Don’t Put Trump’s Fox Into Financial Regulation Henhouse

(Bloomberg Opinion) -- It seemed like good news for the global economy when Randal Quarles, the Federal Reserve’s vice chair for supervision, was put up by the U.S. to chair the Financial Stability Board, the watchdog that insures that international financial institutions keep to the reforms they promised after the 2008 financial crisis.

Quarles is a well-regarded moderate Republican with a strong international orientation, who clearly understands the value of multilateralism.

But the case for Quarles is not as clear as it might appear.

Quarles’s appointment is being pushed hard by two loyalists of President Donald Trump at the U.S. Treasury Department, Treasury Secretary Steven Mnuchin, a Trump friend from New York City, and David Malpass, the undersecretary for international affairs.

From his writings and speeches, Malpass is known for defending his boss’s “America First” agenda in his approach to international bank regulation, which is to say, a deregulation agenda.

The danger that Quarles — as competent as he is — will be a front man for a Trump-Malpass deregulation agenda is not negligible. Trump is not the type of person who is tolerant of independent voices from the people he appoints to top jobs.

Luckily for the global economy, Europe has a top alternative candidate for the FSB chair in Klaas Knot, the hawkish president of the Dutch central bank. Unlike Quarles, Knot promises to be a watchdog with teeth, which is precisely what the global community needs to prevent another 2008-style financial meltdown.

At first, Quarles was reported to be the favorite in the race for the FSB chair. But then Trump started to misbehave on the international stage, first at the G-7 summit in June in Canada and again at the North Atlantic Treaty Organization summit in July in Brussels.

This cost Quarles support, but after the U.S. offered carrots and sticks to voting members, some of the G-7 countries, including Canada and the U.K., switched back to Quarles. My reporting indicates that it’s now about 50-50.

It also indicates that a compromise to split the chair’s position between the two is in the works, in which Quarles would go first as chair and Knot would be vice chair. Then, after a certain amount of time (still being negotiated), they would switch positions.

That would be a big win for Trump because it would probably ensure that his man pulls the deregulation strings for the rest of his term in office.

If Knot ever does get the chair — and with Trump there is always doubt — he will have a lot of deregulation to make up for.

To be fair, there’s really not that much difference between the reform agendas of the two competing candidates. The issue is more one of trust, that the U.S. Treasury will not allow Quarles to do his job of safeguarding the global financial system from another financial meltdown because of its deregulation obsession.

Ordinary savers and households would sleep less soundly as a result.  

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.

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