CFS Interviews John Williamson on the Washington Consensus, Exchange Rates, and More

The CFS is delighted to present an interview with the eminent international economist John Williamson, reviewing his more than five decades of work in the field.

Williamson is best known for coining the term “Washington Consensus” in 1989 as a summary of the policy reforms and structural adjustment measures that the International Monetary Fund, World Bank, and U.S. Treasury advocated for emerging market economies. The term quickly gained resonance and continues to be widely used today, both as the description Williamson initially presented it as and as a prescription of what good policies should be (see the appendix to the interview).

He also worked for much of his career on “intermediate” exchange rates between the extremes of fixed and floating. The late Rüdiger Dornbusch of MIT summarized Williamson’s proposals as “BBC” – band, basket and crawl. In support of them, Williamson devised the influential concept of the “fundamental equilibrium exchange rate” (FEER).

In 2012 Williamson retired from the Peterson Institute of International Economics, where he had been a senior fellow for more than 20 years. His previous appointments included professorships in his native England, the United States, and Brazil; an advisory post at the British Treasury; and staff or management positions at the International Monetary Fund, World Bank, and United Nations.

Besides covering the major ideas of Williamson’s career as an economist, the interview offers a few glimpses into other areas of his life and reminds us of how much economic conditions have changed. He was born at home, common in his generation but now rare in rich countries. Despite being the son of a successful English businessman, he went abroad only once before adulthood, on a one-week school trip to Paris. The UK had extensive exchange controls back then, and allowances for tourism were notoriously stingy. He served his compulsory national service, another now-bygone institution, working on a nuclear attack scenario for the Royal Air Force that has a bit of a darkly comic Dr. Strangelove feel.

I interviewed Williamson with CFS research associate Robert Yee. John’s daughter Theresa gave us considerable help, for which we are grateful.

House Urges Supreme Court to Uphold Constitutionality of CFPB

The House of Representatives filed an amicus curiae brief urging the Supreme Court to reject a challenge to the constitutionality of the CFPB. The CFPB is an independent agency within the Federal Reserve System created by Title X of the Dodd-Frank Act. The Supreme Court scheduled the matter for oral argument on March 3, 2020.

The House brief argued that the Court should affirm the Ninth Circuit’s ruling in Seila Law LLC v. Consumer Financial Protection Bureau, 923 F.3d 680 (9th Cir. 2019), which upheld the CFPB’s constitutionality following the refusal of Seila Law LLC (“Seila”), a debt-collection firm, to comply with a civil investigative demand (“CID”) issued by that agency. In its petition to the Supreme Court, Seila argued that the CID is unlawful because the CFPB is unconstitutionally structured. In particular, Seila maintained that CFPB’s regulatory structure violates the Constitution’s separation of powers because it is an independent agency headed by a single Director who exercises substantial executive power but can be removed by the President only for cause.

The House brief addressed two questions: (i) whether the CFPB Director’s removal protection violates the separation of powers and (ii) whether a constitutional flaw in the CFPB Director’s removal protection entitles Seila to relief from the civil investigative demand, and requires invalidation of Title X of the Dodd-Frank Act, the statutory provision creating the CFPB.

In its brief, the House urged the Supreme Court to avoid ruling on the constitutionality of the CFPB Director’s removal protection, arguing that the Court should rule that the CID would be enforceable even if the removal protection is invalid. Second, the House contended that if the Court does reach the constitutional question, it should uphold the CFPB Director’s removal protection, arguing that such protection “is exactly the same as” that provided members of other independent agencies such as the FTC, and that the CFPB’s single-director structure enhances, rather than diminishes, the agency’s accountability to the President. Finally, the House argued that the constitutionality of the removal protection should not affect Title X and, therefore, the legal viability of the CFPB, pointing to the severability provision within the Dodd-Frank Act, which states that if “any provision” of the statute “is held to be unconstitutional, the remainder of th[e] Act . . . shall not be affected thereby.”

Amici curiae briefs from New York and 23 other state attorneys general, the National Consumer Law Center, and several other consumer-advocacy organizations echoed similar arguments in support of preserving the CFPB’s structure. Click here to see all amici briefs submitted on the constitutionality of the CFPB.

LOFCHIE COMMENTARY

Leaving aside the big picture question of the constitutionality of the CFPB structure, the CFPB structure makes for bad public policy. It represents an immense amount of power concentrated in the hands of a single individual, who does not report to any branch of Congress. There is simply no good reason why the CFPB should not be reorganized following the same basic structure as the other independent regulatory agencies, with representation from both political parties on the Commission, and the leader of the Commission being appointed by the current President, of whichever party that might be.

