Economics

Trump Is Wrong About the Fed, and the Fed Is Wrong About Economics

Milton Friedman once said that "money is much too serious a matter to be left to the central bankers." He was right. Still, we should ensure the Fed isn't being swayed by partisan interests.

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Americans are probably accustomed by now to President Donald Trump lashing out against Federal Reserve Chairman Jerome Powell on Twitter. In one recent tweet, Trump asked his followers which man is America's "bigger enemy": Powell, or Chinese President Xi Jinping. In another tweet, Trump wrote that "China is not our problem….Our problem is with the Fed" and called Powell "clueless."

The Fed's biggest crime, according to Trump, is that Americans would be richer and the economy would grow faster if only Powell would cut interest rates by a full percentage point. After months of resistance, Federal Reserve officials in September announced a reduction of interest rates by a quarter of a point. That wasn't enough for Trump, who now demands that "The Federal Reserve should get our interest rates down to zero, or less" in response to the European Central Bank cutting its rates.

Following these repeated groundless attacks, libertarians and free market conservatives have found themselves jumping to the institution's defense. But when it comes to bad economic thinking, there's plenty of blame to go around.

Take Congress' 1977 amendment to the Federal Reserve Act, which gives the Fed its dual mandate to achieve both price stability and maximum sustainable employment. The first part gives the Fed control of the money supply with the goal of containing inflation and creating stability in the financial system. By most accounts, the body has done a poor job of it. Research suggests this failure has played a role in producing most of the country's severe banking crises, including those in the 1920s, the 1930s, the 1980s, and the 2000s.

In the Fed's defense, the goal itself is ludicrous. Independent or not, the agency has no more ability to determine the correct supply of money than would an agency set up to determine the correct amount of bread or steel. Determining the right supply of money should be left—as it is with other goods—to competitive markets. As F.A. Hayek argued, and as George Mason University economist Larry White and the Cato Institute's George Selgin have shown, the knowledge necessary to determine the appropriate supply of anything, including money, is discovered and revealed only through the competitive market process.

Then there's the Fed's second mandate of boosting employment. This, of course, reflects most politicians' belief that it is the role of the government to create, control, and maximize the number of jobs. Again, the expectation is unrealistic.

The Fed has long relied on the now academically debunked idea that there is a negative relationship between inflation and unemployment (the so-called "Phillips curve"). Yet the agency's own experience belies the notion. Since the 2008 financial crisis, its balance sheet has ballooned from $1 trillion to $4 trillion as it pursued policies of quantitative easing and super-low interest rates. At the same time, it pursued "tightened" money by effectively paying banks not to lend. The result of these contradictory policies was to prolong the recession.

Quantitative easing often leads to higher inflation, making the lives of retirees and others who live on fixed incomes harder by reducing their spending power. Luckily, there has been very little inflation this time around, with the Fed undershooting its 2 percent target. (Turns out social engineering is harder than it seems!) What these policies have done is reduce the return seniors earn from their savings (because of low interest rates) and encourage higher risk taking to compensate for the loss. They've also discouraged saving and investment, leading to reduced capital expenditures and slowing the growth of labor productivity and real output after the recession. Experts seem unsure of the Fed's impact on growth since 2017.

The second part of the dual mandate also encourages presidents to think that the Fed's job is to bail them out when the economy is taking a hit—say, because of destructive trade policies. In a 2014 piece for the Cato Journal, the late Fed historian Allan Meltzer noted that this politicization of the Fed has led it to pursue policies that go against the objective of price stabilization and financial stability.

Milton Friedman once said that "money is much too serious a matter to be left to the central bankers." He was right. But given that we have a Fed, we should at least work to ensure it's not being swayed by political interests.

