The mask is off at the Federal Reserve
Bill Dudley is the former president of the New York Fed and former chief U.S. economist of Goldman Sachs. He got in some hot water Tuesday over a Bloomberg column suggesting that the Fed should maybe deliberately tank the economy to harm President Trump politically. "There’s even an argument that the election itself falls within the Fed’s purview," he wrote. "After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives."
It's a perfect demonstration of what is already obvious: America's central bank, the Federal Reserve, is a highly political institution — its heavily rich-friendly politics are just usually obscured behind a technocratic facade. Recognizing this fact will be key if we want a prosperous future.
Of course, very seldom do former Fed officials come out and say outright that the Fed should start throwing around its power over the money supply. Current Fed chairman Jerome Powell has repeatedly emphasized that his decisions are free from any influence from Trump or any other political factor.
But it is ridiculous on its face to think that top Federal Reserve officials aren't influenced by the president, who appointed Powell, five other members of the Federal Open Market Committee (the FOMC is the Fed's governing body), and has two vacancies left open he could fill. They are certainly paying attention, and the president has many levers aside from tweeting he might use to apply pressure. For instance, in 1972 President Nixon conspired with Alan Greenspan to force then-Fed Chair Arthur Burns to keep the economy running hot — Nixon leaked a fake damaging story to the press, then had Greenspan visit Burns to play good cop and suggest he cooperate — so Nixon could win the election.
However, it is equally ridiculous to think that private businessmen, who elect the remaining five out 12 FOMC seats as presidents of the various regional reserve banks, do not have their own politics. Back in 2011 in the pit of the Great Recession, Fed transcripts reveal several of the regional Fed presidents blaming sky-high unemployment on people's unwillingness to work or stop doing drugs, and worrying about high inflation. Former Citibank executive Dennis Lockhart, then running the Atlanta Reserve Bank, joked that a majority of unemployed didn't realize they couldn't have a day off every week. Conservative economist Charles Plosser passed along a perspective from a McDonald's franchiser who alleged job applicants couldn't read or pass a drug test. All this was basically akin to crying "'Fire, fire!' in Noah's flood."
But probably more important than any direct, mechanical influence is the enormous class and ideological bias that still permeates the Fed and the economics profession as a whole.
For instance, former Fed chairman Janet Yellen is by all accounts a scrupulous professional and a political liberal, not one to scoff at jobless West Virginians. Yet her only major action as Fed chief was to commit a gargantuan policy error that materially harmed the American economy and people. The Fed is supposed to balance inflation and unemployment — not letting prices rise too fast, but neither letting unemployment get too high. Under her leadership, the Fed began raising interest rates in December 2015 (thus slowing the economy by restricting credit), despite the fact that on the one hand, the Fed's favored inflation measure had been under its 2 percent target for all but five months since October 2008, and on the other, one could easily measure enormous lingering economic damage from the 2008 crash.
In other words, there was every sign the economy remained scarred from the Great Recession, and no sign whatsoever that prices would soon start spiraling out of control. In such a situation, holding off on rate hikes until we could see the whites of inflation's eyes — thus signaling that full employment had really been reached — was obviously the right move. Yet Yellen went ahead with hikes, and sure enough, it turns out the economy can handle an unemployment rate fully 1.3 percentage points below where it was in December 2015 without so much of a whisper of inflation, as I and many others predicted at the time. Whoops!
What explains this baffling situation? It's a problem of class ideology. Wealthy people would be harmed if economic stimulus led to inflation (thus eroding their nominal wealth), and more importantly, the capitalist class dislikes the policy steps necessary to fight unemployment, which would erode their political power and strengthen the working class. Therefore they make a great effort to install as conventional wisdom their own narrow self-interest — often doing so unconsciously, as people would naturally prefer to believe whatever they are doing is for the greater good, no matter what it is. As Michał Kalecki famously wrote in his essay on this subject, "obstinate ignorance is usually a manifestation of underlying political motives."
Now, that is not to say that Yellen is some sort of secret agent of the ultra-rich. No doubt she thought she was simply doing the responsible thing — thus revealing one of the great achievements of neoliberalism, which is to smuggle in laissez-faire capitalism under an ostensibly-neutral technocratic framework.
And that brings me back to Bill Dudley. The expressed point of the Fed's so-called "political independence" is to prevent politicians from stoking the economy too hot just before election day, thus causing a never-ending inflation spiral. This was always a fairly silly worry, since average people hate excessive inflation almost as much as they do high unemployment, but we see now the real problem. Trying to "remove central banking from politics" is an a priori impossible task. Efforts to do so only entrench the power of those with political, social, and ideological access to Fed decision-makers — namely, the rich. The situation is even clearer in Europe, where a totally unaccountable European Central Bank has wreaked eye-popping economic devastation across the eurozone.
In a democratic political system, important policy decisions should be made by the people's elected representatives. It may be tempting for progressives for the Fed to turf Trump out of office — especially since he received three million fewer votes than his opponent — but this would set a very troublesome precedent indeed. Dudley bases his case for removing Trump on his trade war with China. An attempt by a President Warren or Sanders to overhaul the global trade regime in a more rational direction — or hike taxes on the banker class — could inspire similar thoughts of insurrection. It's long since time the Fed became just another government department.