CFS Monetary Measures for December 2019

Today we release CFS monetary and financial measures for December 2019. CFS Divisia M4, which is the broadest and most important measure of money, grew by 7.0% in December 2019 on a year-over-year basis versus 7.4% in November.

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Dec19.pdf

For more information about the CFS Divisia indices and the data in Excel:
http://www.centerforfinancialstability.org/amfm_data.php

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) {ALLX DIVM }
2) {ECST T DIVMM4IY}
3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

FRBNY Assesses Potential Impact of Cyberattacks on Payment Systems

The Federal Reserve Bank of New York (“FRBNY”) analyzed the potential impact of a cyberattack transmitted through a payment system against a (i) single large bank, (ii) group of smaller banks and (iii) common service provider.

In a report entitled “Cyber Risk and U.S. Financial System: A Pre-Mortem Analysis,” the FRBNY warned that an attack on a bank’s ability to send payments “would likely be amplified to affect the liquidity of many other banks in the system.” According to the FRBNY, the U.S. financial system would be impaired by such an attack on (i) any one of the five most active U.S. banks, (ii) several small to midsize banks that are associated through a shared vulnerability or (iii) a bank with a small number of total assets but a heavy payment flow.

Additionally, the FRBNY:

– compared cyber risk against the “broader theoretical literature on bank runs,” such as cyber and other shocks modeled in the theoretical literature;

– investigated the quantitative impact that a cyberattack can have on the financial system by studying the impairments of a cyberattack on a set of banks’ payment activities in Fedwire Funds Service;

– conducted a baseline scenario to highlight the high concentration of payments between large institutions within the wholesale payment network, and the great imbalance in liquidity that follows if a large institution does not remit payments to its counterparties; and

– considered scenarios involving multiple institutions that would be directly affected due to technological or other commonalities.

LOFCHIE COMMENTARY

Presumably, the bad guys know how to do this anyways, and the issues raised will focus the good guys on the risks.

FINRA Identifies 2020 Risk Monitoring and Examination Priorities

In its Risk Monitoring and Examination Priorities Letter (the “2020 Letter”), FINRA identified several areas of focus for 2020, including:

– Sales Practice and Supervision. FINRA will assess firms’ compliance with Regulation Best Interest (“Reg. BI”) and Form CRS. In addition, FINRA will focus on (i) communications to retail investors regarding private placements, (ii) use of different electronic communication channels (e.g., texting and social media), (iii) cash management and bank sweep programs, (iv) sales of IPO shares and (v) trading authorizations.

– Market Integrity. FINRA will monitor firms for compliance with current Order Audit Trail System (“OATS”) requirements, and implementation of Consolidated Audit Trail (“CAT”) reporting requirements. In addition, FINRA will address firms’ compliance with (i) direct market access requirements under Exchange Act Rule 15c3-5, (ii) best execution requirements under FINRA Rule 5310, and (iii) the requirements of Rule 603 (the “Vendor Display Rule”) and Rule 606 (“Disclosure of order routing information”) of Regulation NMS.

– Financial Management. FINRA will focus on (i) clearance and custody of digital asset transactions, (ii) liquidity management, (iii) compliance with net capital requirements in connection with underwriting commitments and (iv) the steps firms are taking to transition away from LIBOR.

– Firm Operations. FINRA will focus on (i) cybersecurity, (ii) technology governance programs and (iii) supervisory controls relating to customer confirmation and AML requirements.

Lofchie Commentary

Several of the financial management areas of focus are as to issues where there is not actually a rule in place; e.g., liquidity management and transition from LIBOR. That does not make them any less significant. Firms may want to consider how they institute operational procedures to deal with regulatory expectations where there is not a specific rule that drives the firm’s conduct.

WSJ: Positive Revival of Agency that Aids Exporters (Exim)

The Wall Street Journal reports this morning on the reauthorization of the Export-Import Bank of the United States (EXIM) for seven years.

– The move represents a positive step forward to enhance economic growth, financial stability, and national security.

– Exim’s educational opportunities and finance unleash meaningful network effects. Once small and medium sized companies overcome obstacles to exporting, new markets open.

– Conservative critics are justifiably worried about heavy-handed “industrial policy.” Yet, Exim activities fall far short of a well-intention public sector misallocating resources.

Congratulations to Chairman Kimberly Reed and Exim for the hard work and reforms needed to safeguard US financial and strategic interests!