Disruptive Donald Balks at the Fed

Modus Operandi: Chaos

When Donald Trump descended that golden escalator over two years ago, he began by tossing grenades at every stronghold of the government establishment.  A sizable enough contingent of the Republican party had decided the system was against them, and someone promising to blow it up had to be better than the status quo.  Disruption of the norm has been a constant in the Trump administration.  Unfortunately, rather than leading to creative destruction, which could be beneficial, mostly what we have gotten is chaos.  The constant threat of a Trump “tweet bomb”, combined with the ongoing Russia investigation, has dissolved what little goodwill was left in  D.C. between the major parties.  Despite the Republicans controlling the White House, and both houses of congress, they have been unable to pass any significant legislation.  But along with executive orders, the president has great power to shape the government through appointments.


Until now, many Trump appointments have been so far outside the norm, they have engendered fear and loathing in the political opposition, and in some cases, alarm among the establishment.  With regard to the opposing party, this isn’t completely abnormal.  The opposing party always attacks certain nominees as unqualified, or too extreme.  But as is often the case with any Trump action, the concept of normal has to be adjusted severely.


The recent nomination for the U.S. Department of Agriculture, Sam Clovis, was a conservative radio talk show host that ran Trump’s Iowa campaign.  This position is usually held by someone with a strong scientific background, which is completely lacking with Clovis (although he has been very vocal in expressing skepticism on climate change).  Incidentally, he has had to withdraw his nomination due to being implicated in the Russia investigation, but he is by no means the only example of an controversial nominee.  The current head of the Environmental Protection Agency, Scott Pruitt, spent most of his time as Attorney General of Oklahoma suing the EPA for what he called an “activist agenda”.  Unsurprisingly, he is also a climate change skeptic.  Hatred of Pruitt by environmentalists is so extreme that he is receiving death threats at a rate 4 to 5 times the norm, and his security detail dwarfs his predecessors.  Rick Perry, former governor of Texas, and a former presidential candidate, once recommended dismantling the Department of Energy.  He now heads the agency, and it was readily apparent that he had no idea what the job entailed.  While not exhaustive, these examples are emblematic of the Trump approach to government.  Many of his nominees are either unqualified, or they have a complete disdain for the agency they were picked to lead.  Which is why the nomination of Jerome Powell for Federal Reserve Chair, while seemingly boring, raises some interesting issues.


Don’t Bite the Hand That Feeds You


I’m pretty sure no U.S. president has ever criticized a Federal Reserve Chairman for keeping interest rates too low.  At least not while in office.  However, before taking office, President Trump stated that Fed Chairwoman Janet Yellen should be “ashamed” of what she’s doing to the country ( Trump: CNBC Yellen ), and implied that keeping rates low was a politically motivated decision designed to benefit President Obama.  He also called the stock market a bubble driven by low interest rates  ( Trump: Market is a Bubble ).  Naturally, he is now touting new record highs in the market as indicative of the efficacy  of his proposed economic policies.


Markets have rocketed higher since the election.  Business and consumer surveys have been manic in anticipation of tax cuts and deregulation, although real data has not been exceptional, and a tax overhaul has not been passed.  But I contend the situation would have been the same with any Republican nominee had they been handed a congress completely controlled by the GOP.  The global economic acceleration since 3Q last year had a part to play as well.  What’s notable here is that despite Trump’s penchant for change, and an expressed belief that easy money has caused long-term damage to the economy, he has acquiesced to the status quo.  The nomination of Jerome Powell for Fed Chairman is not materially different to nominating Yellen to a second term.  Powell voted along with Yellen at every turn.  Certainly, it could be argued that he will take a more hawkish view than Yellen would on future monetary policy, but there’s little evidence to support that.


An easy money policy is almost always the preference of leaders in the short-run, regardless of the long-term problems it may pose.  So Trump’s flip-flop on this issue is not at all surprising.  But besides the obvious issue of possibly promoting another market bubble in the long-run, there are implications for the populist movement Trump has spearheaded.  Trump ran on a demagogic platform that targeted certain scapegoats as the source of economic angst.  Immigrants, corrupt politicians, and “stupid” trade deals were all promoted as the root causes for the economic malaise dubbed “the new normal”.  Arguably, the popularity of Trump and Bernie Sanders, in this last election, was primarily driven by the anxiety of the financial crisis which unfolded in 2008-2009, and the lackluster economic growth in it’s wake.  None of the culprits promoted in Trump’s campaign had anything to do with that.  Financial crises are always a function of too much leverage, which is often exacerbated by lax regulation.  With the nomination of Powell, not only has Trump picked a nominee likely to continue easy money policy, but one who has also shown a desire to loosen banking regulations imposed by Dodd-Frank legislation after the crisis.


Lather, Rinse, Repeat


There are certain human errors that will be invariably repeated.  The policy mistakes that precipitate financial crises fall into this category.  Part of this is ignorance, as new policy makers fail to learn the mistakes of their predecessors.  The other part, which may be more prevalent, is a complete lack of courage.  Neither politicians, nor central bankers care to assign  long-term stability the same importance  as short-term gain.  Even if such a remarkable individual should happen to come to power, it’s unlikely the masses would let them.


The aftermath of financial crises often leaves scars which linger for a generation.  Human nature, being what it is, people will often grasp at whatever remedies seem easiest at the time.  History has shown that right-wing populism gains popularity in the decade after a financial crisis, and those at the bottom of the socioeconomic spectrum are easy prey.  The rhetoric employed by Donald Trump during the presidential campaign last year was right out of the demagogue’s playbook.  But what policies are actually being promoted right now?  We just saw that despite the president being on record (see link above) blasting monetary policy for promoting a bubble, he nominates a man for Fed chairman quite likely to continue the same policies.  And despite corporate profit margins being near record highs ( Record Profit Margins ) Republicans are pushing a corporate tax cut as panacea for systemically weak economic growth.  Total debt to GDP remains at a record high, but it doesn’t feel so onerous, because interest rates are barely off record lows.  Don’t be concerned though, the market loves this!  But I’m starting to think I’ve heard this song before.  More accurately, it’s two songs:  “The Supply Side Revolution”;  and “The Great Moderation”.  A mashup of two of our greatest economic hits!  Two songs which both hit the top of the charts, got played to death, and now we’re sick of hearing them.  But what should we expect? Folks are suckers for nostalgia.  And some lessons never get learned.









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