Holiday Stress Test

Plus: AI energy boom, Biden vs. Nippon Steel, and more...

Banks are Fed up: In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a major law regulating large financial institutions. The goal of the law was to prevent another financial crisis. Among the law's many provisions was a requirement that the Federal Reserve perform "stress tests" to determine how big banks would perform in another, hypothetical crisis. 

But like so many elements of Dodd-Frank, the exact details weren't spelled out. Instead, Congress left others to figure out the particulars. Since then, the Fed has performed capital adequacy analyses as part of the test, and has used those analyses to require banks to maintain certain levels of capital. 

To make those determinations, the Fed uses various models and scenarios to determine a bank's performance in a crisis. How do those models work? What sort of scenarios? Well, like an unopened Christmas present, that's something of a secret. In July, CNBC reports, a consortium of financial institutions "accused the Fed of being in violation of the Administrative Procedure Act, because it didn't seek public comment on its stress scenarios and kept supervisory models secret." Unwrap those stress test models! 

So, on Christmas Eve, a group of banks and business groups sued the Fed, arguing that the process needs to be more transparent. The banks are trying to eliminate the stress tests, the suit claims. Instead, they just want the rules and requirements to be clear and logical. The existing system, they argue, "produces vacillating and unexplained requirements and restrictions on bank capital." 

The Fed was already moving in this direction. Just one day before the lawsuit was filed, the Fed announced that it would implement changes to the stress test program, allowing banks to provide comment and feedback on the models it uses, perhaps along with other transparency measures. 

But the Fed's shift may not have been entirely voluntary. The Fed cited an "evolving legal landscape" for the move, which is another way of saying that the Supreme Court has made it somewhat more difficult for bureaucracies to engage in shady business. As Reuters coyly noted, the decision "followed recent court rulings that have significantly changed the framework of administrative law in recent years." 

What's the opposite of low-energy? On Christmas day, the front page of The New York Times website linked to a report worrying that incoming President Donald Trump might scrap clean energy "investments"—read, federal spending—put in place by the Biden administration, specifically by pulling back on subsidies included in the Inflation Reduction Act. 

But whether Trump will be good or bad for clean energy is a separate question from whether he'll continue to push the Biden administration's subsidies-first approach to green tech. 

On the contrary, it's possible that in the next few years, we'll see a clean energy boom driven by market demand rather than by central planning. As a fascinating article in The Wall Street Journal says, "President-elect Donald Trump's enthusiasm for artificial intelligence and cryptocurrencies could have an inadvertent effect: buoying clean-energy businesses he bashed for years." 

AI tools like ChatGPT and cryptocurrencies like bitcoin need a gargantuan amount of energy. This means that pretty much any source that can deliver at a competitive cost will be valuable. This is somewhat counterintuitive for those who understand everything through a political lens. As the Journal article notes, "the likelihood that Trump could inadvertently trigger a surge of investment into clean energy runs counter to fears the sector is in for a reckoning." And Trump, while not always an entirely reliable narrator, has pushed for more energy production in order to compete with China on AI and other energy-intensive tech. Meanwhile, AI visionaries are investing in nuclear, and electricians are flocking to AI boomtowns. Power to the people?

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Scenes from Washington, D.C.: It's dead here this week. The city feels like a ghost town. But I do have a new puppy, and he's very, very cute.

Big staffing announcement at the newsletter.

I have a new assistant, a new researcher, a new barback.

He's an 8 week old bullmastiff, and his name is Huckleberry. pic.twitter.com/2OgDvmvGVp

— Suderman (@petersuderman) December 18, 2024

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