NEXT: Brickbat: The Last Place You Look

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  1. I don’t know that Trump is “wrong” about the Fed – there’s no reason to believe that Trump believes any of the shit he’s spewing and every reason to believe that he’s merely “playing the refs”. Is Trump correct to believe that he can whine and complain and cry and bitch about “Unfair!” and “Sad!” enough to get the Fed to do what he wants? We shall see, won’t we? We already know there are a lot of people who will make up preposterous arguments as to why Trump is making wise and intelligent and cogent points demonstrating his complete mastery of the subject of economics rather than admitting that Trump is an unprincipled master bullshitter and conman and to the extent he’s right it’s completely by accident.

  2. Sigh….a poorly written screed looking for a central point. Really, a PhD?

    1. Your comment is so much more enlightened and factual. We could all learn a lesson from excellence such as yours.

      1. He is basically right.

        1. Ah yes, the master chimes in, the guy who thinks tariffs are not taxes.

          1. Yup. Tariffs are not taxes because it’s possible to avoid paying tariffs.

            By that reasoning, sales taxes aren’t taxes either because it’s possible to avoid buying things at retail establishments.

            1. Extending that reasoning, income taxes aren’t taxes because it’s possible to have no income. You could, for example, sponge off your parents forever, live off the land, etc.

              Yeah, that line of argument to call tariffs “not taxes” was never defensible.

      2. You probably could = We could all learn a lesson from excellence such as yours.

    2. Dr. de Rugy must be part of the Deep State looking to get cocktail party invitations at Georgetown. Amirite?

  3. Trump asked his followers which man is America’s “bigger enemy”: Powell, or Chinese President Xi Jinping.

    It was a trick question. The answer is Elizabeth Warren.

    1. Naw, that’s the trick answer. The real answer Trump was angling for was “Donald Trump”, because he’s being sarcastic. Trump has never wanted real answers! He always wants fake answers, the better to illustrate his magical questions. 36DD Zen, doncha know.

      1. It was my folly to only go one D deep. I’m still trying to make my mind more limber in the age of Trump. Need copious amounts of brown liquor.

  4. Vero misses some background. The US Crash of 1837 was British capital being pulled from America to finance opium wars to overcome Chinese prohibition, repeated 20 years later. Christ-addled insugencies killed some 20 million in the meantime, and the Boxer revolt rekindled ill-will into the boycott of 1905 which led to the Pure Food law effective 1907 and the TR-Taft push for plant prohibition as of 1909. The revolt of 1911 guaranteed an opium glut, fairly assuring Balkan Wars, possibly WWI. The Fed hardened the US banking system to survive a world war among morphine refining nations.

  5. Of course, one reason those living “on a fixed income” have such a hard time is low interest rates on the bonds they buy.

    Just a technical point: social security is NOT a fixed income, it is adjusted ‘for inflation’ each year. Of course, the inflation rate used excludes housing and fuel because old people do not live in housing or use electricity/fuel oil.

    1. It’s a terrible thing, but it’s good for the market. Millions are now reaching retirement age and interest rates are so low that they’re forcing retirees to enter the market and take risk. This is a time that they should be avoiding risk, but the dividend yield on the S&P 500 is 2%, while the 10 treasury is at 1.8%.

  6. Trump is indeed wrong about the Fed – and Veronique is partially right. When she says “quantitative easing often leads to inflation” – I wonder if she can point to some modern examples. In recent USA history, I think Bernanke was the first to implement QE, which has continued in various ways since. As it was essentially a giant asset swap, it didn’t cause inflation. It should be clear by now that central bankers don’t really have much control over inflation. Japan has been doing their own version of QE for a lot longer than the USA – and they have not experienced high inflation – in fact, they’re struggling against deflation. I would also remind Veronique that the Fed’s role in controlling the money supply is over stated. The primary source of money supply growth is the private banking sector. Loans create deposits. Another important part of the machine is federal deficit spending – a matter of fiscal policy, not monetary policy. The Fed’s does play a role when it buys bonds or other assets from non-banking-system private sector agents.

    1. Feds can control the banking supply by raising interest rates on loans. Why someone would argue for a central entity to do so is beyond me.

