{"id":762,"date":"2026-09-03T09:08:11","date_gmt":"2026-09-03T09:08:11","guid":{"rendered":"https:\/\/frontierhousingreport.com\/?p=762"},"modified":"2026-09-03T09:08:11","modified_gmt":"2026-09-03T09:08:11","slug":"the-lawless-fed","status":"publish","type":"post","link":"https:\/\/frontierhousingreport.com\/?p=762","title":{"rendered":"The Lawless Fed"},"content":{"rendered":"
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Anyone who has gotten a whiff of how Washington functions knows that it doesn\u2019t work like Schoolhouse Rock!<\/em>. After a bill becomes a law, the next step of turning law<\/em> into reality<\/em> resembles not so much a cheerful children\u2019s civics lesson as a dark fable of corruption and rot. In particular, the combination of corporate lobbies, byzantine subject matter and\u2014above all\u2014captured regulators, can gut the intent of laws. No agency exemplifies this unedifying barrier to democracy better than the Federal Reserve.<\/p>\n

Read more The Postal Service\u2019s Destruction of Democracy<\/a><\/p>\n

It\u2019s time to call this conduct what it is: lawless. The Fed, Wall Street\u2019s most dependable friend in Washington, is a wellspring of extralegal behavior that contributes to the preservation and expansion of corporate power over the public interest.<\/p>\n

More from Carter Dougherty<\/em><\/strong><\/p>\n

The backdrop to any conversation like this one is usually about whether the Fed takes seriously its dual mandate on inflation and employment as it relates to monetary policy, enshrined in the Humphrey-Hawkins Act of 1978. Ideologues like former Fed chair Alan Greenspan always downplayed the latter and talked up the former, rationalizing their position by arguing that low inflation was essential for long-term employment. Critics pushed back. And so on. A perennial, and somewhat circular, debate.<\/p>\n

In the matter of financial regulation, the other responsibility of the nation\u2019s central bank, the case is damning.\u00a0<\/p>\n

The Fed leadership has simply tossed out key elements of the Dodd-Frank financial reform law instituted after the crash of 2008 and substituted its own bank-friendly version, via regulation, of what the law should say. While heightening economic and financial risk, the Fed\u2019s approach makes a mockery of how the law is supposed to operate. And it suggests that the Fed should not be let within 100 miles of financial regulation whatsoever.<\/p>\n

For example, the Fed is now ignoring the law that governs bank capital, specifically something known as the Collins Amendment. In a new paper, Graham Steele (a former assistant Treasury secretary) and Jeremy Kress (a former adviser to the Department of Justice on antitrust issues) argue that the Fed is going easy on the biggest banks in the United States because \u2026 well, because it can.\u00a0<\/p>\n

Kress and Steele, professors of law at the University of Michigan and the University of North Carolina, respectively, make a strong case that the Fed is pursuing \u201cExtra-Legal Bank Capital Regulation.\u201d That dryly diplomatic title undersells the paper\u2019s bite.<\/p>\n

\u201cRegulators\u2019 efforts to dismantle the post-2008 capital framework defy the Dodd-Frank Act\u2019s plain text, hand the largest and most systemically important banks an unwarranted advantage over their smaller competitors, and increase the risk of another financial crisis,\u201d Kress and Steele write in the paper.<\/p>\n

As the Prospect<\/em> explained recently, capital regulation is a live fight right now as the Fed\u2019s vice chair for supervision, Michelle Bowman, seeks to water down post-crisis rules put in place to make the nation\u2019s largest banks more resilient. Tougher capital guidelines can help mega-banks absorb losses by forcing them to fund their operations with more equity (selling shares) and less debt. Wall Street hates that arithmetic because, all other things being equal, more equity lowers share prices. And share prices are often a determinant in executive compensation.<\/p>\n

Kress and Steele meticulously pull apart why Bowman\u2019s plan, which Trump Treasury Secretary Scott Bessent has publicly endorsed, violates this law.\u00a0<\/p>\n

One part of Dodd-Frank, Section 165, instructs the Fed to establish enhanced standards for mega-banks with more than $250 billion in assets; it sets the principle that bigger banks get tougher treatment. To that provision, Sen. Susan Collins (R-ME) layered on two more requirements: The Fed cannot apply to any single bank rules weaker than the generally applicable ones, and it cannot dip below levels that prevailed before Dodd-Frank.<\/p>\n

