{"id":10191,"date":"2018-11-05T11:14:33","date_gmt":"2018-11-05T19:14:33","guid":{"rendered":"http:\/\/occupysf.net\/?p=10191"},"modified":"2018-11-05T11:14:33","modified_gmt":"2018-11-05T19:14:33","slug":"trumps-war-on-the-fed","status":"publish","type":"post","link":"https:\/\/occupysf.net\/index.php\/2018\/11\/05\/trumps-war-on-the-fed\/","title":{"rendered":"Trump\u2019s War on the\u00a0Fed"},"content":{"rendered":"
Posted on\u00a0November 4, 2018<\/span>\u00a0by Ellen Brown (ellenbrown.com)<\/div>\n
\n

President Trump has stepped up his criticism of the Federal Reserve, saying of its aggressive interest rate hikes that it has \u201cgone crazy.\u201d The same charge has been leveled against Trump, but there may be a method to his madness . . . . \u00a0<\/em><\/p>\n

October was a brutal month for the stock market. After the Fed\u2019s eighth interest rate hike on September 26th<\/sup>, the Dow Jones Industrial Average dropped more than 2,000 points and the NASDAQ had its\u00a0worst month<\/a>\u00a0in nearly 10 years.\u00a0After the Dow lost<\/a>\u00a0more than 800 points on October 10th<\/sup>\u00a0and the S&P 500 suffered its first weeklong losing streak since Trump\u2019s election, the president said, \u201cI think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.\u201d\u00a0In a later interview<\/a>\u00a0on Fox News, he called the Fed\u2019s rate hikes \u201cloco.\u201d And in a\u00a0Wall Street Journal interview<\/a>\u00a0published on October 24th, Trump said he thought the biggest risk to the economy was the Federal Reserve, because \u201cinterest rates are being raised too quickly.\u201d He also criticized the Fed and its chairman in July and August. \u00a0<\/span><\/p>\n

Trump\u2019s vocal criticisms are worrisome<\/a>\u00a0to some commentators, who fear he is attempting to manipulate the Fed and its chairman for political gain. Ever since the 1970s, the Fed has declared its independence from government, and presidents are supposed to avoid influencing its decisions. But other Fed-watchers think politicians should be allowed to criticize the market manipulations of an apparently out-of-control central bank.<\/p>\n

Why the Frontal Attack?<\/strong><\/p>\n

Even if the president\u2019s challenges are a needed check on the Fed, it has been questioned whether he is going about it in the right way. Challenging the central bank in public forces it to stick to its guns, because\u00a0it must maintain its credibility<\/a>\u00a0with the markets by showing that its decisions are based on sound economic principles rather than on political influence. If the president really wants the Fed to back off on interest rates, it has been argued, he should do it with a nod and a nudge, not a frontal attack on the Fed\u2019s sanity.<\/p>\n

True, but perhaps the president\u2019s goal is not to subtly affect Fed behavior so much as to make it patently obvious who is to blame when the next Great Recession hits. And recession is fairly certain to hit, because higher interest rates\u00a0almost always trigger recessions<\/a>. The Fed\u2019s current policy of \u201cquantitative tightening<\/a>\u201d \u2013 tightening or contracting the money supply \u2013 is the very definition of recession, a term Wikipedia defines as \u201ca business cycle contraction which results in a general slowdown in economic activity.\u201d<\/p>\n

This \u201cbusiness cycle\u201d is not something inevitable like the weather. It is triggered by the central bank. When the Fed drops interest rates, banks flood the market with \u201ceasy money,\u201d allowing speculators to snatch up homes and other assets. When the central bank then raises interest rates, it contracts the amount of money available to spend and to pay down debt. Borrowers go into default and foreclosed homes go on the market at firesale prices, again to be snatched up by the monied class.<\/p>\n

