Having served as deputy secretary at the US Treasury between March 2014 and January 2017, Sarah Bloom Raskin is well versed in what keeps the country’s economy ticking and the dangers it faces. With the International Monetary Fund (IMF) predicting the US economy is set to cool to 2.1% gross domestic product (GDP) growth in 2020, Ms Bloom Raskin sees uncertainty as one of the most pernicious challenges to a revival of economic activity. Speaking to The Banker at the FT Banking Forum in New York in October 2019, Ms Bloom Raskin discussed what contributes to that uncertainty, and what policy measures are available to support economic growth at a time of extraordinarily low interest rates and unprecedented international sanctions.
Q: The IMF warns that, based on current low global growth forecasts for 2020, there isn’t much room for policy mistakes. Is there room for any other policy action that can support economic growth in the US?
A: When we think of policy-making tools, we think of the different buckets: the monetary policy tools, fiscal policy tools and the structural regulatory tools, and I would put in there some of the sanctions work as well. When you open the toolbox, you see that they are just not as sharp as they have been; certainly [not as sharp as] when we confronted the global financial crisis.
Let us start with monetary policy. In the US, we don’t technically have negative interest rates in the way other central bank regimes have moved their country’s economies into, but interest rates are very low in the US, they’re close to zero. This means that the runway for accommodation through lowering the Fed funds rate is actually a shortened runway.
Now, there are other tools, short of quantitative easing, such as forward guidance communication, in which the Federal Open Market Committee [the monetary policy-making body of the Federal Reserve system] would indicate that it is not going to raise interest rates until a certain level of inflation is reached. Those sorts of communication devices are also possible tools, and we could have a whole conversation about the usefulness of [them] but the point is that the usual tool – the first defence, which is the Fed funds rate – has limited bandwidth right now.
Q: What about fiscal policy?
A: In the US, the fiscal policy settings are such that we are running very high deficits in proportion to our GDP historic highs. They got blown out after the tax bill was put in place [at the end of 2017], which lowered taxes significantly for corporations but didn’t produce the revenue that was predicted by the administration. The result is that the US deficit is historically very high.
The space is limited now [but] I would argue that [because] we have historically low interest rates, you can actually do a little bit more from a spending perspective. You can get some good spending done, actually, because the cost of that spending is lower. We have to adjust our thinking in that respect. I think we are going to have to do something on infrastructure; infrastructure investment could be a very targeted way of bringing about some more growth.
Q: You like to say that challenges and their solutions are usually found ‘in the seams’. That was certainly the case for the causes of the financial crisis, but what about its solutions? And is the current regulatory adjustment justified?
A: [Future] solutions are going to be [found after we] figure out what a regulatory structure looks like for optimal resilience. What has happened in the US, as many bankers know because they had to live with it, is that the financial crisis produced the Dodd-Frank Act, which was a massive set of structural regulatory changes that were codified by law. Some of those were, I would argue, completely right.
Some have not been so right. And so there needed to be some adjustment. I think that the adjustments have been too much. I think from a regulatory perspective there hasn’t been quite the degree of care that I’d like to see from a regulatory pull-back to promote resilience. A lot of the changes that have occurred could have interactions that really have not been fully explored from a resilience perspective. So I think the regulatory actions of late could be undermining [systemic] resilience.
Q: You have also been vocal about economic sanctions. Why?
A: Sanctions work was something that I had to deal with at the Treasury, as in the US that is where this work is housed. And the use of economic sanctions has 1735215068 really exploded. [Sanctions] used to be very selective tools because they are, in a way, restraints on trade. A sanction creates a whole cascade of costs and actions that have to be taken not just by bankers but, obviously, by the businesses affected. These are tools that had always been used very selectively and carefully. Now in the US, you see them used in an almost head-dizzying way. We had sanctions on Turkey [imposed on October 14; then nine days later] they were taken off. So within one week, you can have a sanctions regime that is colossally different. How in the world is a firm supposed to plan [in this environment]? [The US] sanctions policy is something that has not been promoting resilience.
Q: Is banking supervision a political issue?
A: Banking oversight has to be credible. If you really want people to have confidence in both the bankers and their [corporate clients] as well as in other areas that are regulated, such as auditing, there has to be credibility, and one way credibility is enhanced is by having appropriate oversight. In the US, some of the oversight has come under criticism primarily because it appears to be partisan. We can’t let partisanship come into what is really pretty dry ‘check and balance’ [work], and that’s unfortunate. This is also ultimately detrimental to people’s ability to trust a system. And when you lose trust, you lose resilience – that’s a Pandora’s box.
Q: What risks are we overlooking that could lead to the next big crisis?
A: Bankers control risk and policy-makers are supposed to identify potential risks. In the US, I would argue that we have got one significant risk that has not been taken up in a meaningful, robust way and that is climate change risk. Other countries and other central banks have gotten into this area quite a bit. The US is lagging [behind].
From a policy-making perspective, it is lagging because [climate change is] viewed as a political issue. I do not think it should be a political issue. We need to understand it, regardless of whether [some still doubt] it is real. [Luckily] you are starting to see [some movement]. The San Francisco Fed did a symposium on climate risk and its effects on the financial sector [in November 2019]; and the Commodities Futures Trading Commission in the US is setting up an advisory group to examine these risks. So it is starting to happen but I know the European Central Bank and the EU have done a lot more to try to understand what those risks are and what the right response should be. And if I were a banker right now, I would be wanting to look at what climate risk means to my portfolios and to shareholder returns.
I know people think ‘oh let’s not stir the pot, we don’t want more regulation, we don’t want more burdens on and incursions into our businesses and our cost structures’. But what we are talking about here is just trying to understand this [risk] and trying to articulate what its effects and interactions might be with the financial sector – and I don’t think we should run away from that. If it is something that does have ramifications for our portfolios and our businesses, we should think about the best approaches to mitigate it. Not [as something] to be feared, but to be looked at.
Sarah Bloom Raskin is a former deputy secretary of the US Treasury and former member of the board of governors of the Federal Reserve. She is currently a Rubenstein Fellow at Duke University and works with the Rethinking Regulation programme at Duke’s Kenan Institute for Ethics and with the Global Financial Markets Center at Duke Law School. She spoke to Silvia Pavoni during the FT US Banking Forum in New York on October 24, 2019.
