November 17, 2021
When President Joe Biden appointed Saule Omarova to the Office of Comptroller of the Currency, it was not hard to discover that the Cornell academic held positions that were far from the American mainstream and would reset the U.S. economy under a command-and-control model.
That’s because the evidence has all been published, quite recently, in academic journals or appeared in videos accessible on YouTube. She has argued for the abolition of private sector banking, has urged said that all corporate charters should be conditioned on pledges to serve bureaucrat approved purposes, and said that the bankruptcy of oil and gas companies would be welcomed.
Yet New York Magazine this week launched a cover-up of her views this week, calling criticisms “ludicrous red-baiting.” The puff-piece allows Omarova to mischaracterize her own views, quotes no critics, and even more tellingly does not quote from her own paper.
Here’s the most egregiously misleading passage from New York:
“Of course, I expected that Wall Street banks would be strenuously opposing my nomination,” Omarova told me, “because my work has been focused on how to minimize systemic risk that is created when large banking institutions start aggressively growing their trading operations and feed speculative booms that may be unsustainable. I expected that they would be worried about me becoming their regulator because they would know that I have strong views about not allowing another crisis to happen; they know I ask difficult questions and keep asking them, rather than being satisfied with superficially reassuring answers from the industry.”
Every single phrase is misleading.
First, it’s not primarily Wall Street banks that are opposing her nomination. In fact, the big Wall Street banks would likely be fine with Omarova at the head of the Office of Comptroller of the Currency. They’re not as dependent on deposits for funding so they will not be vaporized by her proposal to force all bank deposits into the Federal Reserve. And the OCC is not their primary regulator. That’s the Federal Reserve, which is the primary regulator for financial companies designated as systemically important and for the big bank holding companies. The OCC plays second fiddle when it comes to regulating Wall Street. It only regulates the actual national depository bank parts, not the trading, private equity, investment banking, corporate advisory, or financial advisory parts.
Instead, it’s the smaller banks that have the most to fear from Omarova. And so, sure enough. the most vocal opposition has come from smaller, independent and community bankers. The Montana Independent Bankers group has written to Sens. Jon Tester (D-MT) and Steve Daines (R-MT) opposing Omarova’s confirmation and calling on the senators to vote against her. “Ms. Omarova’s positions are antithetical to the economic principles that have long-guided this nation’s monetary policies and systems,” MIB president Andrew West wrote in an October letter. Chair of the Independent Community Bankers of America Brad Bolton tweeted, “This nomination must be stopped!”
— Brad Bolton (@BradMBolton) September 30, 2021
It’s not Wall Street banks lined up against Omarova. It’s Main Street banks.
Second, Omarova misstated her work when she says it has been “focused on minimize systemic risk that is created when large banking institutions start aggressively growing their trading operations and feed speculative booms that may be unsustainable.” Minimizing systemic risk is important and valuable. It’s what we want bank regulators to do. But that’s not what she has focused on.
Instead, her work has called for an end to regular, old banking. In “The People’s Ledger: How to Democratize Money and Finance the Economy”—a law review article published this year—Omaraova argues that all bank deposits should be transferred into what she calls FedAccounts at the Federal Reserve. This would eliminate most banks that are funded by deposits, and would a death sentence for every smaller, community bank serving smaller cities, towns, and farm communities in the U.S.
As Omarova points out, this growth in the liability side of the Fed’s balance sheet would also require growth in the asset side. With banks destroyed and deposits at the Fed, the Fed would become the primary source of financing and credit in the U.S. Lending decisions would be made according to centralized, bureaucratic fiat instead of competitive decisions by bankers attempting to profit by making good loans.
Note, also, that this would do little to curb trading by large financial institutions. Lehman Brothers and Bear Stearns were not deposit taking banks when they collapsed. In fact, it was the lack of stable funding in the form of deposits that contributed to their collapse. The same was true of Fannie Mae and Freddie Mac, two institutions that were charged with directing credit according to a regulatory view of public purpose—one of the very things that led to their collapse. The kind of aggressive trading and speculative booms Omarova says she wants to address were not primarily fueled by deposit takers but instead by the shadow banking system her nationalization of deposits would not only leave untouched but likely enlarge.
Far from minimizing systemic risk, Omarova’s proposal maximizes it by centralizing economic decision-making in the hands of officials at the central bank. She would eliminate that particular genius of capitalism which is competition of views. In our current systemic, financial risk can become systemic when too many bankers adopt the same view of risk and pursue the same assets. Those assets rise in price and too few precautions are taken against error when a herd mentality takes over. That’s what happened in the lead-up to the financial crisis, when bankers became enamored of mortgage-backed securities and derivatives and regulators encouraged this devotion by giving housing-linked assets low capital requirements. Omarova’s proposal to centralize deposit-taking and lending at the Fed makes this far worse. Only one view of credit and risk would prevail and the cost of errors would become system-wide.
In other words, Omarova’s takeover of the banking system would leave American finance more fragile and more vulnerable to widespread collapse. It’s a plan that makes her too dangerous to confirm.
We could use reforms that would further decentralize banking by encouraging innovation, new bank start-ups, and breaking up or severely curtailing the activities of our biggest banking behemoths. The answer to Too Big to Fail is not Even Bigger.
Omarova goes even further. In another paper, published this summer, she calls for all corporate charters to be conditioned on pledges by founders that they will serve approved government purposes. In her terms, this is requiring corporations to serve a “public purpose” but that’s misleading. The acceptable purposes will be subject to approval by the American public. Instead, businesses would be forced to comply with the mandates of bureaucrats focused on Green New Deal climate change and critical race theory-oriented social justice.
It’s a view of the economy that puts the government first. There are no private businesses in her view—just franchises granted the privilege to operate by the government and subject to government control at every turn. Only growth deemed “beneficial” by the bureaucrats will be permitted.
“The corporate form is best described as a ‘franchise’ arrangement in which the sovereign public (as franchisor) grants private firms (as franchisees) extraordinary organizational privileges, with the ultimate goal of promoting economic development and publicly beneficial growth,” she writes.
The Senate Banking Committee will have the opportunity to question her on these views tomorrow. Let’s hope the Senators on both sides of the aisle are not fooled by the establishment media’s cover-up. They should pay close attention to how dangerous and destabilizing Omarova’s views truly are.