But it is a game of Monopoly that cannot go on forever. According to Elga Bartsch, chief European economist at Morgan Stanley, one more financial cataclysm could be all that it takes\u00a0for central bank independence to end<\/a>. \u201cHaving been overburdened for a long time, many central banks might just be one more economic downturn or financial crisis away from a full-on political backlash,\u201d she wrote in a note to clients in 2017. \u201cSuch a political backlash could call into question one of the long-standing tenets of modern monetary policy making \u2013 central bank independence.\u201d<\/p>\n

And that may be the president\u2019s end-game. When higher rates trigger another recession, Trump can point an accusing finger at the central bank, absolving his own policies of liability and underscoring the need for a major overhaul of the Fed.<\/p>\n

End the Fed?<\/strong><\/p>\n

Trump has not overtly joined the End the Fed campaign, but he has had the ear of several advocates of that approach. One is John Allison, whom the president evidently considered for both Fed Chairman and Treasury Secretary. Allison has proposed\u00a0ending the Fed altogether<\/a>\u00a0and returning to the gold standard, and Trump suggested on the campaign trail that he\u00a0approved of a gold-backed currency<\/a>.<\/p>\n

But a gold standard is the ultimate in tight money \u2013 keeping money in limited supply tied to gold \u2013 and today Trump seems to want to return to the low-interest policies of former Fed Chair Janet Yellen. Jerome Powell, Trump\u2019s replacement pick, has been called \u201cYellen without Yellen<\/a>,\u201d a dovish alternative in acceptable Republican dress. That\u2019s what the president evidently thought he was getting, but in his October 24th Wall Street Journal interview, Trump said of Powell, \u201che was supposed to be a low-interest-rate guy. It\u2019s turned out that he\u2019s not.\u201d The president complained:<\/p>\n

[E]very time we do something great, he raises the interest rates. . . . That means we pay more on debt and we slow down the economy, both bad things. . . . I mean, we had a case where he raised interest rates right before we have a bond offering. So you have a bond offering and you have somebody raising interest rates, so you end up paying more on the bonds. . . . To me it doesn\u2019t make sense.<\/p><\/blockquote>\n

Trump acknowledged the independence of the Fed and its chairman but said, \u201cI\u2019m allowed to say what I think. . . . I think he\u2019s making a mistake.\u201d<\/p>\n

Presidential Impropriety or a Needed Debate?<\/strong><\/p>\n

In a November 2016 article in Politico titled \u201cDonald Trump Isn\u2019t Crazy to Attack the Fed<\/a>,\u201d Danny Vinik agreed with that contention. Trump, who is not a stickler for consistency, was then criticizing Fed Chair Janet Yellen for keeping interest rates too\u00a0low<\/em>. Vinik said that while he disagreed with Trump\u2019s interpretation of events, he agreed that the president should be allowed to talk about Fed policy. Vinik observed:<\/p>\n

The Federal Reserve is, by definition, not independent. Unlike the Supreme Court, the central bank is a creation of Congress and is accountable to lawmakers on Capitol Hill. It can be changed\u2014or abolished\u2014by Congress as well. And to pretend it\u2019s not\u2014to treat the Fed as an entity totally removed from American politics\u2014also leaves us powerless to talk about the ways it might be improved.<\/p>\n

. . . The long tradition of deference to the Fed\u2019s policy independence can even pose a risk: It creates an environment in which any critique of the Fed is seen as out of line, including the idea of reforming how it works.<\/p><\/blockquote>\n

Vinik quoted Andrew Levin, a Dartmouth economist and twenty-year veteran of the Fed, who\u00a0published a set of recommended<\/a>\u00a0central bank reforms in conjunction with the Center for Popular Democracy\u2019s Fed Up campaign in 2016. One goal was to make the Federal Open Market Committee, which sets Fed policy, more representative of the American public.\u00a0The FOMC is composed<\/a>\u00a0of the president of the New York Fed, four other Federal Reserve Bank presidents, and the Federal Reserve Board, which currently has only four members (three positions are vacant). That means the FOMC is majority-controlled by heads of Federal Reserve Banks, all of whom must have \u201ctested banker experience<\/a>.\u201d As Vinik quoted Levin:<\/p>\n