Already, the Fed has weakened an extra capital surcharge it had imposed to make sure, per Section 165, that mega-banks faced more stringent rules than others. On the Collins Amendment, to comply with the law, the Fed hitherto directed mega-banks to calculate capital levels based on two separate formulas and apply the higher result; that approach stopped big players from gaming the rules. In very broad brush, if the Fed finalizes a new rule, that tweak will allow larger banks to dip below levels achieved under the Collins Amendment, according to Kress and Steele.<\/p>\n

Lawlessness at the Fed hardly began with capital rules. Just ask Sen. Elizabeth Warren (D-MA), who has pressed the Fed to write rules, mandated in Section 956 of Dodd-Frank, designed to limit incentive pay that encourages reckless risk-taking by bank executives.<\/p>\n

Read more A Fitting End to a Big-Money Primary Season<\/a><\/p>\n

Then-Fed chair Jerome Powell, when asked about the matter in an August 2024 House hearing, said that he \u201cwould like to understand the problem we\u2019re solving\u201d before proposing a draft rule. A few weeks later, Warren\u2014fully aware of the Fed\u2019s historical recalcitrance to regulate Wall Street\u2014let Powell have it.<\/p>\n

\u201cChair Powell, the law does not say: Jerome Powell, in his infinite wisdom, should decide if we have a problem with executive compensation,\u201d Warren said. \u201cThe law, passed 14 years ago, says executive pay is a problem that threatens the stability of our economy, so write the rules to rein them in.\u201d<\/p>\n

The regulation remains unwritten.<\/p>\n

The Fed\u2019s willingness to flout the law can be seen throughout its implementation of Dodd-Frank. Another example is the Durbin Amendment, a provision that took a gentle swing at the problem of Visa and Mastercard\u2019s grip on debit card transaction networks.<\/p>\n

Sen. Dick Durbin (D-IL), mindful of Wall Street lobbying, instructed the Fed in precise detail to set a rate merchants pay when a customer uses a debit card, and to base that calculation on specific costs that banks and card networks incur for the transaction. And the Fed proceeded in 2011 to set a high rate (22 cents plus 0.05 percent for each transaction) that wrapped in a new type of cost not authorized in the law.\u00a0<\/p>\n

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Read: Why Scott Bessent can\u2019t fix the bond market<\/strong><\/p>\n<\/blockquote>\n

The Fed rationalized the outcome by inventing from whole cloth a new category of costs to be covered. Coincidentally, the move followed heavy lobbying from mega-bank CEOs at a time when the Fed\u2019s prevailing wisdom, following the 2008 crisis, was that a profitable bank was a stable bank.<\/p>\n

The regulation spawned a decade of litigation. Merchants only got a ruling on the merits last August, in federal court in North Dakota. The decision, written by Judge Daniel M. Traynor, a Trump appointee, found that the Fed simply chose a different outcome than Congress intended.<\/p>\n

\u201cCongress certainly did not hand the [Fed] a blank check of discretion that it claims to have,\u201d Traynor . The agency, it added, is trying to \u201coverride the congressionally-constructed narrow boundaries\u201d with a legal interpretation of the Durbin Amendment\u2019s text that has no basis in law or legislative history.<\/p>\n

Then there\u2019s the Volcker Rule. The much-ballyhooed provision of Dodd-Frank, named after famously stern former Fed chair Paul Volcker, aimed to bar Wall Street mega-banks from the kind of speculative trading that lay at the heart of the financial crisis. When the first Trump administration took their hammers to the Volcker Rule, no less than Paul Volcker chimed in with some choice words that exposed the lie that the Fed merely wanted to \u201csimplify\u201d the rule.\u00a0<\/p>\n

Invoking the influence of \u201cwell compensated industry lobbyists,\u201d the aging Volcker the Fed\u2019s 2017 effort \u201ca ploy to weaken the core elements of the reform\u201d and a step that \u201cshould trouble anyone concerned with the eroding public trust in government.\u201d Money talks.<\/p>\n

None of these episodes are trivial on their own, but together they indict the entire theory behind the Dodd-Frank law that the Obama administration advocated. Obama appointees, notably Treasury Secretary Timothy Geithner, resisted or actively fought proposals to break up big banks, hive off casino-like activity from commercial finance, and cut Wall Street\u2019s market power down to size.<\/p>\n

In short, Team Obama staked the whole architecture of the response to the 2008 crisis on the good faith of regulators to impose tough rules on the most powerful industry in the world, finance. Asked to hold up its end of the bargain, the Federal Reserve said, in so many words, \u201cNah.\u201d<\/p>\n

Read more Are Centrist Democrats Too Racist to Compete in Michigan?<\/a><\/p>\n<\/div>\n


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