I received a short note from a long-time supporter of this Berean criticizing Jay Powell’s latest interest rate decision, and my reply is worth mentioning to all of you. Jay Powell is absolutely not the problem with interest rates, nor was Ben Bernanke or anyone else that has been a Fed Chair. The problem is the institution itself.

The interest rate is a price in our economy, and just like any other price, should be set by supply and demand for our economy to function well. We’re all familiar with the typical results of price controls–they must, by definition, lead to surpluses or shortages. The reason is because price controls are implemented by governments who do not like what the market price is. For example, we don’t like it that rent is so high in cities, so we cap the rental rate allowed. But when the government caps the rate this reduces supply–maybe not in the short run, but certainly in the long run. And even in the short run there are well known negative consequences.

This is well worth a view; stick to the end to hear my late, great Professor Walter Williams say, “short of aerial bombardment, the best way to destroy a city is through rent controls.” If you watch the video, you’ll see all the progressive socialists demand that the government set the price of rents, since they “know” they’re too high. Probably you’ll be 100% in agreement with John Stossel and the economists that the market ought to set this price for the good of society, and you won’t agree with Bernie Sanders or AOC in this. Yet you may be sympathetic to Donald Trump’s call for the Fed to lower interest rates. But if interest rates are a price–and they most certainly are–then we’re still calling for price controls. We just want to set the price at a different rate than Mr. Powell wants to set the price. Interest rates economically serve the function of coordinating consumption across time. How much do I consume today versus how much do I consume in the future. Economists like myself often call the interest rate the price of current consumption, since if we don’t consume today, we could take the money we would have spent in the bank and earned interest on it. That lost interest is the price of current consumption. So the interest rate balances how much we consume today vs. the future. Absent government price controls, that would be set by those that want to save today, to consume more in the future, and those that want to spend now (consumption or investment). For the resources to be available today to spend by those that don’t have them, somebody must be willing to save–and the incentive to save is by the higher return of higher interest rates. Note the very important fact that interest rates are therefore a recipricol relationship–both savers and investors are involved. For the government to step in an bias the price lower, they are hurting savers. We had over a decade of Fed mismanagement denying you and I the ability to have a positive return on our savings after inflation and taxes. This was the true bailout of the financial crisis, when ordinary savers like you and I were effectively taxed so that the banking system could get well with lower interest rates and drive asset prices higher. In an era of continual government deficits, all savings come from the private sector– the vast majority from households (you and I!). Just as rent control can destroy a country, so can an interest rate out of whack with true consumption patterns–we see the value of our dollar being sucked away, and we intuitively know that someone is ripping us off. Donald Trump has politically taken advantage of this, and yet in the case of the Fed, we are seeing the enemy, and it is us.

Mr. Trump is increasingly explicit about why he wants lower interest rates–we have a $37T national debt and the higher the interest rate, the less government is able to spend on other areas. This gets to the issue of financial repression, which is exactly what governments have always done to their population to deal with government spending–they inflate the debt away rather than tackle the tough issue of cutting spending.

Under Trump II, our spending rate is slightly less than last year, but it is a drop in the bucket, as both parties are refusing to responsibly address our entitlement programs which we cannot afford. Hence the stealth tax Mr. Trump wants Mr. Powell to raise on all of us. Politicians always call for lower interest rates–never ever higher (if they are in power). The prime beneficiary is clear–debtors benefit from lower interest rates. Mirror, mirror on the wall, who is the biggest debtor of them all? You guessed it, Uncle Sam. Shock that Mr. Trump wants lower interest rates. This explains his unrelenting public pressure on the Fed, to include his desire to fire Fed Governor Lisa Cook.*

So this Berean doesn’t want Jay Powell or Mr. Trump setting interest rates. Meaningful reform of the Fed must be reducing its power to affect the economy, not changing who is the captain of the ship.** Trumpians seem to think the problem of government is that the wrong people have been running the ship. And some of that is definitely true. But the bigger problem, certainly in this case, is that government shouldn’t be doing this at all.

* If the published reports are correct re her taking two mortgages simultaneously, and fraudulently claiming she would live in both to secure a lower interest rate, then I do believe she should resign. However I am very concerned that the Trump administration may be searching for this crime only on his political opponents. It would be great to show how this was uncovered by the routine processes of catching mortgage fraud rather than what Mr. Trump’s opponents are alleging–he has enemy lists that he is scouring. Nevertheless, if she did it, she should go.

** In my ideal world we would end the federal reserve. The country did fine without a central bank before, and we will do so again. It’s not clear at all that the Fed has improved financial market stability since its inception, indeed I agree with George Selgin that it has made it worse.