The Federal Reserve is a crucial public agency, so there are lots of important questions\u2014including the selection of its leaders, the determination of their priorities, and the specific strategy that they\u2019re following\u2014that should all be open to public discourse.<\/p><\/blockquote>\n

Vinik also cited Ady Barkan, the head of the Fed Up campaign, who agreed that questioning Fed policy was appropriate, even for the president. Barkan said the Fed\u2019s independence comes from its structure: its leaders are appointed, not elected, for long terms, which inherently insulates them from political pressure. But the Fed must still be accountable to the public, and one way policymakers fulfill that responsibility is through public comments. Monetary policy decisions, said Barkan, are therefore appropriate topics for political debate.<\/p>\n

Reassessing Fed Independence<\/strong><\/p>\n

According to Timothy Canova<\/a>, Professor of Law and Public Finance at Nova Southeastern University, the Fed is not a neutral arbiter. It might be independent of oversight by politicians, but Fed \u201cindependence\u201d has really come to mean a central bank that has been captured by very large banking interests. This has not always been the case. During the period coming out of the Great Depression, the Fed as a practical matter was not independent but took its marching orders from the White House and the Treasury; and that period, says Canova, was the most successful in American economic history.<\/p>\n

The Fed\u2019s\u00a0justification for raising interest rates<\/a>\u00a0despite admittedly low inflation is that we are nearing \u201cfull employment,\u201d which will drive up prices because labor costs will go up. But wages have not gone up. Why? Because in a globalized\u00a0world<\/u>, the availability of cheap labor abroad keeps American wages low even if most people are working (which is\u00a0questionable today<\/a>\u00a0despite official statistics).<\/p>\n

Higher interest rates do not serve consumers, homebuyers, businesses or governments. They serve the banks that dominate the policy-setting FOMC. The president\u2019s critiques of the Fed, however controversial, have opened the door to a much-needed discourse on whether the fate of the economy should be in the hands of unelected bureaucrats marching to the drums of Wall Street.<\/p>\n

Postscript<\/em><\/strong>: The stock market has turned positive as of this writing (November 1), but the rebound has been\u00a0led by the FAANG stocks<\/a>\u00a0\u2013 Facebook, Amazon, Apple, Netflix and Google. As noted in my\u00a0article of September 13th<\/a>, these are the stocks that central banks are now purchasing in large quantities. The FANG stocks\u00a0jumped in unison<\/a>\u00a0on October 31st<\/sup>\u00a0although only one (Facebook) had positive news to report, suggesting possible market manipulation for political purposes.<\/p>\n

_____________<\/p>\n

This article was first posted on\u00a0TruthDig.com<\/a>. Ellen Brown is an attorney, founder of the\u00a0<\/em>Public Banking Institute<\/a>, and author of twelve books including\u00a0<\/em>Web of Debt<\/a>\u00a0and\u00a0<\/em>The Public Bank Solution<\/a>. A 13th<\/sup>\u00a0book titled\u00a0Banking on the People: Democratizing Finance in the Digital Age<\/u>\u00a0is due out at the end of the year. She also co-hosts a radio program on PRN.FM called \u201c<\/em>It\u2019s Our Money<\/a>.\u201d Her 300+ blog articles are posted at\u00a0<\/em>EllenBrown.com<\/a>.<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Posted on\u00a0November 4, 2018\u00a0by Ellen Brown (ellenbrown.com) President Trump has stepped up his criticism of the Federal Reserve, saying of its aggressive interest rate hikes that it has \u201cgone crazy.\u201d The same charge has been leveled against Trump, but there may be a method to his madness . . …. Continue reading → <\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/10191"}],"collection":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/comments?post=10191"}],"version-history":[{"count":1,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/10191\/revisions"}],"predecessor-version":[{"id":10192,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/posts\/10191\/revisions\/10192"}],"wp:attachment":[{"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/media?parent=10191"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/categories?post=10191"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/occupysf.net\/index.php\/wp-json\/wp\/v2\/tags?post=10191"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}