Tuesday, January 18, 2022

Fed Nominees

I salute President Biden's nominations for the Federal Reserve Board, especially Sarah Bloom Raskin and Lisa Cook. (Philip Jefferson seems straightforward and uncontroversial, but other than reading a CV I haven't looked that hard.)

 We can now have an honest conversation about where the Fed is going, and whether and how the Fed should use its tools, primarily regulation, to advance the Administration's agenda on climate, race, and inequality. 

The Wall Street Journal nicely assembled crucial quotes on Ms. Raskin and climate. In 2020,   

The Fed established broad-based lending programs to prevent businesses that were otherwise sound from failing due to the shutdowns. 

Writing in the New York Times in May 2020, 

Ms. Raskin wanted the Fed to exclude fossil-fuel companies from these facilities. “The Fed is ignoring clear warning signs about the economic repercussions of the impending climate crisis by taking action that will lead to increases in greenhouse gas emissions at a time when even in the short term, fossil fuels are a terrible investment,” she wrote. ...

“The Fed’s unique independence affords it a powerful role,” Ms. Raskin added. “The decisions the Fed makes on our behalf should build toward a stronger economy with more jobs in innovative industries—not prop up and enrich dying ones.”  

Writing for Ceres,  

“We must rebuild with an economy where the values of sustainability are explicitly embedded in market valuation,” she wrote. This will require “our financial regulatory bodies to do all they can—which turns out to be a lot—to bring about the adoption of practices and policies that will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.”

My emphasis. The report also 

suggests the Fed use the “community reinvestment process to bolster the resilience of low-income communities to climate change.” 

This is wonderful. For the last year that I have been following the issue, it has all been clouded in what I regard as deceitful misinformation -- Oh, we're not trying to regulate climate policy. That's beyond our mandate. We just look around at risks to the financial system and lo and behold we find that climate poses an important risk to the financial system. So we're just doing our job as dispassionate financial regulators. The idea of climate risk to the financial system is, in my view (and my reading of the scientific literature) so farcical that I called this out as a subterfuge. But there the argument lay. 

No more. Thank you Ms. Raskin for stating the truth so clearly. Now we're ready to put that nonsense smokescreen aside and have an honest debate. Should the Fed get involved in allocating capital in order to pursue climate policies? Especially to go beyond what Congress, Administration, and EPA are willing to do, for fear of wrathful voters? 

Ms. Raskin is superbly qualified and experienced. If you don't like these policy preferences, that makes her more dangerous as she has the knowledge and skill to implement them.  That's great too -- the discussion can't get derailed over qualifications. 


A few journalists approached me to ask about Professor Cook's qualifications. Since they had an obvious agenda, I did not comment. But it is a line of argument you will hear. 

My answer is simple: It depends what the job is. Just spend some time on her website. Read her CV. Cook is an academic, so her main qualification is her writing, not business or other experience which some other Fed board members bring. 

Indeed, in her extensive writing for academic journals and think tank essays listed under "publications," you will find essentially nothing related to monetary policy, monetary effects on employment, interest rates, inflation, financial regulation or other traditional Fed topics. (Maybe her most cited paper “Trade Credit and Bank Finance: Financing Small Firms in Russia,” Journal of Business Venturing, 1999 counts, but on the conventional basis it's a slim basis to sit at the Fed.)0

But, to keep a blog post short, just read a selected few of the most recent publications: 

• “Can addressing inequality unleash economic growth?” (with Nela Richardson and Jim Tankersley) Business Economics 56, 5966, (2021).

• “Addressing gender and racial disparities in the U.S. labor market to boost wages and power innovation,” Washington Center for Equitable Growth, January 14, 2021.

• “Policies to broaden participation in the innovation process,” Brookings Institution, The Hamilton Project, August 14, 2020.

• “Getting money urgently to low-wage U.S. workers,” Washington Center for Equitable Growth, March 30, 2020.

• “The implications of U.S. gender and racial disparities in income and wealth inequality at each stage of the innovation process,” (with Jan Gerson) Washington Center for Equitable Growth Policy Brief, July 2019.

