Mitchell’s Musings 11-28-16: What Could Possibly Go Wrong?
Daniel J.B. Mitchell
There has been much commentary and controversy about various picks of the incoming Trump administration for top cabinet and other positions. No, I’m not going to offer more comments on those. Nor am I going to rehearse the numerous after-the-fact explanations and criticisms related to the election, polling (mis-)predictions, news media coverage, etc.
There are some things an incoming administration – whatever its ideological leanings – can change quickly and others which take time. Things like Supreme Court appointments take time to go through the Senate approval process. Supreme Court appointments, even when justices are finally seated, take time to have an effect; it takes a while before cases come to them that can alter past judicial directions.
But there is one area in which there can be important impacts quickly and that is at the Federal Reserve. Once approved (there is a Senate vetting process), appointees can quickly change monetary policy (or decide not to change it). Fiscal policy, in contrast, requires legislative approval which generally is an involved process. Thus, in the 2008 financial crisis and its aftermath, the Fed became the prime mover. Congress meanwhile debated whether fiscal stimulus should be applied through tax cuts or through spending (or how much of each) and which taxes or spending projects should be considered. When it came to spending, moreover, it turned out – as it generally does – that the “shovel-ready” projects put forward really weren’t shovel ready but could only gradually (too late?) came into force.
The Fed, as the nation’s central bank, has long been a target of conspiracy theories both of the left and the right. It is, after all, a “bank,” right? Actually, although central banks such as the Bank of England emerged gradually out of commercial banks, in their modern guise, “bank” is a misleading term for central banks. They can’t be appraised on a commercial basis, i.e., are they at risk of bankruptcy? Modern central banks create money. Repeat, modern central banks create money. (See the chart below showing the Fed’s response to the 2008 crisis.) So – absent some artificial legal constraint – they can’t be at risk. The cries to “audit the Fed,” therefore, are at best ambiguous. Audit it for what?
People have trouble wrapping their heads around the idea that the Fed creates money out of nothing. Isn’t money based on something “real”? (No.) Are you saying it’s just a social convention? (Yes.) But don’t people work hard to get it, sometimes cheat or steal or even murder to get it? (Yes.) So how can it not be “real”? (Sorry, but is an “inch” real? It, like the “dollar” is a social convention.)
Put bluntly, there are a lot of wacko ideas about the Fed and putting someone with wacko ideas in positions of authority at the Fed could have very bad consequences. Right now, there are two vacant positions at the Fed and more to come in a year or so including the Fed chair. The wrong folks could do a lot of damage in relatively short order.
It’s true that there are other presidential decisions – particularly in the foreign policy/military area – that could do a lot of damage quickly. But if you are making a list of things that could possibly go wrong, think about putting appointments to the Fed up towards the top.
 Note that the central banks in countries which adopted the euro are no longer central banks in any meaningful sense of that word. They are at best legacy monetary institutions.