By
all accounts, Rex Tillerson has demoralized and degraded the State
Department to the point of uselessness. Tom Price did much the same to
Health and Human Services before jetting off. Scott Pruitt has moved
rapidly to eliminate the “protection” aspect of the Environmental
Protection Agency. And similar stories are unfolding throughout the
executive branch.
Donald
Trump has, in short, been like a Category 5 hurricane sweeping through
the U.S. government, leaving devastation in his wake. And one question I
don’t see being asked often enough is, will the same thing happen to
the Federal Reserve? And if it does, how disastrous will that end up
being for the world economy?
The
Fed, which sets monetary policy, is by far our most important economic
agency; its chairwoman (or chairman) is arguably the most powerful
economic official in the world, more than the president himself. Its
institutional status is peculiar: It isn’t exactly part of the executive
branch, but it isn’t exactly independent, either. Its board members are
appointed by the president subject to congressional approval, but have
traditionally been technocrats expected to distance themselves from
partisan politics.
That is, however, a norm rather than a legal requirement. And we know what tends to happen to norms in the Trump era.
For
more than a decade the Fed chair has been a distinguished academic
economist — first Ben Bernanke, then Janet Yellen. You might wonder how
such people, who have never been in the business world, who have never
met a payroll, would deal with real-world economic problems; the answer,
in both cases: superbly.
In
particular, both Bernanke and Yellen responded effectively to a
once-in-three-generations economic crisis despite constant heckling from
back-seat drivers in Congress and on the political right in general.
And their intellectual and moral courage has been completely vindicated
by events.
Given
this track record, you might expect to see either Yellen reappointed or
an equally qualified technocrat take her place. But remember, we’re
living in the age of Trump, which means that we should actually expect
the worst.
It
seems safe to assume that Trump himself understands nothing about
monetary policy. True, he’s pronounced on the subject fairly often, but not in any coherent way.
One day he praises low interest rates for boosting the economy; the
next he denounces them for hurting the incomes of the middle class. So
trying to guess his Fed choice from his policy views is a mug’s game.
What
he’s more likely to do is what he’s done with many other appointments:
defer to congressional Republican leaders — leaders who, on matters
monetary, have been wrong about everything.
When
the financial crisis struck in 2008, it was essential that the Fed
engage in aggressive monetary expansion — loosely speaking, print lots
of money. There are circumstances in which that kind of action would be
inflationary, but economists (like Bernanke and, well, yours truly) who
had studied the subject understood that this wasn’t one of those times.
Indeed, inflation stayed quiescent even as the Fed quadrupled the monetary base.
But
congressional leaders fought these necessary measures every step of the
way. Most notably, Paul Ryan, who gets his ideas about monetary policy
from Ayn Rand novels, berated Bernanke, claiming that his policies would debase the dollar and lead to runaway inflation.
Writing
with John Taylor, one of the people whose name is being floated as a
possible Fed chairman, Ryan went so far as to suggest that the Fed’s
policies were part of a politically motivated attempt to bail out President Obama’s fiscal policies. And so on.
And
it goes more or less without saying that none of the people who kept
warning that the Fed would cause terrible inflation have admitted having
been wrong, or learned anything from the experience.
What
all this means is that if congressional Republicans play a large role
in selecting the next Fed chair, they’ll insist that it be someone who
has been wrong about everything for the past decade.
Kevin Warsh, a former Fed governor widely considered a favorite for the job, certainly fits the bill. He warned about inflation in the midst of global economic collapse; he argued vigorously
against doing anything, monetary or other, to fight 10 percent
unemployment; he warned that the United States was about to turn into
Greece, Greece I tell you. And he has shown no hint of being chastened by the failure of events to play out the way he expected.
Now,
I don’t know who Trump will actually pick to head the Federal Reserve.
It might actually end up being someone smart, knowledgeable and honest.
Hey, there’s a first time for everything.
But
surely it’s possible, even probable, that the Federal Reserve, like
other government agencies, is about to get Trumpified, that one of
American policy’s last remaining havens of competence and expertise will
soon share in the general degradation. And won’t that be fun when the
next crisis hits?
