The nomination of Cornell University law professor Saule Omarova to head the Office of the Comptroller of the Currency (OCC) has drawn criticism for views offered in the professor’s research. Should expounding extreme ideas disqualify someone from government service?
One of Professor Omarova’s papers proposed shifting bank deposits to the Federal Reserve. Banks would continue to accept deposits but instead of making loans themselves, their funds would be turned over to the Fed. Essentially this would let the Fed allocate credit and represents a radical departure from our private credit markets. The OCC regulates some of America’s banks. Should an advocate of “putting banks out of business,” as describe by some pundits, have regulatory authority over banks?
Bankers’ groups certainly think not. The president of the American Bankers Association said, “We have serious concerns about her ideas for fundamentally restructuring the nation’s banking system which remains the most diverse and competitive in the world.” Liberals, however, contend that the OCC has been lax in regulating America’s largest banks and applaud the nomination of an industry critic.
Let’s first consider two immediate responses. The first is the nature of academic research. Research frequently involves imagining alternatives to existing institutions and working through potential advantages and disadvantages; it is frequently speculative, not a blueprint. Professor Omarova’s paper “The People’s Ledger” clearly fits this mold, so describing this as “advocating” the elimination of private banking is misleading.
The second is the limits to government powers. Agencies’ authority derives from Congressional legislation. A regulation issued without legal basis can be challenged in court, as is currently occurring with the Biden Administration’s workplace vaccine mandate. Bankers need not fear Professor Omarova implementing any restructuring she has written about.
Regulators do, however, possess discretion. Agencies formulate the details of many regulations and offer compliance guidance, or instructions on how to follow their rules. And regulators decide about pursuing enforcement actions. Small actions can accumulate, just as tiny snowflakes form massive snow drifts.
I find calls to give the Federal government more control over economic activity highly problematic. Research convincingly demonstrates a link between economic freedom and prosperity. Government control means decisions benefiting politically favored causes and groups. Numerous elected officials – including Presidents Clinton and Bush and Congressman Barney Frank – pushed banks to issue subprime mortgages. A minimum proportion of mortgages purchased by Fannie Mae and Freddie Mac had to be subprime mortgages.
In a market economy consumers decide which businesses succeed or fail. But to start a business, an entrepreneur must first access financial capital. Today many independent banks making their own decisions about loans. Ten loan denials do not prevent an entrepreneur from getting a loan from a bank which finds her idea promising.
Banks risk their own money when making loans. This incentivizes banks to both fund promising business ideas and pull the plug on failing ventures. Would bureaucrats lose their own money or their jobs for wasting Americans’ savings on worthless ventures?
The Biden Administration is aggressively using financial regulations to push investment in Green New Deal ventures. Pursuing policy through finance causes two harms. First, bureaucrats will do worse on average than investors investing their money. Second, voters have difficulty attributing poor investment returns to political demands. Effective government requires accountability and financial subterfuge make it difficult for people to hold politicians accountable.
I question whether any expert supporting greater political controls over banks truly understands the enormous societal benefits from financial markets. This is my concern with this nomination.
Periodically the research of professors nominated for executive branch positions turns out to be controversial. Normally these nominations get quickly withdrawn. Dozens of other equally qualified individuals would implement the President’s left-leaning policies at the OCC without so angering bankers. I will let political pundits postulate why President Biden proceeded with the professor’s nomination.
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