President-elect Joe Biden has chosen former Federal Reserve Chair Janet Yellen to be Treasury Secretary, the Wall Street Journal reported on Monday, after Biden previously said his nominee would “be accepted by all elements of the Democratic Party.”
If confirmed, Yellen — the first woman to chair the Fed — will smash another glass ceiling by becoming the first woman to lead the Treasury Department. In making such a choice, President-elect Biden is distinguishing himself from former President Barack Obama, whose controversial choices to lead his economic team were widely criticized as being too Wall Street friendly. Yellen has the trust and support of both the progressive and centrist wings of the Democratic party. That’s good because she will need all the help she can get to deal with the pandemic as well as address long-standing weaknesses in financial oversight and tax collections that have been neglected by prior administrations.
As our economy continues to struggle under the burden of COVID-19, the Treasury Secretary will be President Biden’s most important Cabinet selection.
The Treasury Secretary is the administration’s point person on pandemic relief programs both in negotiations with Congress and in overseeing the disbursement of pandemic relief funds. Yellen’s positive relationships with both moderates and progressives should help build consensus within the party on pandemic relief as well as pursue much needed Republican votes in the Senate, which is likely to remain under GOP control. With important CARES Act benefits expiring at the end of the year, we can only hope that Congress achieves agreement under the current administration on another relief package. It’s welcome news that Team Biden is encouraging Congressional Democrats to compromise to get a bill enacted before the end of the year. Even if that happens, addressing the needs of our pandemic-stricken economy promises to be the major pre-occupation of our next Treasury Secretary for most of 2021.
That includes working with the Federal Reserve on its special lending programs. Much criticism was heaped on current Treasury Secretary Steven Mnuchin last week as he requested that the Federal Reserve return some $450 billion in taxpayer funds allocated by the CARES Act to protect the Fed against losses on some of those programs. But the programs in question, which support credit to corporations, municipalities, and medium-size businesses, can be continued even without the CARES Act money. The Treasury Secretary can still use about $75 billion in its Exchange Stabilization Fund to support them.
With over $2 trillion in corporate debt issuance this year, I hardly think the Treasury or the Fed need to continue supporting that market, though the same cannot be said for municipal debt and credit to businesses that are too small to access public debt markets.
The new Treasury Secretary should work with the Fed to reconsider the design of these scarcely used programs to determine whether credit standards were designed to be too stringent. However, the primary focus should be on continued fiscal stimulus. Hard-hit small businesses and households mostly need cash payments, not more debt, to weather this ongoing pandemic storm.
The Treasury Secretary also has a lead role in financial stability, as Chair of the Financial Stability Oversight Council, or FSOC, a group of financial regulators charged with monitoring and addressing systemic risk in the financial system.
The market disruptions of last March, which required massive interventions by the Fed, show continued fragility in non-bank segments of our financial system. As underscored in a recent report by the Financial Stability Board, money market funds — which were sources of stress during the Great Financial Crisis — again faced a huge wave of destabilizing redemptions. Mutual funds and exchange traded funds contributed to widespread selling pressure in corporate bond markets. High-speed algorithmic trading by heavily leveraged hedge funds created turbulence in the markets for U.S. Treasuries — markets which should be safe havens in times of turmoil.
Though oversight of regulated banks has dramatically improved since the Great Financial Crisis, oversight of non-banks such as these is woefully inadequate. Because these entities span a cross-section of financial regulatory authorities, only the FSOC, led by the Treasury Secretary, will have the tools to fully address them.
Tax policy and enforcement
Another area of protracted neglect relates to the Internal Revenue Service, a bureau of the U.S. Treasury. The IRS has long been under-staffed and under-resourced. It also suffers from antiquated technology while trying to enforce a tax code increasingly complex and laden with loopholes that benefit the rich and powerful.
We are woefully undertaxed, collecting about 24% of GDP in tax revenue compared to an average of about 34% in other developed nations. President-elect Biden will no doubt face resistance in a GOP Senate to his plans to raise rates, though he may find more allies in closing special breaks and loopholes. The Treasury Secretary will be key in those policy battles, but there is also a lot she can do to make sure the IRS is equipped to collect the taxes due under current law. One recent report from the Tax Justice Network estimates that the U.S. loses about $90 billion a year to tax avoidance and evasion. Simply giving the IRS more resources and support could raise much needed revenue.
And so much more…
In addition to the economy, financial stability, and taxes, the Treasury Secretary has important roles in international trade policy, the war against terrorism financing, and of course issuing the massive amounts of debt the government needs to finance its ever-expanding spending ambitions.
The new Treasury Secretary won’t be able to tackle these huge responsibilities alone. Secretary Mnuchin’s tenure has been plagued by personnel shortages in key jobs. It will be essential for the Biden Administration to move swiftly to fill senior Treasury positions, particularly in operations, domestic finance, tax, and congressional relations. One can only hope that at least for some honeymoon period, the Senate will put politics aside and confirm the new administration’s first wave of appointments to Treasury and other Cabinet agencies. President-elect Biden has said he wants to pull the country together. He deserves a chance to assemble his troops and lead.
The writer is former Chair of the FDIC and former Assistant Secretary of the US Treasury for Financial Institutions.
Editor’s note: This story was updated after the Wall Street Journal reported that Yellen was Biden’s pick.
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