Even a stopped clock is right twice per day, and Mr. Trump is right much more than that (from an economic perspective). So despite my angst over his posture on immigration and free trade, let’s give Mr. Trump his due. The Fed’s easy money policy is fraught with significant problems, and the Fed itself is institutionally political. Mr. Trump excoriated the Fed this week, and was quickly attacked by the standard bearers in the press, as well as Mark Cuban:
What was Mr. Trump’s great offense? He argued forcefully that Janet Yellen (Chairwomen of the Federal Reserve, our nation’s central bank that provides the monetary foundation to our economy) is a political animal and is driven by a desire to help the Obama legacy.
“She’s obviously political and doing what Obama wants her to do, and I know that’s not supposed to be the way it is,” Trump said.
Speaking the truth is often offensive, and no more so than when it attacks a key base of an opponent’s power. Of course the Federal Reserve is political. Let’s begin with just some of the reasons we can conclude this. First, the Board of Governors are appointed by the President of the United States, and approved by the Senate. To insulate the Fed from political pressures, they are given 14-year non-renewable terms. The significant duration of their terms should ensure no party can control the Fed. Yet it hasn’t worked out that way: every member of the Board of Governor’s was appointed by Mr. Obama–every one. Governors have left the Fed to pursue other more lucrative private sector opportunities, leaving only Mr. Obama’s appointees. His appointees are not surprisingly going to reflect his policy perspectives. Generally, they all support an activist monetary policy, with as much discretion and power as they can get (not unlike any other bureaucracy. As Vera Smith duly notes in her path-breaking book The Rational of Central Banking, central banks are always a creation of the state and are created precisely to ensure the state has easy access to financing. Which interest group has been the biggest beneficiary of the easy money policies of the Fed? Yes, that would be the debtor class. Who would be the largest debtor in the world? Yes, that would be the U.S. government. Who is the primary political beneficiary of low interest policies? That would be the politicians that want more government spending, and do not care about the national debt–because every dollar of government spending is effectively cheaper when interest rates are at zero, and the cost of servicing the massive almost $20T national debt are significantly lower. Indeed, the low interest rate regime leads to hue and cry from liberal politicians and economists that we must spend more. As Nobel laureate Paul Krugman argues:
Government borrowing costs are at record lows; markets are in effect pleading with the government to borrow and spend. So why not do it?
Which political party benefits more from the low interest rate policy? The party of government–and you know which political party is the party of government.
Further, the apoplectic reaction on the left to Mr. Trump’s comments show either stunning naïveté or historical ignorance of central banks, and our Fed in particular. There is a large literature in the Public Choice field of economics on “the political business cycle.” To think we are above politics in our monetary policy is simply wrong. We may all even agree that we want the Fed to be supportive of the political establishment (such as the Fed’s low interest rate regime during WWII to keep government financing low–finally broken by the Fed-Treasury accord of 1951), but let’s not foolishly say that the Fed doesn’t take orders from its congressional and Treasury masters. And I take the Fed governors at their word that political considerations are never overtly part of their discussion; yet clearly markets think that it is almost impossible for them to yet raise rates in Sept and thus potentially cause a stock market hiccup that will cost the incumbent party the presidency. One doesn’t have to directly discuss political considerations for there to be political considerations.
The Fed has given us ten years of effectively no return to savings. Deferred gratification is a healthy habit to grow into, and having a positive reward from saving over current consumption enables the development of this attitude. Yet the Fed’s current policies are teaching a new generation, “don’t save for the future, spend for today.” Donald Trump is right on this one–“that’s not the way its supposed to be.”