We are back from Bordeaux and guess who is in the news?
Bad ideas never die. They just bide their time.
The latest version of this truism is brought to us, naturally enough, by a Presidential contender. This time around it is none other than Donald J Trump. If the Wall Street Journal’s front page story is accurate, Trump’s advisors are busy concocting a plan to blunt the independence of the Fed on the assumption that he (Trump) emerges victorious in November.
And, as Trump likes to say—he is a low interest rate man.
Various iterations of the Trump plan would place more power over interest rate decisions into the hands of the President. One of the arguments is that the President is the one figure elected by all the people and that as a result he should be the voice that represents them in this crucial area of policy making. This time worn argument gets dredged up constantly by people who either don’t understand the separation of powers or resist it.
Which is another way of saying that they argue that the constitution should be shredded (yet again) because it is inconvenient (as it is meant to be) for power hungry politicians. After all, Section 8 of the U.S. Constitution specifically authorizes Congress, not the President “…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…”. It says absolutely nothing about the President having any authority whatsoever over monetary policy.
It is important to realize that there is a long history here. This is not a new stupid idea. On the contrary, it is a very old stupid idea. It was in 1832 that populist President Andrew Jackson vetoed a Congressional vote to extend the charter of the Second Bank of the U.S. After his re-election, Jackson announced that the Government would no longer deposit Federal Finds in the Bank, thus putting it on the road to extinction, which finally occurred in 1836. Jackson apparently thought that the bank corrupted politics with “too much money”. Sound familiar?
But Jackson wasn’t the only one who railed against banks. There was William Jennings Bryan, a lifelong Democrat whose father was a fan of—Andrew Jackson. Bryan secured the Democratic Presidential nomination in 1896, 1900 and 1908. He lost all three times.
It was in 1896 that Bryan made his famous “Cross of Gold” speech that excoriated eastern bankers and argued that the debate over monetary policy was part of a broader struggle over democracy and the welfare of the “common man”. That also sounds very familiar.
And then we have Congressman Wright Patman (D.TX), another hater of banks. He is described in the American Journal of Economics and Sociology as a supporter of populist legislation whose perennial target was the Federal Reserve System. He resented the Central Bank’s political independence, and thought that “high” interest rates, brought about by monetary policy, benefitted banks at the expense of ordinary citizens.
Once again we have the populist argument that the common man is harmed by banks.
None of this is to say that the Fed has a history of getting things right. On the contrary, the Fed has a pretty appalling track record when it comes to a sober evaluation of its policy making. But its track record during the times it fell under the influence of the White House is even worse. Much worse.
Consider the 1960s and 1970s. Then President Lyndon B Johnson took Fed Chair William McChesney Martin to task for tightening policy in 1965. That apparently intimidated the Fed sufficiently that it proved to be more pliant. And inflation took off.
Similarly Arthur Burns did President Richard Nixon’s bidding and eased up on the money supply for the 1972 presidential election. Inflation soared afterwards. Again in the late 1970s President Jimmy Carter’s Fed Chair G . William Miller decided to be a team player rather than clamp down. Once again inflation took off. Shortly thereafter the U.S. fell into a financial crisis and had no choice but to allow interest rates to explode. Treasury Bill rates soared into the teens and Mortgage rates topped 16% before it was all over.
Which brings us back to Donald J Trump. Does anybody this side of sanity think that Trump (or any other politician for that matter) would bring sobriety to monetary policy making? Of course not. Politicians count votes. And more people borrow than lend. Ergo the great majority of politicians will support fixing “low” interest rates over market determined rates. That is, until there is a financial crisis brought about by bad monetary policy.
Where is the evidence for this supposition? Entitlements. Both major party candidates promise to leave entitlements alone (mostly Social Security and Medicare), even though the programs are insolvent.
The evidence could not be any more clear. Populist politicians will make a beeline for a cliff if they think there is enough of a crowd with them. And then they will fall off the cliff.
JFB
