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Centralverse Q&A, Round IV

Round IV of the listener favorite, Centralverse Q&A: What does the CFPB have to do with the Federal Reserve? Who is Marvin Goodfriend? If you have questions you’d like answered on the podcast send them in. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.

Introduction

I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.

There have been some big news that have come out somewhat on the peripheral of the Centralverse over the last few weeks. News that doesn’t reach the very top of Centralverse leadership or news that is Centralverse related once removed frequently doesn’t get the translation necessary for understanding in the regular news cycle. You may hear a name or an institution and in the story they may mention the Fed or another Central Bank, but rarely is there enough time or, frankly knowledge, on the reporters side to make the full connection to the Centralverse. And that’s where The Bankster Podcast comes in to bridge the gap. On today’s episode: (1) What does the CFPB have to do with the Federal Reserve? And (2) Who is Marvin Goodfriend?

Remember that on Centralverse Q&A each topic gets a question, a background story, a short answer, and a long answer. So let’s dive right in.

Question #1

What does the CFPB have to do with the Federal Reserve?

Background #1

The Consumer Financial Protection Bureau (or CFPB) saw about as much drama last week as any government agency can see. The agency was created as part of the financial regulation act that was passed in response to the Great Recession. The Act was called the Dodd-Frank Wall Street Reform and Consumer Protection Act. The creation of the CFPB was a big part of the “Consumer Protection” portion of the law.

Last week two people showed up on Monday morning claiming to be the Acting Director of the agency. One of them arrived before 7am and shot out an email to staff welcoming them back from the Thanksgiving holiday. The other arrived shortly after the first, and with a box of donuts in hand, walked around introducing himself as the Acting Director.

The first was Leandra English, the former Chief of Staff to the previous Director who resigned the Friday before. The second was Mick Mulvaney, Director of the Office of Management and Budget in the Trump administration. On the previous Friday the first Director of the CFPB announced that he would be resigning and would name English as the Acting Director until President Trump nominated the next official Director and they were approved by the Senate. However, Trump announced that same weekend that English would not be the Acting Director but rather Mulvaney.

This confusion came from conflicting language in two laws. English claimed her authority to be the Acting Director from the Dodd-Frank Act which says that a deputy of the Director can serve as Acting Director until a new Director is nominated and confirmed. Mulvaney claimed his authority to be the Acting Director from a previous, 1998 Federal Vacancies Act, which says that the President has the power to immediately appoint a temporary official into any federal position when a vacancy is pending a nomination and confirmation.

A judge on Monday sided with President Trump, allowing Mulvaney to claim the title of Acting Director of the CFPB, for now at least.

And that’s a quick background of any number of articles or stories you may have heard about the CFPB last week. Some of the articles didn’t mention the Fed at all and other’s made vague and somewhat misleading like, “the CFPB which is part of the Federal Reserve System”. So let’s move on to the Short Answer to the real question here, “What does the CFPB have to do with the Federal Reserve?”

Short Answer #1

The CFPB is funded by the Federal Reserve. The CFPB also took some of the responsibilities that were formally responsibilities of the Fed.

Long Answer #1

The Federal Reserve has a very large quantity of assets on its books, about $4.5T worth. A very large portion of those assets are interest bearing. We won’t get into what the assets on the balance sheet are in today’s Q&A, but suffice it to say that after subtracting all of the expenses that the Fed incurs every year they have about $100B left over. That “extra” money is given to the Treasury. Since the inception of the CFPB the Fed gives slightly less to the treasury because the budget for the CFPB comes out first.

So as far as the financing of the CFPB goes it is within the Federal Reserve System because it gets its financing from the Fed. However, the Fed doesn’t have any authority over the CFPB and that’s where I think the quote about the CFPB being part of the Fed is misleading. It makes it sound like it might be comparable to the supervision and regulation department of the Fed or the FOMC. That’s really not the case.

The only real connection to the Federal Reserve System is the money. The Fed has no “oversight” of the CFPB.

So hopefully that helped bridge the gap between what the CFPB is and how it is and isn’t connected to the Federal Reserve System. On to question #2.

Question #2

Who is Marvin Goodfriend?

Background #2

The reason Marvin Goodfriend’s name is popping up in the Centralverse is because he was recently nominated by President Trump to be an additional Governor on the Board of Governors in Washington DC. If confirmed by the Senate, Goodfriend would be the 5th Governor. This leaves Trump with two more seats to fill.

Short Answer #2

Marvin Goodfriend is an economics professor at Carnegie Mellon University and the former director of research at the Federal Reserve Bank of Richmond.

Long Answer #2

According to the Wall Street Journal, “Mr. Goodfriend remains popular with conservative economists, including many who have been critical of the Fed in recent years, as well as influential Republican lawmakers.” In a different article the Journal continued, “[Goodfriend] could end up as an enigmatic swing vote on monetary policy in the coming years, one who sides sometimes with the “hawks” who favor higher interest rates to prevent excessive inflation, and sometimes with the “doves” who prefer lower rates to help nudge inflation up to target.” He’s spoken out in favor of more congressional oversight of the Fed, in opposition to programs like Quantitative Easing, in favor of negative interest rates, and would be open to a monetary policy rule. (WSJPRO newsletters on 11/30/17 and 12/1/17).

We’ll see how quickly congress acts on getting Goodfriend through the confirmation process. But when that happens you’ll now have a little bit of background on who he is and where his priorities might lie for his new job at the Central Bank.  

Conclusion

If you have questions you’d like answered on the podcast send them in. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.

Today’s episode was written, edited, and produced by me, Alexander Bagehot. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!

 

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