The progressive strike back?

Lina Khan, Jonathan Kanter, Tim Wu, and now, Saule Omarova. President Joe Biden is showing an appetite remarkable for an ordinary old-time politician in pushing the progressive agenda on competition and (less so) financial market reform. 

Khan, who advocates a return to the original anti-trust agenda, is the Chair of Federal Trade Commission (FTC), the primary anti-competition agency. Kanter, leads the anti-trust division of the Department of Justice (DoJ). Wu is the special assistant to the President for technology and competition. The three form a progressive trifecta, leading the anti-trust efforts against rising business concentration and monopoly power, especially but not only in technology sectors.

It's remarkable that, amidst all the acrimony on the political front, the anti-trust agenda has enjoyed largely bipartisan political support in the US. Khan, as radical an FTC Chair choice as it can get, even got votes of Republican senators. It's also an equally remarkable step of boldness from President Biden to nominate these three simultaneously on trust busting and the most definitive signal of political intent. 

Given the strongest executive intent, rarest bipartisan support, and the growing dominance of the progressive wing within the Democratic Party, coupled with the leadership of these three officials, there cannot possibly be a more opportune moment for anti-trust action. The three of them cover all the major flanks for bureaucratic policy action - regulator, government at DoJ, and executive office of President. Any failure despite these advantages could be seen as further evidence of the dysfunctionality of American democracy. More accurately, they would reflect the supremacy of monopolist vested interests within the US political system. 

Khan is perhaps the most formidable voice on anti-trust and especially on Amazon. The Times has a good profile. It summarises her landmark paper,

Once-robust monopoly laws have been marginalized... and consequently Amazon is amassing structural power that lets it exert increasing control over many parts of the economy. Amazon has so much data on so many customers, it is so willing to forgo profits, it is so aggressive and has so many advantages from its shipping and warehouse infrastructure that it exerts an influence much broader than its market share. It resembles the all-powerful railroads of the Progressive Era, Ms. Khan wrote: “The thousands of retailers and independent businesses that must ride Amazon’s rails to reach market are increasingly dependent on their biggest competitor.”

Now, doubling down on its progressive agenda, the Biden administration proposed the nomination of Saule Omarova as the Comptroller of the Currency, perhaps the most important banking regulator. Omarova's claim to fame is this paper where she takes on one of the less known distortions in the financial market, the problems with "fractional reserve" banking which confers on banks the power to create money. She calls for separation of the bank's lending function from their money creation role, lending without creating money. She advocates shifting deposit taking away from banks to the Federal Reserve. This issue is discussed in detail in The Rise of Finance. 

In a Business Standard oped TT Rammohan does a good job to summarise Omarova's proposal,

Moving all deposits to the Fed (FedAccounts). The FedAccounts would earn interest just as deposits do. This interest rate would set an effective floor on the interest rate structure in the economy. It would dramatically increase the Fed’s capacity to manage interest rates —the familiar “transmission” problem would disappear. It would also enable the Fed to manage money supply by directly crediting and debiting the FedAccounts. The bottom line: The Fed no longer needs to conduct monetary policy through banks. 

Two questions arise. One, what happens to banks if they lose their deposits to the Fed?... Banks don’t have to close shop when they lose access to deposits. The Fed will make funds available to them at a subsidised rate against collateral in the form of qualifying securities. By specifying the collateral eligible, the Fed can nudge banks to lend in preferred ways. To finance activities that do not qualify for funds from the Fed, banks will have to raise funds through costlier debt or equity securities as corporations do. Once banks lose access to deposits, bank runs and the fragility inherent in banking will end. So will the need for deposit insurance and reserve requirements and bank capital requirements. The whole complex structure of bank regulation can be dismantled. Banks’ asset side remains unchanged except that it is financed in a different way. Ms Omarova does not touch on the point but it is likely that Fed funds will be more expensive than deposits, so banks will have to live with lower net interest margins...

What does the Fed do with all the deposits it acquires?... If the liabilities side of the Fed expands through access to public deposits, there has to be a huge expansion on the asset side. How will this happen? One way is through the Fed’s new discount window loans to banks mentioned above. Another would be buying securities issued by the proposed National Investment Authority... A third deployment of funds would be expanded open market operations aimed at market stabilisation.

This may be too radical a shift to get accepted soon. As expected Omarova's nomination faced intense backlash, reminiscent of the McCarthy era defamations. She has finally pulled herself out of the nomination. 

Back to the Biden administration's progressive agenda. Clearly the pendulum has swung to the other extreme on business concentration and financialization to warrant this type of response. This is not likely to be the incremental tinkering at the margin kind of reform. However, it remains to be seen how much of the progressive agenda will survive the inevitable onslaught from powerful interests like the Big Tech and Wall Street.  

It's also a testament to the strength and maturity of American democracy that even with all its too obvious flaws such change is being triggered from within.