“The Repub­li­cans’ shal­low com­mit­ment to fis­cal rec­ti­tude is now be­ing ex­posed as they ad­vo­cate mas­sive tax cuts for cor­po­ra­tions and bil­lion­aires that will add one and half tril­lion dol­lars to the deficit over the next decade”

Financial Mirror (Cyprus) - - FRONT PAGE -

One of the im­por­tant pow­ers of any US pres­i­dent is to ap­point mem­bers and heads of the many agen­cies that are re­spon­si­ble for i mple­ment­ing the coun­try’s laws and reg­u­la­tions and, in many cases, govern­ing the econ­omy. Per­haps no in­sti­tu­tion is more im­por­tant in that re­gard than the Fed­eral Re­serve.

In ex­er­cis­ing that power, Don­ald Trump has bro­ken a long-stand­ing pat­tern, go­ing back al­most a half-cen­tury, whereby the pres­i­dent reap­points (on a non-par­ti­san ba­sis) the in­cum­bent Fed chair, if he or she has been seen to be do­ing a good job. Prob­a­bly no chair has done a bet­ter job, in a par­tic­u­larly dif­fi­cult mo­ment, than Janet Yellen.

Whereas her two im­me­di­ate pre­de­ces­sors greatly tar­nished the Fed’s rep­u­ta­tion by look­ing the other way as mas­sive risk was ac­cu­mu­lat­ing – and mas­sive fraud oc­cur­ring – within the fi­nan­cial sec­tor, Yellen re­stored the Fed’s rep­u­ta­tion. Her calm and bal­anced hand nur­tured broad con­sen­sus among a Fed­eral Re­serve Board char­ac­terised by di­ver­gent eco­nomic philoso­phies, and she nav­i­gated the econ­omy through a slow re­cov­ery in a pe­riod when fis­cal pol­icy was un­nec­es­sar­ily con­strained, as du­plic­i­tous Repub­li­cans hyped the dan­gers of deficits. The Repub­li­cans’ shal­low com­mit­ment to fis­cal rec­ti­tude is now be­ing ex­posed as they ad­vo­cate mas­sive tax cuts for cor­po­ra­tions and bil­lion­aires that will add one and half tril­lion dol­lars to the deficit over the next decade.

To be fair, Trump chose a mod­er­ate, when many in his party were push­ing for an ex­trem­ist. Trump, never shy about con­flicts of in­ter­est, has an un­canny abil­ity to em­brace eco­nomic poli­cies, such as the pro­posed tax cuts, that ben­e­fit him per­son­ally. He re­alised that an ex­trem­ist would raise in­ter­est rates – any real-es­tate de­vel­oper’s worst night­mare.

Trump broke with prece­dent in an­other way: he chose a non-econ­o­mist. The Fed will face great chal­lenges in the next five years, as it re­verts to more nor­mal poli­cies. Higher in­ter­est rates could give rise to mar­ket tur­moil, as as­set prices un­dergo a sig­nif­i­cant “cor­rec­tion.” And many are ex­pect­ing a ma­jor down­turn in the next five years; oth­er­wise, the econ­omy would have ex­pe­ri­enced an al­most un­heard-of decade-and-a-half ex­pan­sion. While the Fed’s tool kit has been greatly ex­panded in the last decade, the Fed’s low in­ter­est rates and huge bal­ance sheet – and the pos­si­bly mas­sive in­crease in debt, should Trump get his tax cuts – would chal­lenge even the best-trained econ­o­mist.

Most im­por­tantly, there has been a bi­par­ti­san (and global) ef­fort to de­politi­cise mon­e­tary pol­icy. The Fed, through its con­trol of the money sup­ply, has enor­mous eco­nomic power, and such power can eas­ily be abused for po­lit­i­cal pur­poses – say, to gen­er­ate more jobs in the short run. But lack of con­fi­dence in cen­tral banks in a world of fiat money (where cen­tral banks can cre­ate money at will) weak­ens long-term eco­nomic per­for­mance, owing partly to fears of in­fla­tion.

Even in the ab­sence of di­rect politi­ci­sa­tion, the Fed al­ways faces a prob­lem of “cog­ni­tive cap­ture” by Wall Street. That’s what hap­pened when Alan Greenspan and Ben Ber­nanke were in charge. We all know the con­se­quences: the great­est cri­sis in three quar­ters of a cen­tury, mit­i­gated only by mas­sive gov­ern­ment in­ter­ven­tion.

Yet, some­how, the Trump ad­min­is­tra­tion seems to have for­got­ten what hap­pened less than a decade ago. How else to ex­plain its ef­forts to re­scind the 2010 Dodd-Frank reg­u­la­tory re­forms, de­signed to pre­vent a re­cur­rence? The con­sen­sus be­yond Wall Street is that Dodd-Frank didn’t go far enough. Ex­ces­sive risk tak­ing and preda­tory be­hav­iour are still real prob­lems, as we are fre­quently re­minded (for ex­am­ple, by re­ports about the grow­ing vol­ume of sub­prime auto loans). In one of the more in­sid­i­ous re­cent in­stances of malfea­sance, bankers at Wells Fargo sim­ply opened ac­counts on be­half of cus­tomers, un­be­knownst to them, so that it could col­lect ad­di­tional fees.

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