I’m worried about the Fed
Our economy should not be entrusted to an incompetent
Rex Tillerson has demoralized and degraded the State Department to the point of uselessness. Tom Price did much the same to Health and Human Services before jetting off. Scott Pruitt is trying to eliminate the “protection” aspect of the Environmental Protection Agency. Similar stories are unfolding throughout the executive branch.
Donald Trump has been like a Category 5 hurricane sweeping through the U.S. government, leaving devastation in his wake. Will this happen to the Federal Reserve? And if it does, how disastrous could that be for the world economy?
The Fed sets monetary policy and is by far our most important economic agency. Its chair is arguably the most powerful economic official in the world. It isn’t exactly part of the executive branch, but it isn’t exactly independent, either. Its board members are appointed by the president subject to congressional approval, but have traditionally been technocrats expected to remain aloof from partisan politics.
That is, however, a norm rather than a legal requirement. And we know what happen to norms in the Trumpera.
For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. Neither hasbeen in business or met a payroll, but each has dealt with real-world economic problems superbly.
Both Mr. Bernanke and Ms. Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and elsewhere on the political right. Their courage has been completely vindicated by events.
Given this track record, you might expect to see Ms. Yellen reappointed or an equally qualified technocrat take her place. But in the age of Trump, we should expect theworst.
Mr.Trump himself understands nothing about monetary policy. He’s pronounced on the subject, but not in any coherent way. One day he praises low interest rates for boosting the economy, the next he denounces them for holding down middle-class incomes. So trying to guess his Fed choice is a mug’s game. He’ll likely do what he’s done with many other appointments: defer to congressional GOP leaders, who have been wrong about everything regarding monetarypolicy.
When the financial crisis struck in 2008, it was essential that the Fed engage in aggressive monetary expansion — loosely speaking, print lots of money. Sometimes this would be inflationary, but economists who had studied the subject (like Mr. Bernanke) understood that this wasn’t one of those times. Indeed, inflation stayed quiescent even as the Fed quadrupled the monetary base.
But congressional leaders fought these measures every step of the way. Notably, Paul Ryan, who gets his ideas about monetary policy from Ayn Rand novels, berated Mr. Bernanke, claiming that his policies would debase the dollar and lead to runaway inflation.
Writingwith John Taylor, one of the people whose name is being floated as a possible Fed chairman, Mr. Ryan went so far as to suggest that the Fed policies were part of a politically motivated attempt to bail out President Barack Obama’s fiscalpractices. And so on.
Of course, none of the people who kept warning that the Fed would cause terrible inflation has admitted having been wrong, or learned anything from the experience. What all this means is that, if congressional Republicans play a large role in selecting the next Fed chair, they’ll insist that it be someone who has been wrong about everything for the past decade.
Kevin Warsh, a former Fed governor widely considered a favorite for the job, certainly fits the bill. He warned about inflation in the midst of global economic collapse. He argued vigorously against doing anything to fight 10 percent unemployment. He warned that the United States was about to turn into Greece. And he has shown no hint of being chastened by the failure of events to play out the wayhe predicted.
Perhaps Mr. Trump will end up picking someone smart, knowledgeable and honest to lead the Fed. There’s a first time for everything.
But surely it’s possible, even probable, that the Federal Reserve, like other government agencies, is about to get Trumpified, and that one of our government’s last remaining havens of competence and expertise will soon share in the general degradation. Won’t that be fun when the next crisis hits?