Lael Brainard's ‘crisis Management Agency’ — And Her Warning For Trump

Just weeks after Lael Brainard left the Federal Reserve to become President Joe Biden's top economic adviser in early 2023, she faced a crisis: multiple large regional banks teetering, a situation that also threatened to destabilize other, healthier institutions.

She worked with a familiar cast of characters, many of them current and former Fed officials like Treasury Secretary Janet Yellen, to take an aggressive approach to convincing depositors that their money was safe.

In an exit interview with POLITICO, Brainard pointed to that situation, as well as a slew of battles she helped mediate between labor unions and corporations, as evidence that the White House is really a “crisis management agency.”

And she had a particular warning for her successor about another crisis that is looming: the growing federal debt.

“Looking ahead, there are things that you can control and things that are unanticipated,” she said. The debt is solidly in the former camp, she added, arguing against the full extension of the 2017 Tax Cuts and Jobs Act as a danger to the economy.

Biden, too, added trillions to the debt through domestic spending initiatives, though his administration has claimed that Republican tax cuts over the last quarter-century have been the bigger problem for the trajectory of red ink. Republicans flatly reject that assertion.

In 2025, the GOP is looking at extending and expanding tax cuts that would decrease revenue and add roughly $5 trillion to the debt, straining financial markets’ ability to absorb it — potentially threatening U.S. standing as a borrower and leaving less space to spend money on other potential crises, Brainard argued.

“The real question is, how much incremental risk of a big credit downgrade do you want to take on, and how much fiscal space do you want to lose, in order to get tax cuts for really high-income people?” she said. “And those are choices that they’ll face.”

This transcript has been edited for length and clarity.

In the time that you’ve been at the White House, what’s been the most stressful day or week?

The night before Silicon Valley Bank’s collapse was certainly a memorable moment of high stress.

There were some in the market who thought that this class of banks was not going to be viable. And so the market dynamics had the potential to lead to much broader problems for the economy.

The prospect that we would have a major sector of the economy shut down has loomed several times over. The economy just [recovered] from Covid, and our supply chains were healing very well, but we know now how easy it is for a supply chain disruption to balloon into shortages and price spikes.

We had a series of high-stakes labor negotiations that all ended very positively, like the UAW-Big Three negotiations, the UPS-Teamsters, APFA-American Airlines and IAM-Boeing. All of those would have had really important impacts to our supply chains. And it was important to see really good contracts, because those workers had sacrificed so much.

East Coast ports was perhaps the most notable. I spent about 12 hours one night getting on the phone with all the CEOs at the global level of the shipping companies. And these are all non-US companies and their decision-makers are not accustomed to hearing from somebody at the White House, and we did not know any of them, did not even have phone numbers for many of them. That was a very dramatic night of finding an ambassador here, or a business contact there, who could get us to these folks who were either in Asia — which is why it was at night — or Europe, and make them recognize they actually needed to take action and move.

The debt limit had several moments of a game of chicken to it. So, all three of those crises had a few moments that felt very consequential. And they resolved very favorably, but I certainly wasn’t confident going into them that we were on the brink of resolution.

In those kinds of conversations, what is the role that you’re playing? Are you trying to figure out a deal that both sides will be happy with and playing a mediator role? Or is it much more broadly, just pressure to get something done?

In the case of the port negotiation, we had really good communications with the labor union head and knew where a possible deal might lie. The decision-makers at the shipping companies were not engaged at that juncture, and … no one person that was engaged on the port shipper side felt that they had the ability to drive to a solution. So it was a classic standoff.

For me, it wasn’t so different from coming up with repeated solutions in the European debt crisis at Treasury. You [start with] a sense of where a landing zone might be. And then you have to keep calling and seeing what each decision-maker’s red lines are. And of course, they don’t want to tell you what they can do, because they don’t want to go there.

But it’s an iterative process of helping to figure out where that Venn diagram gets you to a little overlapping area of possible agreement. And then pushing people to it by reminding them the consequences of not getting to agreement. So it’s both helping find middle ground and pressuring. It’s both.