      1. The Fed influences interest rates on loans – but even that is over stated. Then there is the basic idea of demand for loans – which is certainly influenced by interest rates, but also influenced by other factors, depending on what else is going on in the economy. The Fed’s QE certainly helped drive down interest rates – but private sector credit growth didn’t spring back to life quickly – and in fact, has trended in a mostly muddle through fashion since the great recession (in aggregrate). Commercial and industrial loan growth trended down from 2015 to 2017, then trended up until early this year – and has been going down since. (Thanks, tariff man.) Take a look at housing start trends. We’re nowhere near the levels from the early 2000’s – to say nothing about being way off from the peak in late 2006. Mortgage rates have NEVER been lower – so this suggests there are more factors than the Fed’s “control” of interest rates or the money supply. More recently, low mortgage rates have sparked refinancing, but not so much for new purchases.

    2. “As it was essentially a giant asset swap, it didn’t cause inflation.”

      This was a big head scratcher to me as well. Not sure why she believes this as she’s usually much stronger on monetary policy issues.

    3. blondrealist: “the Fed’s role in controlling the money supply is over stated. The primary source of money supply growth is the private banking sector. Loans create deposits.”

      This doesn’t seem right to me. Isn’t it a fact that the reason banks can make so many loans is that the Fed covers their balance sheets overnight? It also allows them to have small reserves covering all their liabilities and protects them from risky loans.

    4. the inflation is in paper assets, goofy

  7. This article is…. odd. Most libertarians are against a central banking authority. They would prefer banks act as a market to set baseline rates instead of a central authority. But since Trump is criticizing this authority it seems that Veronica is slightly defending the central group. With a low floor, banks are free to set rates above said floor. This implies the most free market response for central rate setting would be an extremely low floor, which is what Trump asked for. It is akin to neutering the central bank. This should generally be a good thing to a libertarian.

    1. Yes, but you forget: Orange man bad.

    2. Oh so THAT’S why Trump is trying to browbeat the Fed into lowering interest rates. Because he’s totally a libertarian when it comes to central banking. Yup that’s it.

      1. See?

        1. Yup, you nailed it.

          Am I supposed to ignore the REASONS why Trump does something occasionally good?

          I mean, that is what you are mocking with your “Orange Man Bad” meme, right? That some people have the temerity to look a gift horse in the mouth and say “I’m not comfortable with how that gift was obtained”?

          The “gifts” that Trump is bringing, at least as far as libertarian ideas are concerned, come with a lot of costs that too many around here seem completely willing to ignore, just as long as “The Left” is kept at bay.

          I am glad that Trump is doing, accidentally and stupidly, a few occasionally libertarian things. I am not willing to overlook all of the other bullshit and insanity that is associated with Trumpism however.

          1. Berating the FED to lower interest rates thinking it will goose the economy is not a good or libertarian thing to do.

  8. Normal, healthy, mentally sane Americans close their eyes and into their heads pops an image of a gay man thrusting his erect penis in and out of another man’s butthole until he has a pleasurable, shuddering orgasm resulting in the powerful ejaculation of gobs and gobs of HIV infected man cream into the other man’s colon. When they open their eyes, they’re sweating and gag in disgust. Liberal Democrats picture that and think “Aww, what a sweet, healthy, courageous marital act between a husband and a husband!”

    1. People who are averse to TEH GAY have detailed fantasies about gay buttsex. Ok.

      1. It was pretty specific.

        1. Reminds me of Mr. Garrison’s “romance novel” in South Park.

          1. Garrison knows what women want to read.

    2. into their heads pops an image of a gay man thrusting his erect penis in and out of another man’s butthole

      Only when I’m reading about monetary policy, but I acknowledge that I’m atypical in that way.

    3. 1) Why the hell does this have anything at all to with the Fed?
      2) I get you are obviously against same-sex marriage. But, what do you care if 2 consensual adult men have sex in the privacy of their home?
      3) For someone so “disgusted”, you do an awful good job of describing the act!

      1. He’s disgusted by the way the Gays inject those detailed, delicious fantasies into his head against his will. When he comes back to his senses, he’s disgusted, he tells ya, just disgusted!

