Quote of the Day (Paul Volcker, on Threats to the Federal Reserve’s Independence)

“The credibility of the Federal Reserve, its commitment to maintaining price stability, and its ability to stand up against partisan political pressures are critical. Independence can’t just be a slogan. Nor does the language of the Federal Reserve Act itself assure protection.”—Economist and former Federal Reserve Board chair Paul Volcker (1927-2019), “The Fed and Big Banking at the Crossroads,” The New York Review of Books, Aug. 15, 2013

Before he died six years after writing the above, many of the fears of Paul Volcker (pictured) about the Fed’s loss of independence were being borne out. As Donald Trump rained down insults on his own appointee to head the financial institution, Jerome Powell, Volcker warned in even starker terms about the consequences of these threats:

“Not since just after the second world war have we seen a president so openly seek to dictate policy to the Fed,” Volcker and Christine Harper wrote in Keeping At It: The Quest for Sound Money and Good Government. “That is a matter of great concern, given that the central bank is one of our key governmental institutions, carefully designed to be free of purely partisan attacks.”

Volcker also placed this within the larger context of “nihilistic forces” that not only aim to roll back environmental regulations, but also “to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.”

Any resemblance to the Presidential administration at that time was anything but coincidental.

Today, another half-dozen years after what amounted to Volcker’s valedictory, everything he tried to alert Americans about has come closer to reality.

Not content to badger an inflation-conscious Powell into lowering interest rates, Trump now seems bent on forcing him out before the Fed chair’s term expires next year—even to the point of surprising members of Congress, meeting him on an unrelated matter, by waving before them a draft letter firing him.

Since by law the Fed chair can only be removed “for cause”—i.e., malfeasance—Trump’s Cabinet and Capitol Hill stooges are braying for an investigation of what they regard as inordinate renovation expenses at its headquarters.

I would call the evidence for this “paper thin,” except that it doesn’t even deserve this phrase. How this renovation is more egregious than questionable outlaws at other buildings—including Pete Hegseth’s space next to the Defense Department’s press briefing room, modified into a make-up studio—goes unexplained.

In May, the Supreme Court, in a ruling that temporarily allowed Trump to terminate board members of other independent agencies such as the National Labor Relations Board, hinted that he could not wield that power against the Fed. Why Powell would enjoy such security, unlike other heads of agencies created by Congress, the conservative majority did not say.

In any case, I don’t think the Supremes can be counted on to aid Powell if he’s dismissed. 

Four decades ago, “Doonesbury” cartoonist Garry Trudeau annoyed then-Vice President George H.W. Bush, then trying to placate the GOP right wing by changing some of his prior positions, with a strip on how he'd been persuaded to “place his embattled manhood in a blind trust,” to be “restored to him only in times of national emergency."

That phenomenon seems to be occurring on the court of last appeal, with the only opposition to Trump’s assault on the Constitution coming from the females on the bench—the three Democrats joined, very occasionally, by the only Republican-appointed woman, Amy Comey Barrett. The men? Missing in action during our current "national emergency."

With densely presented data and periodic oracular pronouncements, the Fed has often seemed remote to most Americans. (No surprise that William Greider’s history of the institution was entitled Secrets of the Temple.)

But observers of central banks the world over are doing little to hide their anxiety over Trump’s latest attempt at winning through intimidation. Among the dreaded possibilities:

*Treasury Secretary Scott Bessent adding the Fed to his responsibilities, in much the same way that Secretary of State Marco Rubio now functions as effective head of agencies closed via Elon Musk’s DOGE order;

*Trump naming a replacement months before Powell actually steps down, diluting the authority of the current Fed chair;

*Destabilizing foreign markets because of rising yields on long-term U.S. government debt;

*Sinking the value of the dollar;

*Whipping up uncertainty in a market guessing at the government’s intentions;

*Creating a revolving door of central bank heads directly controlled by a leader with authoritarian aspirations—similar to Turkey, home of one of Trump’s favorite foreign allies, President Recep Tayyip Erdogan; and, 

*Yielding to such leaders’ demand for low interest rates, no matter the circumstances—which, in Erdogan’s case, has meant five central bank governors in the past six years, who collectively have watched Turkey’s inflation rate climb to its current 35%.

Ultimately, the Powell controversy revolves around two mindsets: Trump’s and the collective mental calculus of those who could drive up prices. 

