Power & Market

Here we go again. A fed official is once again going to the media to repeat the age-old myth that the Fed is totally independent of political influence.

The last time we heard about this from someone at Powell's level what last year, when Steve Mnuchin reminded everyone of the Fed's alleged independence in January:

Responding in writing to questions from Senator Bill Nelson , Steve Mnuchin described the Fed as “organized with sufficient independence to conduct monetary policy and open market operations.” He also praised “the increased transparency we have seen from the Federal Reserve Board over recent years.”

This time, it's Fed chair Jerome Powell himself, who granted an interview to NPR's Marketplace . Most of the interview was devoted to making this point about independence. Here's some of it:

Ryssdal: There is a question that has to be asked — actually a couple of them — about the political environment in which this economy operates right now. Granting that the Fed has always been a source of political frustration for many in the executive branch, it's worth pointing out here that Larry Kudlow, the chairman of the president's National Economic Council, and the president himself have said they are low-interest rate guys. Larry Kudlow encourages the Fed to move very slowly on interest rates on the theory that rising interest rates would be a tricky thing for the president politically. Do you think it's appropriate for the White House to be not telling the Fed what to do, but saying these things in public?

Powell: Let me just say I'm not concerned about it, and I'll tell you why. We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns. We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don't consider political considerat — we don’t take political considerations into account.

I would add though that no one in the administration has said anything to me that really gives me concern on this front. But this is deep in our DNA. For a long, long time the Fed has felt it important to conduct our business that way. I'm deeply committed to that approach. And so are all of my colleagues here.

Ryssdal: Which I understand, but you're also humans. And when the White House leans on you, you must feel it.

Powell: Again, nothing has been said to me publicly or privately that gives me any concern about our independence.

Ryssdal makes a point that anyone not trained to believe Washington, DC sound bytes would see. Powell, like everyone else involved in the Fed's governance is a human being and brings with him his own biases.

We saw some of this in 2016 when it came to light that Fed employers donated far more money to the Hillary Clinton campaign, than to any other campaign:

Bloomberg had an interesting report this week looking at the political contributions of Federal Reserve employees this election season. Unsurprisingly, Hillary Clinton is dominating the field, receiving $18,747 in contributions — over four times more than all other candidates combined. While most of the donations came from lower level Fed officials, Federal Reserve Governor Lael Brainard came under fire for making several donations to Clinton’s campaign.

When people like Powell say "non-political," though, they don't mean non-ideological or unbiased. They mean they aren't making decisions in a way so as to benefit certain candidates or certain political parties.

Even if this were true — which it's not (see below) — it would be of little comfort. The Fed can still act to benefit certain groups over others. Its policies can be employed to keep interest rates low for governments, so as to keep the cost of the national debt low. The Fed can adopt policies that benefit Wall Street more than Main Street. The Fed can act to benefit spenders rather than savers.

These acts of picking winners and losers, and influencing public policy, would be considered "political" by a normal person — as indeed they are political. They're just not directly connected to any political campaign.

Besides, the fact the Fed behaves as a political institution has been documented for years by political scientists. ( Whole classes are taught on the subject .) Only economists and media talking heads are so naive or so willfully ignorant as to believe a policymaking institution can be "non-political."

But even on the matter of straight-up efforts to influence elections, the Fed is guilty. In 2010, when Fed Chairman Arthur Burns's diary was published, Doug French noted:

Burns's diary is page after page of political dirty dealing, lying, and backstabbing. Nixon went so far as to plant negative press about Burns and threatened to expand the Fed's Board of Governors to dilute the chairman's influence, all to bring Burns in line with the president's economic meddling. None of that seems necessary; Burns's diary would indicate that the president had him at hello.

No doubt a well-worn path still exists between the Eccles Building and the White House. But the myth continues. Economist Mark Zandi told CNBC's Lori Ann LaRocco recently,

I think the worst thing that could happen is if the Fed was politicized. An a-political Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.

Ultimately, though, we need to ask ourselves if "independence" is even something that is desirable. After all, the flipside of "independence" is a lack of accountability. The only way for the Fed to be truly independent would be if it was totally unaccountable. Murray Rothbard wondered if that would be a good thing:

“Independent of politics” has a nice, neat ring to it, and has been a staple of proposals for bureaucratic intervention and power ever since the Progressive Era...But it is one thing to say that private, or market, activities should be free of government control, and “independent of politics” in that sense. But these are government agencies and operations we are talking about, and to say that government should be “independent of politics” conveys very different implications. For government, unlike private industry on the market, is not accountable either to stockholders or consumers. Government can only be accountable to the public and to its representatives in the legislature; and if government becomes “independent of politics” it can only mean that that sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel or to “throw the rascals out.”

Not surprisingly, Judge Napolitano sees the Kavanaugh appointment for what it is — a nod to the DC establishment. On Fox and Friends this morning, Napolitano said:

“The Washington establishment, sometimes known as the swamp, wanted Judge Kavanaugh,” said Napolitano. “I am disappointed in the president because this is not the type of person he said he would pick. Justice [Neil] Gorsuch was. This person is at the heart and soul of the D.C. establishment against whom the president railed.”

