Thursday, August 29, 2019

The Rogue Federal Reserve Official

It is, effectively a very big story. I reported on it yesterday in a post on the Politicized Federal Reserve.

The story is getting very little play, for two salient reasons. First, no one really understands the machinations of the Federal Reserve and the way it manipulates monetary policy to serve political ends. In our dumbed down world, we only hear news that the masses can grasp easily.

Second, the Bloomberg column written by former Federal Reserve official William Dudley makes it seem that President Trump was right to attack the Federal Reserve for bad policymaking. And we cannot report anything that makes Trump look right.

For now, examine some of the reactions. First, from Lawrence Summers, a loyal Democrat and a Harvard professor, formerly Treasury Secretary for Bill Clinton and a member of the Obama administration. Summers tweeted:

Bill Dudley's Bloomberg oped, The Fed Shouldn't enable Trump, is the worst case of @realDonaldTrump derangement in the financial world. via @bopinion

— Lawrence H. Summers (@LHSummers) August 28, 2019

And also,

Bill Dudley's @business oped might be the least responsible statement by a former financial official in decades.

— Lawrence H. Summers (@LHSummers) August 28, 2019

Of course, for all we know, Summers was most disturbed that Dudley had spoken an unspeakable truth, thus making it more difficult for the Fed to work its political magic through means that no one understands.

Or else, it made the central bank look like an arm of political partisanship... which is not the same as being a trusted independent institution.

Via Zero Hedge, here is a commentary from MarketWatch, by a British central banker:

Adam Posen, the president of the Peterson Institute for International Economics, and a former central banker at the Bank of England, said Dudley’s column was “horribly mistaken.”

“It feeds conspiracy and it was totally irresponsible to talk that way,” he said. Fed officials will likely react by circling the wagons and become disciplined in their speeches, Posen said.

And then, from Neel Kashkari:

Minneapolis Fed President Neel Kashkari, in an interview with NPR prior to Dudley’s essay, said that when a central bank plays politics “it leads to really bad outcomes over the long run for the economy."

As it happens, the United States Senate is now on the case. In particular, North Carolina Republic Thom Tillis called for an investigation:

Quoted by Politico, Tillis said "I am very disappointed that former Fed monetary Vice Chairman Bill Dudley is lobbying the Fed to use its authority as a political weapon against President Trump. The President is standing up for America against China after 30 years of our country and our workers being ripped off and there is now an effort to get the Fed to try to sabotage the President’s efforts.”

As for presidential efforts to interfere with the independence of the Federal Reserve, here is a quote from The New York Times, from the Lyndon Johnson administration:

... in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanding that the Fed once again hold down interest rates.

“I hope you have examined your conscience and you’re convinced you’re on the right track.” Lady Bird Johnson said to William McChesney Martin, on his arrival at the LBJ ranch.

Martin caved, the Fed printed money, and inflation kept climbing until the early 1980s.

And there is this, from the comments section, responding to the Dudley op-ed, on Bloomberg:

This is so arrogant, cynical, ironic and completely disingenuous that it can’t pass without comment.

A $500B trade war does not tank the global economy. But a 10-year campaign to publicly bail out reckless private banks and insurance companies while blowing the largest most comprehensive debt bubble in history and then raising interest rates on $250T in global debt surely the hell will.

I don’t care who is, has been or will be President, the Federal Reserve and ONLY the Federal Reserve should be blamed for the tepid economy of the last 10 years. A world full of zombie companies, mountains of productivity-crushing debt and disconnected stock markets that reward a tiny minority of the citizenry with bloated “gains.” All this while regular people live hand-to-mouth saddled with stagnant wages and, dare I say it, daily inflation eating at their incomes.

For a Fed official to blame a paltry trade war for its own foolishness and THEN recommend the Fed purposely crush the economy with a deep recession in order to punish His Orangeness, is terrifying and nearly Soviet in its punitive childishness. Like all good technocrats, Mr. Dudley believes only his class of Brahmins may decide for you unwashed masses what is best. The Road to Hell and all that…

What is coming should be pinned forever on the hubris, blindness and arrogance of the Fed. Naturally, regular people will be hurt the most.

Sad to say, most people will not understand this, but surely it is interesting to see the writer downplaying the trade wars and emphasizing the importance of the Federal Reserve. Where have we heard this before?

1 comment:

trigger warning said...

It's a pity, in my opinion, how all this verbal debating, with all the finality of virtual thumb-wrestling, leads to economics as ideology. And once an economic theory graduates to an ideology, the proponents stop looking at the world around them and focus on defending the ideology by "refining" terms, finding scapegoats for failure, and assigning dark motives to their theoretical opponents. I've seen this play out so many times; two recent examples are Marxists blaming foreign capitalists for the collapse of the Venezuelan economy, and Randians blaming the gutting of the American industrial base on lazy, ignorant hicks who refuse to work for a wage and hours competitive with drones in a Communist state. Another example is airline deregulation, which has not been, by any measure, an unalloyed success. In the politest terms possible, deregulation has been a "mixed bag", and the ideologues on both sides claim the only "solution" is, naturally, more of their ideology.

Were the debates not so damn destructive in human terms, it would be fun to watch.

In fact, the likelihood of developing a useful (i.e., predictive) theory of the dynamic global economy is about the same as the likelihood of building a model of the tightly coupled atmospheric and oceanic fluid dynamics involved in climate science: i.e., zero. Of course, as ideologies, both are attractive candidates precisely because they are so empirically intractable and so much is at stake.