- Key insight: Christopher Phelen, a professor at the University of Minnesota and President Donald Trump's pick to lead the Council of Economic Advisers, has been a critic of the basic ways that banks across the company take and lend out capital.
- Forward look: Phelen is up for a nomination hearing in the Senate Banking Committee on Thursday, but there's no established timeline for his final confirmation to the post.
- What's at stake: Phelen wouldn't have hard power to change bank regulation, but he'll have Trump's ear on these issues as the White House upends the financial system in the image of crypto and stablecoin interests.
WASHINGTON — Christopher Phelen, President Donald Trump's pick to be one of his top economic advisors, has written critically about traditional banking, a review of his academic papers found.
Phelen is nominated to chair the Council of Economic Advisers, which acts as an economic think tank within the White House. If confirmed he'd follow Stephen Miran, who departed the council during his time as a Federal Reserve Board member, as the confirmed chair of the body.
As chair of the CEA, Phelen would not have hard power to make the kind of changes he advocates for. He would potentially, however, have the president's ear on these kinds of issues, as the country attempts to overhaul the financial system to more thoroughly integrate stablecoin and crypto companies, many of which have publicly made similar complaints about the banking system.
His confirmation could also mark the ascendancy of a policymaker with very different ideas about bank regulation than financial institutions have become accustomed to. The CEA has been a waystation for several important economic policymakers over the years, including former Federal Reserve Chairs Janet Yellen, Ben Bernanke and Alan Greenspan.
Phelen is currently an economics professor at the University of Minnesota, and consultant to the Federal Reserve Bank of Minneapolis' research department. His background suggests that he's a traditional pick for the position for which he's nominated, especially compared to the industry-heavy backgrounds of others tapped for top roles in the Trump administration. But his positions on a number of economic policy issues stray from the norm.
Specifically, Phelen has written critically of the "social usefulness" of fractional reserve banking, where banks keep only a fraction of their deposits in reserve as liquid assets and use the rest to lend out, thus generating revenue for the bank and interest for savers.
"Fractional reserve banking is, to put it mildly, problematic," said Phelen in a
The authors argue that if "technology" allows more of a household's wealth to be accessible, then the usefulness of fractional reserve banking is nonexistent.
"Banks are worse than useless in that they use up real resources but provide no societal benefit, and this is true even when we explicitly rule out significant societal costs such as bank runs," the authors said. "The more general point we wish to make is that the private benefits from creating private payments systems may exceed the social benefits."
In another post for the Minneapolis Fed, the pair argue that banks are no longer as socially useful as they have been in the past when they were necessary to provide payment services.
"While this rationale was compelling in an earlier historical era — prior to modern advances in information and communication technology that facilitate transactions of all sorts — the necessary services can now be provided through existing financial vehicles that do not rely on traditionally structured, inherently fragile banks," they said.
They also wrote about a potential new regulatory regime and restrictions for payment companies, including banks, while broadening the scope of oversight for financial institutions.
"The payments system should be both restricted and broadened," they said. "Transactions accounts should be restricted to institutions that mark the value of their assets to market continuously and that issue mutual-fund-like equity claims to owners. Such accounts should be broadened to institutions that are possibly very different from modern-day banks to include institutions such as stock and bond mutual fund companies."
The changes would lead to a "banking system that is radically different from the one we currently have."
"Institutions that issue large amounts of short-term debt relative to their assets would be regulated and required to hold relatively little of their assets in publicly traded securities," they said. "The liabilities of such institutions would not serve as means of payment. The payments system would consist of institutions that issue equity claims."
Phelen's nomination is not the only one being considered Thursday. The Senate Banking Committee will also consider the nomination of John Crews to serve as chair of the National Credit Union Administration, replacing Kyle Hauptman, who has been selected to serve on the board of the Public Company Accounting Oversight Board. Crews is currently serving as deputy assistant secretary for financial institutions at the Treasury Department.