See the video:

.@Judgenap: “I am disappointed in the president because this is not the type of person that he said he would pick… this person is at the heart and soul of the DC establishment.” pic.twitter.com/Dygeg4zywi

— Fox News (@FoxNews) July 10, 2018

In May, President Trump pulled the United States out of the Iran nuclear deal despite Iran living up to its obligations and the deal working as planned. While the US kept in place most sanctions against Tehran, China and Russia - along with many European countries - had begun reaping the benefits of trade with an Iran eager to do business with the world.

Now, President Trump is threatening sanctions against any country that continues to do business with Iran. But will his attempt to restore the status quo before the Iran deal really work?

Even if the Europeans cave in to US demands, the world has changed a great deal since the pre-Iran deal era.

President Trump is finding that his threats and heated rhetoric do not always have the effect he wishes. As his Administration warns countries to stop buying Iranian oil by November or risk punishment by the United States, a nervous international oil market is pushing prices ever higher, threatening the economic prosperity he claims credit for. President Trump’s response has been to demand that OPEC boost its oil production by two million barrels per day to calm markets and bring prices down.

Perhaps no one told him that Iran was a founding member of OPEC?

When President Trump Tweeted last week that Saudi Arabia agreed to begin pumping additional oil to make up for the removal of Iran from the international markets, the Saudis very quickly corrected him, saying that while they could increase capacity if needed, no promise to do so had been made.

The truth is, if the rest of the world followed Trump’s demands and returned to sanctions and boycotting Iranian oil, some 2.7 million barrels per day currently supplied by Iran would be very difficult to make up elsewhere. Venezuela, which has enormous reserves but is also suffering under, among other problems, crippling US sanctions, is shrinking out of the world oil market.

Iraq has not recovered its oil production capacity since its “liberation” by the US in 2003 and the al-Qaeda and ISIS insurgencies that followed it.

Last week, Bloomberg reported that “a complete shutdown of Iranian sales could push oil prices above $120 a barrel if Saudi Arabia can’t keep up.” Would that crash the US economy? Perhaps. Is Trump willing to risk it?

President Trump’s demand last week that OPEC “reduce prices now” or US military protection of OPEC countries may not continue almost sounded desperate. But if anything, Trump’s bluntness is refreshing: if, as he suggests, the purpose of the US military – with a yearly total budget of a trillion dollars - is to protect OPEC members in exchange for “cheap oil,” how cheap is that oil?

At the end, China, Russia, and others are not only unlikely to follow Trump’s demands that Iran again be isolated: they in fact stand to benefit from Trump’s bellicosity toward Iran. One Chinese refiner has just announced that it would cancel orders of US crude and instead turn to Iran for supplies. How many others might follow and what might it mean.

Ironically, President Trump’s “get tough” approach to Iran may end up benefiting Washington’s named adversaries Russia and China — perhaps even Iran. The wisest approach is unfortunately the least likely at this point: back off from regime change, back off from war-footing, back off from sanctions. Trump may eventually find that the cost of ignoring this advice may be higher than he imagined.

Reprinted with permission.

Donald Trump has made his second Supreme Court nomination: Judge Brett Kavanaugh of the US Court of Appeals for the District of Columbia.

Relative to the other names that were discussed, Kavanaugh’s selection could be seen as a win for the establishment.

For one, he will uphold the Court’s record of Justices with law degrees from either Harvard or Yale.

Two, he has a very swamp-friendly resume, including a long history of doing legal work for the Republican Party and a particular closeness with the Bush family. Having worked on matters including the Clinton Impeachment, the 2000 Florida Recount, and challenges to Obamacare, he has been described by Senator Dick Durbin as the “Forrest Gump of Republican politics.”

Interestingly, a decision he made regarding the Constitutionality of the Affordable Care Act is what troubles many on the right. Though he dissented to the question of whether the bill was Constitutional under the Commerce Clause, his minority opinion made it clear that it his objection was to the court’s jurisdiction and not the law itself. He viewed the individual mandate as a tax, logic used by Chief Justice John Roberts in upholding the law.

As Christopher Jacobs wrote for The Federalist:

In Kavanaugh’s view, the mandate could fit ‘comfortably’ within Congress’ constitutional powers,” Even as he ‘do[es] not take a position here on whether the statute as currently written is justifiable,’ Kavanaugh concludes that ‘the only potential Taxing Clause shortcoming in the current individual mandate provision appears to be relatively slight.

Attention now will turn to Kavanaugh’s views on Roe vs. Wade and whether his appointment will challenge that decision. On Fox News this morning, Judge Andrew Napolitano thought Kavanaugh’s explicitly pro-life track record as a Justice would make the nomination process more difficult, possibly pushing Trump to nominate someone different. We will now see how moderate Republicans, such as Senator Susanne Collins, react to the decision. 

Of course, the fact that the appointment of a single Supreme Court Justice warrants nationwide protests now erupting is simply a reminder of the inherent failures of a system which gives so much power to nine people in black robes.