Trump is Right to Blow Up the Fed

Discussion in 'Politics' started by Tsing Tao, Apr 9, 2019.

  1. Tsing Tao

    Tsing Tao

    Trump is Right to Blow Up the Fed
    The Federal Reserve is out of control, acting in ways and with powers that were never explicitly granted by Congress.
    By CHRISTOPHER WHALENApril 9, 2019

    Last week, President Donald Trump set the economics community aflame by suggesting that he will appoint businessman and presidential aspirant Herman Cain to the Federal Reserve Board. Even more than political economist Stephen Moore, the critics maintain, Cain represents a threat to the cabal that has controlled the central bank for decades.

    Why? Because Cain is a successful executive who founded a real business, took risks, and created jobs, things most academic economists will never ever do.

    Media outlets and other allied constituencies have howled with rage at the prospect of President Trump “packing the Fed,” a distant reference to attempts by President Franklin D. Roosevelt to pack the Supreme Court in the 1930s. Those worried about the independence of the Federal Reserve Board should reconsider. Independence from what exactly?

    While the Fed is meant to be independent from the executive branch on a day-to-day basis, it is certainly not independent of Congress or the law. Yet the Fed in recent years has shown a troubling tendency to deviate from its legal mandate and make up new authorities to fit the changing economic situation. Case in point: the dubious notion that we should seek a 2 percent rate of inflation.

    Anybody who cares to read the 1978 Humphrey Hawkins law will know that the Fed is directed by Congress to seek full employment and then zero inflation. Not 2 percent, but zero. Yet going back a decade and more, the Fed, led by luminaries such as Janet Yellen and Ben Bernanke, has advanced a policy of actively embracing inflation. And neither Bernanke nor Yellen bothered to consult Congress when they decided to discard their legal responsibilities.

    Quantitative easing, to take another example, represents a vast inflation of the financial markets and housing, yet Fed officials actually appear in public and talk about the conundrum presented by “low inflation.” The inflation in home prices that occurred during and after the Fed’s purchase of trillions in securities has permanently raised the price of housing in many parts of the country, preventing millions from purchasing homes. Yellen confesses to be “perplexed” by the dearth of home purchases by young families, but she is the cause of the malady.

    Not only are these pro-inflation policies in violation of the letter of the Humphrey Hawkins law, but they have contributed to increased volatility in the financial markets. The third and frequently forgotten mandate in the Humphrey Hawkins law commands the Fed to employ policies that will produce “stable interest rates.” But the economists have long since stopped talking about this.

    The basic problem with the Fed today is that it has gradually fashioned a new set of rules for itself, particularly since 2008, on which Congress has never been consulted. In the same way that economists use their imaginations to concoct new theories about economic behavior, the Fed board has apparently decided to take up legislative powers as well. Is the Fed meant to be free of any real-world restraint on its actions?

    As Alex Pollock of the R Street Institute writes in American Banker:

    One may wonder whether Fed independence is a technical or a political question. It is political. The nature and behavior of money is always political, no matter how much technical effort at measuring and modeling economic factors there may be. For example, the Fed over the last decade systematically took money away from savers and gave it to leveraged speculators by enforcing negative real interest rates. Taking money from some people to give it to others is a political act. That is why the Fed, like every other part of the government, should exist in a network of checks and balances and accountability.

    The biggest problem facing the financial markets today is that the folks at the Fed have no appreciation for how their policies are affecting the real economy. Ten years of inflation, open market manipulation, and other experiments have left the U.S. burdened with trillions of dollars in new public and private debt. The December market break was a direct result of the fact that Fed officials do not really understand the real-world consequences of their actions.

    Take another example: U.S. financial institutions are facing years of lower profits as funding costs for banks normalize thanks to Fed manipulation. Yet asset returns for banks and investors will remain suppressed by “extraordinary” monetary policy. Are these massive distortions in the financial markets authorized by Congress? No they are not. When investors in bank stocks have to watch the net interest income for the industry contract, one wonders what our friends on the Federal Reserve Board will say.

    Moreover, the Fed’s decision to use excess reserves and repurchase agreements to manage short-term interest rates amounts to the nationalization of heretofore private markets. Is this authorized by Congress? No it is not. Instead the Fed is extending its government-sponsored monopoly over the short-term money markets with little regard for the rights of private investors and financial institutions.