  9. Luckily, there has been very little inflation this time around, with the Fed undershooting its 2 percent target.

    Inflation is far higher than recorded – but it is selectively slamming the lower incomes and younger age groups. The CPI-W (urban wage earners and clerical) ‘basket of goods’ index for example assumes that ‘shelter’ takes up about 31% of the total basket. Which superficially looks reasonable until you drill down. Because that is composed of an assumption that that is split between 10.9% on rent v 19.5% on ‘owner imputed rent’ (ie homeownership). Not only is that entire ‘owner imputed rent’ a completely bogus concept and number. It also effectively distorts ‘shelter spending’ by pretending that homeowners are actually ‘spending’ more on ‘rent’ when their home prices rise or when renters rent rises when in fact that is a return on SAVINGS NOT spending on rent. AND the implied ‘homeownership % split’ is just a blatant lie – 11% v 19% – (for that CPI-W group) – implies that 63% of the lower incomes (the CPI-W covers roughly the lowest 30% of incomes – and very much excludes the elderly/retirees) are homeowners when that % is only equal now to the average for ALL households in the US. It’s completely laughable that homeownership is now equally spread among all incomes and all ages. Finally, even the superficial look at that 11% should tell anyone that there is a bunch of bullshit going on. I’d guess that there are roughly ZERO lower-wage urban renters who are spending 11% of their income on rent. For renters, that average is now closer to 30-35% – and for the lower income probably closer to 40-45%.

    Those should be separated into entirely different groups – renters v homeowners. Especially since the Fed’s impact on interest rates is ALWAYS specifically intended to assist mortgage lenders and banks (and thus indirectly homeowners). Glomming those two groups together is the worst sort of cronyist monetary policy. The sort of assumption that led to TARP and everything else in our asset bubble world that assumes that what’s good for banks/homeowners is good for everyone else too. so let’s just keep them bubbles inflated and and at all costs never let them deflate/pop.

    1. Yeah it is not great that so much policy is devoted to propping up homeowners, often at the expense of everyone else.

      Just like purchasing power, inflation is a local concept. Too bad we can’t have a more honest discussion about that.

  10. Luckily, there has been very little inflation this time around, with the Fed undershooting its 2 percent target.

    What a strange statement. If the Fed “aims for” 2% inflation, they’ve fucked up by not achieving it. Why isn’t anything other than 2% “unlucky”? Anyway, how can the desired 2% inflation be considered part of a stable monetary system? Doesn’t the Fed appreciate the power of compound interest?

    1. A positive inflation rate is desirable because wage levels are “sticky down”; that is, they move up much more easily than they get cut. Whereas, the theory goes, product and service price levels are much more amenable to fluctuations in other directions. So a very gradual long term inflation helps ease wage pressures.

  11. “He was right. But given that we have a Fed, we should at least work to ensure it’s not being swayed by political interests.”

    Personally I find the notion that it’s possible to have a government agency that is apolitical (free of political interests) to be an absurdity bordering on delusional.

  12. Low interest rates benefit borrowers, with the greatest borrower in the world being Uncle Sam.

    1. Not even close. The biggest dollar creator/borrower is Wall St. Which is probably at close to $400 trillion for stuff like FX contracts, commodity contracts, interest rate and CD swaps, etc. Supposedly those all net out. In reality, you can fucking bet that if they go bad, they will find a way to push the liabilities onto govt and leave themselves with the assets. And in fact, that debt REQUIRES govt debt to serve as collateral. Which is the main reason why Wall St will always support public deficits/debt

      1. Wall St. is not a single entity. The federal government is.

        1. OK. As of 3 years ago – higher now for them all
          Citi – $52 trillion derivatives exposure
          JP Morgan – $51 trillion
          Goldman Sachs – $45 trillion
          Bank America – $36 trillion
          Morgan Stanley – $28 trillion

          Happy now?