We have a new administration coming in. Kevin Hassett is taking over the NEC. What economic shocks are you worried about? The big thing that everyone’s been focused on lately is the growing debt. What are you watching?

The White House is a crisis management agency, among many other things. And my experience is that when things are going well, they get resolved at the agencies. But when there is a massive disruption — whether it be a financial system shock, a pandemic, a natural disaster — hard things come to the White House. And so, you have to be a crisis manager in this role at the White House, a crisis manager who’s looking out for those working Americans who are on the front lines of the economic fallout.

We’re trying to manage those shocks in a way that it does not disrupt the ability of working families to continue earning and saving and investing and going about their lives without massive spikes in prices or shortages.

My advice for the incoming administration is that they need to be focused on the sustainability of all of their economic policies together. Mass deportations; large tariffs; big, big increases in the debt, all at the same time, could lead to some inflationary pressures and could certainly lead to some loss of confidence in the financial markets.

If you look at a $5 trillion increase in our debt, that’s really going to strain the ability of the markets to absorb that. And if you had an event like a credit downgrade, some forcing event, that would be a very challenging set of circumstances. And that is within the administration’s control to avoid.

There are other things that, if the last four years or longer is any guide, will surprise them, will happen, and there you want to have as resilient an economy as you can for those unexpected shocks.

I’d also hope they leave themselves fiscal space, because at moments of national emergencies, you need a lot of fiscal space.

Two of the credit rating firms have downgraded the U.S. How likely is it that we could see further downgrades? If there isn’t evidence that we’re getting our debt situation under control, is that enough to prompt further decreases in our credit rating?

A full extension of the TCJA tax cuts, plus some of the other business tax cuts they wish to extend, would add $5 trillion in debt. If you look at our debt burden, the trajectory of our fiscal sustainability, with the number of people who are retiring and going into the Social Security system, those are the kinds of things that, in normal circumstances, would be seen as negative for the credit rating. And of course, it’s a choice. As the Treasury analysis that they just put out shows, if you only extend for the 97 percent of Americans who are under $400,000, the cost falls to $1.8 trillion.

One of the crises that you dealt with was inflation, and that’s a different kind of crisis. It’s a little bit more slow-moving. Did that feel at all like a crisis management situation?

Initially prices actually fell in the pandemic. This was when I was over at the Federal Reserve. It was almost disinflationary because the economy was so shut down.

In that first year after past the fall in prices, that was 2021, it was initially very hard to read. And then inflation started to rise quickly as demand shifted to all the goods sectors where the shortages were most acute because of shipping disruptions and semiconductor fabrication shutting down abroad.

The executive branch is much better equipped to deal with supply chain disruptions today, and businesses are better equipped to deal with it today, and I’ll give you an example from the ports negotiations. Retailers had already started stockpiling well ahead of that initial deadline in the contract negotiations. And shippers had already started putting surcharges in their contracts. So, there’s more anticipation.

There’s [also] a lot more connective tissue and data flow now, because we built it out at the Transportation Department, at Commerce, at [the Department of Homeland Security], so it should be more manageable at moments of big supply chains.

But when the overall economy is truly shut down for reasons like a natural disaster, you are somewhat limited in your ability to get things moving on the supply side very quickly.

Crypto is a big focus for the incoming Congress, the incoming administration. It seems like that they’re set to maybe pass some legislation, maybe give the industry more ability to have a role in traditional financial markets. How worried are you about crypto playing a bigger role in the traditional financial system?

My view is that crypto should be treated no differently than other assets in financial markets.

We need guardrails that are similar to the kinds of guardrails that have been developed over so many crises — for instance to avoid conflicts of interest, in terms of some of the platforms and their overlapping roles, as brokers, as issuers.

We’ve seen that in the FTX crackup, and we’ve seen it in so many successive crises historically, which led to these laws being put in place over time.

It is completely feasible to put in place good laws. A lot of good work has been done. And they got very far on stablecoins. There were a few things that needed to be done there. In market structure, they’re further from the mark, and they need to work really hard at figuring out what it means to be a security and how that maps to the crypto space. But I think they can get there.