    We should be worried about Fed independence, but not because the central bank is somehow suffering under the tyranny of the executive branch. Rather the Federal Reserve is out of control, acting in ways and with powers that were never granted to it. Quantitative easing, “Operation Twist,” and the explicit 2 percent inflation target are just three example of how the Federal Reserve Board is operating outside of its legal authority.

    It’s high time that President Trump put some new faces at the Fed and started asking questions about what policies it follows and why.

    Christopher Whalen is an investment banker and chairman of Whalen Global Advisors LLC. He is the author of three books, including Ford Men: From Inspiration to Enterprise (2017) and Inflated: How Money and Debt Built the American Dream (2010). He edits The Institutional Risk Analyst, and appears regularly on such media outlets as CNBC, Bloomberg, Fox News, and Business News Network. Follow him on Twitter @rcwhalen.
    Snarkhund, Max E. and traderob like this.
  2. Sounds ingenuous.

    Trump wants cheap, easy, plentiful money to bolster his image as president. (He apparently is not concerned about the harm from the fall out.... that will be somebody else's problem.)
  3. He may be right, but there will be consequences, some known and some to be revealed as things evolve. There will be pain.
  4. What's the big problem here? Trump is entitled to appoint Fed governors. Cain has had a successful career and served on the KC regional Fed Board and was its Chairman for a year or two. He has had more experience in the Fed system than Powell did when appointed. Or Bernanke.

    Trump has legitimate reasons to distrust the Fed and its purported independence. The Fed followed a zero interest rate policy for the entire Obama presidency, allowing him to run up massive, unprecedented deficits. The Fed even initiated an unprecedented QE policy under which it bought government bonds, ie printed money, to keep things going for Obama despite his disastrous economic policies.

    Enter Trump and suddenly the Fed starts aggressively raising rates despite zero evidence of inflation and plenty of data showing the economy was rolling over. Left to its own devices, the Fed was on track to create a recession just in time for the 2020 elections. Of course, this was at the behest of the "independent" career people who push policy. We can certainly trust them to be apolitical, just as events have shown how far we can trust the FBI, DOJ and other once respected agencies. As a footnote, the Fed did exactly the same thing to George H. W. Bush, engineering a recession that tanked his reelection hopes.
    tom2 and traderob like this.
  5. piezoe


    Ha ha ha . You've been had again. The 1978 Humphrey Hawkins act, an Act I'm quite familiar with because it allows a government employment program very similar to what the MMT economists -- of whom I am a student -- later proposed. It does not mandate, nor could any rational Act, mandate 0% inflation, nor does it propose such a target. (Wiki has this wrong and has most likely been hacked -- extremely easy to do with Wiki, Wiki's most serious fault!)* The language throughout is "reasonable price stability." The act does not make much mention of the Central Bank**, but concerns itself with fiscal directives to the President and Congress with the primary goal of full employment and "Reasonable Price Stability." It revises the 1946 Act.

    The current Fed inflation Target is 2%. A zero target is impractical and dangerous as it risks deflation. A target value does not mean inflation will be 2% any more than a Fed Funds rate of 2% would mean that the actual Fed Funds rate will be exactly 2%. These are targets and the Fed adjusts policy and operations to come as close to them on average as reasonable and practical.

    *Wiki is most likely the source of the incorrect information in that hopelessly ignorant article you posted.
    **I recall only that the Act dealt with achieving full employment and various directive to Congress and the President to that end. So i just now looked up the Act again. (It's been awhile)
    This below is the only significant part dealing with the C.B. . underlining is mine. Furthermore I should mention that the primary mandates given to the Central Bank will be found in the Federal Reserve Act. Not in Humphrey- Hawkins.