          1. Loans create deposits. That’s the biggest piece of new money supply growth. (Conversely, paying off loans destroys money.)

  13. Rand Paul pls give him copy of Man, Economy and State

    Also, Reason painting Friedman as a tough critic of central banks is hilarious

    1. I was laughing at the Friedman nod too, but you have to admit, from an Austrian bent, the article is not too bad. But for whatever reason, Rothbard, bad, Friedman, good around here.

      1. I’m sure it has nothing to do with the Koch money

      2. Austrian is STUPID, as shown below
        https://reason.com/2019/11/19/trump-is-wrong-about-the-fed-and-the-fed-is-wrong-about-economics/#comment-8019104

        Friedman was the first to demolish gold, with a simple question.
        “Which do we want, a stable money supply or stable prices?”
        OBVIOUSLY prices, which gold failed to achieve … for well over a century,

        Ever hear how prices react to the Law of Supply and Demand?
        How ‘ bout the price of … MONEY!

        It’s FRIEDMAN who applies Supply and Demand for money … which the Austrian STILL fail to accept, because they’re still chasing the WRONG goal … stable money supply.

        For over a century, supply of gold FAILED to increase in line with the escalating demand for gold from the Industrial Revolution … even when silver was added. duh. So there was steady DEFLATION for over a century (except the monetary inflation during two wards — 1823 and Civil)

        Which Karl Marx exploited! What does steady deflation do to worker paychecks? THAT is what he called the “exploitation of the working class.”.

        And deflation benefits the rich … who are most able to capitalize on lower prices in the future.

    2. Also, Reason painting Friedman as a tough critic of central banks is hilarious Your ignorance is far more hilarious, As shown here.

      https://reason.com/2019/11/19/trump-is-wrong-about-the-fed-and-the-fed-is-wrong-about-economics/#comment-8019104

  14. The US Crash of 1837 was British capital being pulled from America to finance opium wars to overcome Chinese prohibition, repeated 20 years later. Christ-addled insugencies killed some 20 million in the meantime, and the Boxer revolt rekindled ill-will into the boycott of 1905 which led to the Pure Food law kinmp3 effective 1907 and the TR-Taft push for plant prohibition as of 1909. The revolt of 1911 guaranteed an opium glut, fairly assuring Balkan Wars, possibly WWI.

  15. Berating the FED to lower interest rates thinking it will goose the economy is not a good kinmp3 or libertarian thing to do.

    1. I assume that was satire!

  16. She started with Friedman … then switched to (presumably) Gold Bugs (like idiot Hayek), who Friedman demolished with a single question: Which do we want, a stable money supply or stable prices?

    OBVIOUSLY we cannot have both, due to that pesky Law of Supply and Demand.

    THEN she screwed up the money supply .. with another meaningless soundbite about competitive markets..

    Back to the top ,,, we want stable prices, which gold FAILED to do, but she has no idea how to do it .,… LAW OF SUPPLY AND DEMAND.

    Why did it take Friedman to “discover” that the price of money is determined … like everything else … by THE LAW OF SUPPLY AND DEMAND!

    So … stable prices .. keep the supply of money matched with the demand for money TA DA!

    Hypothetical: Every three months increase or decrease the supply of money … to estimated demand for the next 3 months … then adjust for the demand that was estimated for the prior quarter.

    He may have retained the Fed, but stripped it of its power. SOME entity, or computer, to estimate the demand for money in the near term.

    Supply and Demand balanced = stable currency.

    Milton Friedman once said that “money is much too serious a matter to be left to the central bankers.” He was right. But given that we have a Fed, we should at least work to ensure it’s not being swayed by political interest

    He also showed you how to do it .. for stable prices forever.

    P.S. Gold FAILED at that, as soon as the Industrial Revolution created skyrocketing demand, which the supply of gold FAILED to keep up with … which is why silver was added … when bimetallism failed … for the same reason… THAT was when the central banks appeared. They did not know, then. how to increase money supply faster … and properly … until Friedman “discovered” the Law if Supply and Demand!! Increase the money supply as fast as you want, limited only by the demand for money.