• “Rural Segregation and Racial Violence: Historical Effects of Spatial Racism,” with Trevon Logan and John Parman, American Journal of Economics and Sociology Volume 1, Numbers 3 and 4, (2018).

• “Racial Segregation and Southern Lynching”, with Trevon Logan and John Parman, Social Science History, vol 42 (4), pages 635-675, (2018).

It goes on like this. Her bio lists a bewildering number of institutional affiliations: 

She is currently Director of the American Economic Association Summer Program and was President of the National Economic Association from 2015 to 2016. In 2019, she was awarded the Impactful Mentor Award (for mentoring graduate students) by the American Economic Association Mentoring Pipeline Program and was elected to the Executive Committee of the American Economic Association. During the 2011-2012 academic year, she was on leave at the White House Council of Economic Advisers under President Obama and has had visiting appointments at the National Bureau of Economic Research, the University of Michigan, and the Federal Reserve Banks of New York, Chicago, Minneapolis, and Philadelphia. She serves on the Advisory Boards of the Federal Reserve Bank of Chicago (Academic Advisory Council), the National Science Foundation (Social and Behavioral Sciences), the Opportunity and Inclusive Growth Institute of the Federal Reserve Bank of Minneapolis, and the Lemelson Center for the Study of Invention and Innovation of the Smithsonian Institution. She is a member of the Council on Foreign Relations. 

(My only complaint: Her bio lists her has having been "a National Fellow at Stanford University." No, she was a National Fellow at the Hoover Institution, at Stanford University. Which signed the checks. Her CV lists it correctly. I'm only sensitive because people accuse Hoover of being right-wing, and here is contrary proof.) 

She is currently a member of American Economic Association Executive Committee (She does more than she even can keep up with on her CV and bio!), and serves on the Committee on the Status of Minority Groups in the Economics Profession of the American Economic Association, which is conducting an expansive "diversity" initiative

So, I answer the question, Lisa Cook is superbly qualified, by written word, experience, and connections -- if the job is to bring the Administration and progressive supporters' racial policies to the Fed. That might mean requiring DEI or ESG practices at banks, or to companies that banks lend to, directing credit to some areas or by race, and strengthening the DEI initiatives and race based hiring and promotion practices within the Fed. 

Should the Fed be doing that? Again, thanks Mr. President, we can now have a straightforward discussion. 


  1. Thanks for your excellent summary. These people are not our best and brightest.

  2. Thanks for your excellent summary. These people are not our best and brightest.

  3. I give John credit for tight walking through a nasty minefield. Because any disagreement, even in the mildest form, could be misconstrued. Perhaps that's the point.

    I will be less artful. One can and should question the motivations behind these specific choices without it impugning women, women of color, or their qualifications in the field of economics.

    I'll go ahead and say it more cleanly. This smells of virtue signaling in the worst way.

  4. As a former FRBNY officer, some thoughts:
    1. Classically, the horizon for climate change would normally allow the repricing of contracts to reflect the risk (absent some very tail probability like the collapse of the ice shelf and the reversal of the Gulf Stream.
    2. Climate change is a classic externality, one that is global in scope. The collective governments have agreed to address by committing to carbon reduction goals.
    3. In the best of all worlds, this would be done transparently through legislation.
    4. We all know that we do not live in such a world.
    5. By nominating Raskin, I don't think you can say it is "beyond what the Administration is willing to do."
    6. I would prefer to directly raise the cost of carbon (either through exchanges or taxes), but this may be a 'next best' solution.
    7. Do not let the best be the enemy of the good.
    8. Prepare for the 2nd order consequences of this action.

    1. I think the natural retort would be:

      This feels like a overreach of the feds stated powers. The whole reason the Fed avoids checks and balances of traditional government is because it has a limited and transparent scope of power.

      The FED is also supposed to be apolitical, but it sure doesn't feel that way.

    2. Politics and economics go together like peanut butter and jelly, but often don't have the same taste every time. There's no escaping or separating these two critical functions of society.

      To me this isn't about the Fed picking winners or losers per se. It's inevitable there's toe smashing in the attempt to have the illusion of stability, with as little variation as possible. Utopia, yes?