The question of Presidential mental acuity that ultimately unraveled Joe Biden’s reelection chances should, by rights, now come into play in assessing Trump’s economic policy. Last week, listener eyebrows shot up involuntarily when Trump said he was “surprised” Powell was appointed Fed chair, blaming the nomination on Biden—somehow forgetting that he was the one who made the decision in 2017.

Together, management and employees could factor in inflation permitted by a Trump-cowed Fed into their own strategies, noted Josh Bivens’ “Working Economics Blog” post last week on the Economic Policy Institute’s Website:

“If Trump degrades confidence in the Fed’s political independence, any future inflation burst (say, one driven by a large increase in budget deficits) could well get embedded quickly into expectations, as workers and firms assume the Fed would not be effective in constraining inflation going forward. People will begin planning with inflation in mind and it could well begin accelerating.”

Quote of the Day (Robert Heilbroner, on Stopping Inflation)

“Although no single coherent theory of inflation commands the assent of the economics profession, there is a general recognition that inflation is the consequence of a profound and probably irreversible change in the social and political fabric of capitalism. And with this recognition has come a change in attitudes about stopping inflation. The idea of stopping the rise of prices dead in its tracks may still be a popular political slogan, but it has lost credence among economists generally. For short of bringing about a real depression or imposing severe wage and price controls, no one has a credible program for bringing the inflationary process to a complete halt. Instead economists ask How much inflation can we afford? and How can we limit its damage?”— American economist and historian of economic thought Robert Heilbroner (1919-2005), The Worldly Philosophers: The Lives, Times And Ideas of The Great Economic Thinkers, Fifth Edition (1980)

Shortly after this edition of perhaps Heilbroner’s best-known book appeared, Federal Reserve chairman Paul Volcker embarked on what the economic historian called “stopping the rise of prices dead in its tracks.” 

The move, propelled by the 1979 oil crisis, raised the Fed’s interest rate to nearly 20 percent in 1981—shock therapy that finally brought inflation down, but at the cost of a recession, rather than the full-scale depression feared by Heilbroner.

For the next 40 years, the United States enjoyed a respite from rampant inflation, courtesy of deregulation, cheap goods from foreign markets, and technology that Fed Chair Alan Greenspan told Congress in 2005, “elevated the growth of productivity, suppressed unit labor costs, and helped to contain inflationary pressures.”

The situation was so unusual that this February 2018 post from the Federal Reserve Bank of St. Louis worried about the implications of very low inflation.

The pandemic, which resulted in disrupted supply chains from abroad and greater government spending to stimulate the economy, ended what increasingly looks like a holiday from history.

Quote of the Day (George F. Will, on Herman Cain and the ‘GOP’s Descent Into Vaudeville’)

“The GOP’s descent into vaudeville began with the 2008 vice presidential nomination of Sarah Palin, it accelerated in 2011 when [Herman] Cain was taken seriously as a presidential candidate, and it reached warp speed with the party’s capture by the man who takes Cain seriously as a maker of monetary policy. Cain’s certitude about his economic nostrums is inversely proportional to the study he has invested in the subject, which probably has involved less effort than he recently invested in organizing a PAC to promote Trump’s reelection. Cain’s and his nominator’s boundless confidence in their economic beliefs demonstrates the Dunning-Kruger Effect. It is named for two Cornell psychologists who in 1999 described the bias by which the lower a person’s intellectual ability, the more the person tends to overestimate it.”— George F. Will, “The Cain and Moore Nominations Are Two More Tests for Republicans to Fail,” Washington Post, Apr. 10, 2019

(Photo of Herman Cain speaking at CPAC in Washington D.C. on February 11, 2011, taken by Gage Skidmore)

Quote of the Day (The Fed’s Stanley Fischer, on Bank Deregulation and Forgotten History)

"It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely short-sighted. One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years."— Federal Reserve vice-chair Stanley Fischer quoted in Sam Fleming, “Lunch With the FT: ‘It’s Dangerous and Short-Sighted,” The Financial Times, Aug. 19-20, 2017

Among the reasons offered by those who voted for Donald Trump last November was the matter of appointments. These supporters could not abide a Hillary Clinton appointee to the Supreme Court handing down decisions for at least a generation, setting precedents for a half century. But appointments extend beyond the Supreme Court.

Steering the economy, for instance, may have a more immediate, even wider, impact than setting a new legal direction. That is the province of the Federal Reserve System, the central bank of the United States, which is tasked with ensuring a flexible, but safe and stable, monetary and financial system.

