governing board to remake the Fed into an institutional force for racial, gender, climate, and economic progress. So, huge thanks, Saqib, for taking the time to join the show, to break all of this down, and for all of your and ACRE’s incredible work as part of this coalition to raise attention to an issue that’s usually kept behind the curtain, because it’s something that we all need to understand and need to be following right now. [upbeat theme music returns]
BHATTI: It was great to be here. Thanks for having me.
VALLAS: And that does it for this week’s show. Off-Kilter is powered by The Century Foundation and produced by We Act Radio, with a special shoutout to executive producer Troy Miller and his merry band of farm animals, and the indefatigable Abby Grimshaw. Transcripts, which help us make the show accessible, are courtesy of Cheryl Green and her fabulous feline coworker. Find us every week on Apple podcasts, Spotify, or wherever you get your pods. And if you like what we do here at Off-Kilter Enterprises, send us some love by hitting that subscribe button and rating and reviewing the show on Apple Podcasts to help other folks find the pod. Thanks again for listening and see you next week.