  5. This comment has been removed by the author.

  6. Your critique of Dr. Cook needs some work. First you say her record is too thin - and then you say she's doing too much and that you're bewildered by how much she's doing. So, which is it? You cherry picked her research to avoid mentioning all she's done that is clearly in line with the Fed's mandate. Do you think Milton Friedman made a mistake by backing her research? Or, did that fact not fit with your fairy tale. I can't find anything she's written about mandating DEI and ESG at banks. Your implication that her work "might mean" she supports those things is utterly silly. As for this notion you led with that some journalists called you and asked for your views on Dr. Cook - well, why not name them? What an odd and truly weird hack job. May your feet never touch the ground, John.

    1. John obviously struck a nerve...

    2. Lee: Cook has a PhD not a Medical Degree. Therefore Cook is never addressed as "Dr. Cook." Doctors have to pass extremely dfficult medical classes to become a Doctor. Cook just "passed" certain courses with which grades are opinions, not facts. Am I a racist? No. I just don't suffer fools gladly.

  7. I have a lot of complaints about the Fed; usually its been too tight.

    The Fed has a thousand economists, but there is never a clear discussion of whether a larger balance sheet is inflationary, or actually anti-inflationary in that it increases investor confidence in the federal government ability to meet debts.

    I might even wonder if it is better to create money through money-financed fiscal programs, rather than through greater government borrowing or more commercial bank lending.

    And yet even I think these three choices for the Federal Reserve board are absolutely crummy, for the reasons suggested in this excellent blog.

  8. Hell, it's the commanding heights! Been there, done that.

    May the Lord have mercy on our souls.

  9. What is Spacial Racism ? Is it discrimination against Martians ?

  10. The Fed doesn't do well what it should be doing. Can we hope that it will do at least as well what it shouldn't be doing?

  11. Hi Dr. Cochrane - I hope all is well. I had your Investments course at the GSB in '97 (or '98?). It was a great class.

    I wanted to ask about the comment, above, "The idea of climate risk to the financial system is, in my view...farcical". I know it's certainly the case that climate change can affect companies and industries so I wanted to ask, what are the criteria for something to have a material, adverse risk to the stability of the whole system. Is it the potential for some x% change in liquidity or prices across the U.S. market (that quickly "infects" world markets), or the world market in general, that persists for a certain time? How quickly does it have to happen? As an example, would it have to be something like the crisis in 2008 but that was precipitated by a climate disaster? It would be helpful to get a sense for what the magnitudes would have to be for people to agree it was due to "climate change" (whether that's a mega-disaster or series of disasters or some quantifiable trend).

    Thanks, Matt

    1. Click on the energy or environment links. I went on and on over the last few months on the topic of climate financial risks. On its own, this is too brusque a sentence, you are right, but there is a lot behind it.

    2. Thanks - I'll check it out. (This was my first foray to the Grumpy Economist blog!)

  12. "The idea of climate risk to the financial system is, in my view (and my reading of the scientific literature) so farcical that I called this out as a subterfuge." You are a theoretical economist, I wouldn't expect you to understand the scientific literature of climate change well enough to derive its risk to financial system (which also requires empirical grounding, something you seem to lack).

  13. I do have one addition here. The FT, as no doubt others, notes the critical lack of banks in minority communities. The Chicago Fed has f
    similar finding in its study of Detroit. Without banking services and loans, local business in minority communities find it difficult to scale their businesses and build wealth. At the time I read this the Chicago Fed asked for local community representatives to serve on an advisory board. I immediately thought of the North Lawndale community which is in partnership with Old St Pat's RC church. Speaking with Rodney Brown, a top official in North Lawndale's comprehensive community organization, they even have a Chamber of Commerce and a banking committee, I learn that North Lawndale just got its first bank in 20 years! Wintrust located in the neighborhood this past April. For these reasons, as well as others, Lisa Cook brings an important perspective to the Fed - that of ample financial services in minority communities to support local businesses, hence growth and wealth building.

  14. "...thinktank essays listed under publications" lol.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.