    SEC. 108.
    (a) Section 2A of the Federal Reserve Act is amended
    by striking out the second and third sentences and inserting in lieu
    thereof the following: "In furtherance of the purposes of the Full
    Employment and Balanced Growth Act of 1978, the Board of Gov-
    ernors of the Federal Reserve System shall transmit to the Congress,
    not later than February 20 and July 20 of each year, independent
    written reports setting forth (1) a review and analysis of recent
    developments affecting economic trends in the Nation; (2) the objec-
    tives and plans of the Board of Governors and the Federal Open
    Market Committee with respect to the ranges of growth or diminu-
    tion of the monetary and credit aggregates for the calendar year
    during which the report is transmitted, taking account of past and
    prospective developments in employment, unemployment, production,
    investment, real income, productivity, international trade and pay-
    ments, and prices; and (3) the relationship of the aforesaid objectives
    and plans to the short-term goals set forth in the most recent Economic
    Report of the President pursuant to section 3(a)(2)(A) of the
    Employment Act of 1946 and to any short-term goals approved by
    the Congress. In addition, as a part of its report on July 20 of each
    year, the Board of Governors shall include a statement of its objec-
    tives and plans with respect to the ranges of growth or diminution of
    the monetary and credit aggregates for the calendar year following
    the year in which the report is submitted. The reports required under
    the two preceding sentences shall be transmitted to the Congress and
    shall be referred in the Senate to the Committee on Banking, Hous-
    ing, and Urban Affairs, and in the House of Representatives to the
    Committee on Banking, Finance and Urban Affairs. The Board shall
    consult with each such Committee on the reports and, thereafter, each
    such Committee shall submit to its respective body a report containing
    its views and recommendations with respect to the Federal Reserve's
    intended policies. Nothing in this Act shall be interpreted to require
    that the objectives and plans with respect to the ranges of growth
    or diminution of the monetary and credit aggregates disclosed in
    the reports submitted under this section be achieved if the Board
    of Governors and the Federal Open Market Committee determine
    that they cannot or should not be achieved because of changing
    Provided, That in the subsequent consultations with, and
    reports to, the aforesaid Committees of the Congress pursuant to this
    section, the Board of Governors shall include an explanation of the
    reasons for any revisions to or deviations from such objectives and

    P.S. Watch out for those pesky Russian Hackers and their clever disinformation! And here is some additional friendly advice, don't give any money to Mr. Christopher Whalen to Manage. "Christopher Whalen provides investment banking and consulting services to institutional investors and corporate clients around the globe." (quote from Christopher Whalen. Ha ha ha. )

    I have said this many times, but it bears repeating as it is our principle defense against disinformation. "If something you read violates your common sense, chances are it is wrong."
    Last edited: Apr 9, 2019
    UsualName likes this.
  6. Tony Stark

    Tony Stark

    Obama came into office with a 1.2 trillion dollar deficit,temporarily increased it to 1.4 trillion then lowered it to 600 billion.

    Trump came into office with a 600 billion dollar deficit and has increased it to 1.1 trillion in 2 years.

    Bush came into office with a budget surplus and turned into a 1.2 trillion dollar deficit.
    UsualName likes this.
  7. UsualName


    I’m sorry but which successful business did Herman Cain found?

    I will say this, there is too much Wall Street superstitious nonsense going around about the Fed. The Fed has a dual mandate to control inflation and promote full employment, not create an economic environment for easy profits.

    We are obviously in a state of stable inflation and full employment and the Fed actions helped bring us here.

    All of this talk about the Fed killing housing for millennials is right wing garbage. Millennials are underpaid and carry way too much student loan debt and that is what is holding them back from housing and starting families.

    Which brings us to the larger point of what the hell is the point of having a country if the conditions in the country are adverse to starting families?
  8. Trump is right to blow up the three Mexican countries so deluge the border in families.
  9. TJustice


    piezoe can you tell us how the board can control the regional fed banks or fomc policy being that they need to make unanimous votes to control the fomc which has 5 bank people on it.
  10. TJustice


    You are the opposite of a monetarist piezoe.

    a monetarist could you tell us what flooding the market with trillions of dollars created by a keystroke would create a devaluation of the dollar and harm savings.

    you really should drop your monetarist act. I am monetarist modified to fit a system in which the FED controls money and prints the money... not the govt.

    exercise for you to consider...
    where you read govt in the writings of monetarists... substitute FED...
    Because, it is fed who controls the money supply and creates the money

    Now.. you may interpret Milton Friedman and his school.
    #10     Apr 9, 2019