The Fed deals with nearly every aspect of how Americans spend and save money, with responsibility for influencing the money and credit supply, regulating and supervising financial institutions; serving as a banking and fiscal agent for the United States government; and supplying payments services to the public through depository institutions like banks, credit unions, and savings and loans. For all the mystery surrounding its operations, its writ is immense.

That’s why the unexpected resignation of the number 2 person at the Federal Reserve, Stanley Fischer, for unspecified “personal reasons” is likely to produce consequences that will affect us all. In the last Presidential election, Donald Trump criticized the Fed for impeding the recovery through a welter of regulations instituted in the wake of the 2007-09 Global Financial Crisis.

You can understand why Trump hates regulations so much. They have forced his company to comply with workers’ compensation and safety rules that drove up construction costs on his projects. And they have forced what little transparency exists into the financial aspects of his wide but rickety business empire that he preferred voters not to see.

But regulations are also the brakes on the speed of the economy, in the same way that they slow a vehicle. Sure, you can boost speed without them, but God help you if you are going downhill or need to avoid a crash.

Now Fischer’s departure, along with prior vacancies on the Fed’s board, gives the President the whip hand in reshaping this institution to his liking. A businessman with a blithe disregard for risk throughout his career is now in charge of an economy and can affect other people’s money. Think about that. You’re entitled to shiver at least a little.

As John Kenneth Galbraith warned in his The Great Crash: “Someday, no one can tell when, there will be another speculative climax and crash. There is no chance that, as the market moves to the brink, those involved will see the nature of their illusion and so protect themselves and the system. The mad can communicate their madness; they cannot perceive it and resolve to be sane.”

Quote of the Day (Rick Perry, with Loose, “Treacherous…Treasonous” Talk)

"If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa. I mean, printing more money to play politics at this particular time in American history is almost treacherous – or treasonous, in my opinion.”—Texas Governor—and new Presidential candidate—Rick Perry, on Federal Reserve chairman Ben Bernanke, quoted in Abby Phillip, “Thrust and Perry: W.H. to Texan: Watch Your Mouth,” Politico, August 16, 2011

I know what you’re thinking: It’s been a long day, and you’re tired. You don’t want to wade through all of this Texas-sized bullchip.

Well, neither do I. But when a newly announced candidate--one, be it noted, from a large state, with a considerable war chest, amid an uncertain economy and, therefore, not only with a terrific chance of winning his party's nomination but of taking the general election in 2012--comes out with the kind of blathering above, we’d all better sit up straight and try to make sense out of it all.

If Texas Governor Rick Perry believes every word of this stuff, all the time, he’s an idiot. If he doesn’t, he’s the worst kind of demagogue. If he starts out not believing it but persuades himself, while delivering it, that he does, he should forsake the stump for the stage immediately.

What does Perry mean by “playing politics”? Is he implying that Ben Bernanke wants President Obama re-elected? Why would that be?

Start out with a fact, a not unimportant one: Ben Bernanke was appointed head of the Fed by George W. Bush. You remember him, right, Rick? A Republican? Not just that, but a conservative one? Oh, and one more hint: your predecessor as governor?

In other words, Bernanke’s appointment was pushed by a President not only dedicated to free-market principles, but one who barely displayed any interest in appointing Democrats to any office during his two Presidential terms, particularly in as high-profile as the one at the Fed. Maybe it was Bernanke’s academic background that led Perry to suspect Bernanke of being a crypto-liberal Democrat.

But there’s another little matter in Perry’s statement: those words “almost treacherous--or treasonous, in my opinion.” Some would question the wisdom of exciting the fevered brain of some talk-radio-addicted yahoo in a state with laws that look kindly on concealed handguns (like Texas!). Just imagine if said yahoo gets anywhere within the vicinity of Bernanke the next time he appears in the Lone Star State. Better yet, don’t.

But leave aside all of this. If Bernanke’s actions at the Fed are close to “treasonous,” what do you say about a governor who has speculated that his state could legally secede from the Union? That he is unworthy to follow in the footsteps of the first (great) GOP President, who told an audience that “as a nation of freemen we must live for all time, or die by suicide”? That he is summoning a dark past of anti-majoritarianism, recalcitrant racism and endless effusion of blood? That those 19th-century advocates of secession, Confederate Lost Cause mythology to the contrary, were guilty of treason? That thus, even before he can run in a single primary, Governor Perry has called into question whether he intends to fulfill the traditional Presidential inaugural pledge to “preserve, protect and defend the Constitution of the United States“?