Shortly after the November 2020 election, defections from what was then a 53-member Senate Republican majority doomed President Donald Trump’s nomination of Judy Shelton to the Federal Reserve Board of Governors. Shelton’s history of gold-standard advocacy marked her as too far out of the mainstream. For an otherwise Trump-dominated party, it was a rare moment of independence and moderation.
It will be interesting to see what the Senate, now Democratic-controlled by the barest of margins, makes of Cornell law professor Saule Omarova, President Biden’s nominee for a key financial regulation post, comptroller of the currency.
Omarova’s left-wing views on banking, and on the Fed’s economic powers, are the opposite of Shelton’s ideologically but are, if anything, more radical. Centrist Democratic senators could — and should — use this nomination to demonstrate the limits of their party’s progressive drift.
The big picture, though, is what Shelton and Omarova both exemplify: As Fed intervention in financial markets has widened, so have the parameters of debate over central banking.
To cope with the 2008 financial panic and the pandemic, the Fed has experimented with zero interest rates and massive asset purchases, swelling its balance sheet from $870 billion 14 years ago to $8.5 trillion now.
Unorthodox policies were bound to provoke unorthodox critiques, whose common theme is: How do we make sure the Fed really operates in the public interest, as opposed to enabling unproductive or even predatory private activity?
Shelton lamented in 2019 that investors "are fixated on the Fed and are making money by arbitraging … after the latest [Federal Open Market Committee] announcement.” Shelton’s instinct, shared with others on the right, was to limit the central bank’s discretion. Her extremism consisted in doing that by linking the dollar to a “benchmark” tied, ultimately, to gold. Otherwise, she mused, "we might as well resurrect Gosplan,” the Soviet Union’s planning agency.
Omarova considers the same Fed-bred profiteering — “collective action problems that create financial instability and hinder socially equitable economic growth,” as she puts it — but concludes that we might as well resurrect Gosplan.
That’s a flippant summary of Omarova’s recent law review article, “The People’s Ledger,” but not a totally inaccurate one. She proposes that the Fed, not banks, should take deposits from the public, then leverage them by “dramatically augmenting the flow of credit into the coordinated nationwide construction of public infrastructure that enables and facilitates structurally balanced, socially inclusive and sustainable economic growth.”
In short, the Fed would replace private commercial banking. Omarova says this would exploit transactional efficiencies made possible by digital currency technologies — why bother with a bank when the money creator itself can automatically credit or debit your account?
Meanwhile, instead of fueling systemically risky speculation as it does now, she argues, Fed money creation would enable truly productive investment — as determined not by private profit motives but by central bank professionals, working with a separate new “National Investment Authority.”
Targeting government aid to areas where market failure has led to underinvestment — research, infrastructure, health care — can be necessary and appropriate, which is why Congress has created programs to do just that, more or less democratically.
Omarova nevertheless refers to her plan as a way to “democratize money." A more plausible view is that, much like a return to the gold standard, it would destroy the economy in the name of saving it.
Like Shelton, Omarova once did academic work on the Soviet economy. Indeed, Omarova graduated from Moscow State University in the late 1980s, before immigrating to the United States. This makes her confidence in the Fed’s ability to manage such a vast and complex portfolio efficiently, honestly and free of undue partisan influence doubly remarkable. “Undoubtedly," she concedes, "there are numerous additional details that will need to be worked out before this system is put in place.” Undoubtedly.
And yet: Omarova has a point. The basis of Fed-created money is the full faith and credit of the United States, which ultimately belongs to everyone. To the extent that quantitative easing (QE) — essentially, asset purchases with newly printed money — makes it artificially cheaper for wealthy individuals and hedge funds to borrow and speculate, the Fed is wasting that public resource making the rich richer.
Fed chairs have heard this critique repeatedly during the past 14 years, and they have an answer: Working people would have suffered even more if not for the Fed’s intervention; speculative excess and inequality can and should be curbed through regulation and tax policy.
They have a point, too, but the Fed’s arguments lose traction as the emergencies that QE was intended to meet recede into the past and the possible downsides — including not only asset-price bubbles but also, now, general inflation — loom larger.
One way to disarm radical critics would be for the Fed to show that its massive asset purchases were, in fact, extraordinary measures, not the new normal. The central bank’s planned “taper” can’t come soon enough, if it isn’t already too late.