    ZERO politics. Gold would fail, even worse than it did. As WORLDWIDE demand grows much faster now.

  17. “Milton Friedman”

    Would that be the same Milton Friedman whose work conned Thatcher and Reagan into thinking that there was such a thing as Rational Markets (EMT for the Analites), Milton Friedman?

    I wonder what that Crazy cost us, seeing as that that raving lunacy is as the root of the failed Conservatives policies that crashed the global financial system.

    I suggest we dig Milton up to see if was buried with any jewelry that could be sold, with the proceeds used to start paying off his many victims.

    1. For a bit on how the 2007 crash was arguably a result of a deviation from Friedmanite theory:
      https://reason.com/2014/11/20/how-the-fed-got-huge/

      Some conservatives claimed to be in his corner only when it made it easy to create free lunches. Just as Mme. Pelosi shouldn’t be a gospel representative for judicious application of Keynes, post-Keynes, or new-Keynes, I don’t think we should hail Bush or any other conservative as pure disciples of Friedman.

      1. Reason blew it there, as they often do on the economy.
        And on taxes
        And on healthcare.
        Even to REJECTING free-market outcomes.

        Libertarians have long had vastly superior actual policy solutions.
        That would be Pro-Liberty libs (aka Pro-People), NOT Anti-Gummint libs (aka Anti-People)

    2. Kuni,.
      If the Law of Supply and Demand has been repealed, is the Law of Gravity next?

      Considering you’ve posted tribal slogans and soundbites, NOTHING intelligible or of substance, and NO sources … please explain what you’re talking about. With sources.

      Which crisis? In this country, we know President Clinton caused the 2007 crash. Lenders could not meet Clinton’s demands for a substantial increase in subprime mortgages (means more high-risk), and still meet the standards of Freddie Mac … and Freddie Mae (whose bankruptcy was also caused by Clinton.) So Clinton trashed the standards!

      Clinton pressured Fannie Mae to REDUCE their standards, in late 1999 — to guarantee MORE bad loans at even HIGHER RISK … guaranteed by taxpayers! Do the math.

      MINE has proof! It was reported in detail at the time, by those crazed rightwing wackos — the New York Times. I understand you may be wondering … HOW IN HELL could Clinton could cause a crash eight years later.

      (my italics) ”Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

      ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the (far-right) American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

      http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

      See! The NYT and AEI … solid lynch pins on the right AND left .. said Clinton had fucked up bigly.

      So what caused the 80s crash? The CRISIS began years before Reagan took office, caused by Paul Volcker’s and the Fed’s TOTAL failure to deal with double digit INFLATION under Carter … 19% Fed Funds Rate, shortly after Reagan took office) …. On the way to a 70% market crash … BEGAN with 10+% unemployment … and the industrial base on its knees. An entire economy TWICE as bad as Obama inherited … AND a recovery nearly twice as strong as Obama’s.

      That means banks and S&Ls were paying 11-12% interest to depositors, to support fixed-rate mortgages of 7-8.5%. Double digit interest rates did not return to normal until 4 years INTO the Reagan recovery.

      That’s like manufacturing costs of $11.00 …. for a product you cannot sell for more than 8 bucks.

      Your turn. Unless and until you provide details and sources …. without hysteria ….. all we’ve seen (so far) is an …. empty rant. Nothing personal. Most Trumpsters suffer an equivalent level of mind control, along with many libertarians. It’s tribal. ????

      (Reason severely limits the amount of PROOF, to one link per comment, For ANY data listed here, tell me where you’d like to see a link to … an original source.)

      Or any other questions, any at all, on this topic.

  18. Hi5, Mme DeRugy. These dweebs don’t appreciate the nuance you present in regards to DT and the current inevitability of the Fed.

  19. Trump is indeed wrong about the Fed… finally i can laugh.. I never seen any good from Trump this month..
    Kasta QQ | Oh please, stop this mess … We need a new leader for a better future… It must be done!

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