Jerome Powell will be a political Fed chair. This is not because Powell, President Donald Trump’s choice to lead the American central bank, has a reputation as an especially fierce partisan. A Republican who served in George H.W. Bush’s Treasury Department, Powell was appointed by President Barack Obama to the Federal Reserve Board of Governors, where he has generally supported the policy initiatives of outgoing Fed Chair Janet Yellen, another Obama appointee.
No, whatever his personal beliefs and allegiances, Powell will be a political chairman because the Fed ― despite its public image as a temple of scientific sterility ― is a political institution. Its management of the economy is a political power derived from the regulation of money, itself an inescapably political substance. In the words of JPMorgan Chase CEO Jamie Dimon: “Governments like to control their currency.” Indeed, they have no choice. Supervision by a sovereign government is what differentiates a currency from a commodity. In the 21st century, a nation that does not control its own money is a vassal of foreign powers. Ask Greece.
Nevertheless, every few months, people who get paid to worry about the Fed start publicly fretting about its independence from American politics. When Trump announced Powell as Yellen’s successor on Thursday, The Wall Street Journal editorial board warned that there were legitimate “questions about Mr. Powell’s independence.” Treasury Secretary Steven Mnuchin had lobbied hard for Powell, with anonymous insiders suggesting to Politico that the Trump administration would be able to “exert some measure of influence” over him. The Washington Post’s Robert Samuelson is concerned that, of the potential nominees under consideration, Powell might have been selected because Trump views him as “the easiest to influence and intimidate.” Sebastian Mallaby of the Council on Foreign Relations doesn’t think Powell has the mettle to “develop a Machiavellian mastery of Washington” and preserve the Fed’s “autonomy” from threats in both the White House and Congress.
The Fed is the most powerful economic entity in the world. By controlling interest rates and regulating banks, it can orchestrate inflation, deflation, employment, unemployment, credit bubbles and bank bailouts. These are never politically neutral maneuvers. What is best for the economy is not a mathematical fact, but a set of judgments about the distribution of social power. Embedded in every claim about the grave importance of central bank independence is the idea that the elected representatives of the American people cannot be trusted to make those judgments. They are feckless halfwits, and it will be best for everyone if the vast power of the central bank is reserved for right-thinking technocrats.
This should horrify people who care about democracy. The problem, of course, is that the president and most members of Congress are feckless halfwits.
People have been arguing about the right degree of democratic accountability at the Fed since before it was founded in 1913. Though it has been reformed several times ― in 1935, 1977 and 2010, each time in the direction of greater public control ― the central bank has worked hand in glove with the executive branch to implement the government’s top policy priorities under a variety of operational structures. Some of these efforts redefined America’s role in the world. World War I, Franklin Delano Roosevelt’s New Deal and World War II were all financed with the help of accommodative policy from the central bank. During the 2008 financial crisis, the Fed deployed trillions of dollars to shore up ailing banks both at home and abroad. In subsequent years, it used trillions more to support the broader economy.
But the relationship between the Fed and the elected government has rarely been a tidy one, and the goals of the executive branch usually involve greater moral complexity than, say, defeating Hitler. When President Lyndon Baines Johnson wanted to run significant deficits to finance the Vietnam War and his Great Society anti-poverty initiatives, he frequently butted heads with his conservative Fed chair, William Martin.
“How can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?” Johnson once roared. “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”
By setting interest rates low, the Fed makes it cheaper for the federal government to borrow money, enabling bigger deficits to fund favored projects, be they wars on poverty or against other people. Low interest rates also make it cheaper for businesses to borrow money to expand their operations, which enables them to hire more workers, reducing unemployment. And politicians figured out a long time ago that low unemployment is good for re-election.
It’s also good for human welfare. But low interest rates come with a hitch. They can, under some conditions, fuel inflation, the chief boogeyman of conservative economists, who are typically hostile to the social spending that low interest rates can facilitate.
For the first 60 or so years of the Fed’s existence, this dynamic was what motivated people to advocate an independent central bank. Fed independence was a way for conservative, Wall Street-allied Republicans to look after the bank accounts of the rich when big-spending liberal Democrats were in power.
That changed when Republicans started winning presidential elections and began to recognize that, just like Democrats, they, too, got a boost at the ballot box from low unemployment. And control of the presidency, Congress, or both gave Republicans an opportunity to look after other elite interests. They could cut taxes, deregulate industries and bail out banks. It turns out these priorities generally matter more to Wall Street Republicans than the threat of inflation, particularly when significant currency inflation just isn’t happening ― which it hasn’t since the 1970s.
Powell hails from this tradition. He’s fine with low rates and low unemployment so long as they generally align with Wall Street’s interests. Where the immediate interests of the public and the banking system conflict ― regulation ― he tends to side with finance.
This puts him squarely in a consensus that runs most of the length of the Democratic Party into even the moderate precincts of the GOP. Democrats surely realize things could’ve been so much worse. Because the Republican Party of 2017. Because the Republican Party of 2017 is home to some absolutely batshit economic ideas.
These did not begin with Donald Trump. In 2011, House Republicans threatened to default on the national debt as a negotiating tactic against tax increases on the wealthy. Wall Street correctly viewed this as an extremely dangerous legislative strategy. Since U.S. Treasury bonds are considered the safest asset in international banking, serving as the benchmark against which all other financial risk is measured, a default would have almost certainly triggered a global financial crisis, as managers and bankers scrambled to revalue and rearrange their holdings. Default would have immediately ended the dollar’s status as a global reserve currency, fundamentally changing America’s role in the global economy in ways impossible to fathom. All of this to avoid a few percentage points on the tax rate for the new income of millionaires. And they came perilously close to the edge ― Republicans didn’t reach a deal with Obama until two days before the default deadline.
Two years later, Republicans intentionally shut down the federal government, convinced that this would somehow magically force Obama to repeal Obamacare, which didn’t happen. They followed this up by threatening to default on the debt again ― a threat made more credible by the fact that, just a few weeks earlier, they had done something politically and economically self-destructive for no reason.
This time around, much of the rank-and-file earnestly believed that warnings about default were a wash of liberal propaganda. Rep. Ted Yoho (R-Fla.) told The Washington Post that a default would actually “bring stability to world markets.” And in his defense, Yoho was channeling the typical GOP voter. According to a Pew survey from October 2013, 54 percent of Republicans thought the government could refuse to raise the debt ceiling ― a move that would instantly force a default ― without creating “major problems.”
Bonkers ideas about banking and finance have spread in Republican circles in the years since. During his 2016 presidential campaign, Sen. Ted Cruz (R-Texas) called for the U.S. to return to the gold standard, a move comparable to the U.S. military saying it would refit active-duty soldiers with bronze armor. Literally no nation on the face of the Earth uses the gold standard. Even conservative economists blame it for the Great Depression.
So, while there remain some Wall Street-aligned Republicans preaching the importance of Fed independence in the name of fighting inflation, today the cause is just as likely to be joined by liberals and Democrats trying to protect the economy from outright madness. Democratic accountability doesn’t sound so great when it means accountability to Cruz, Yoho and Trump.
“We absolutely have to guard this independence,” noted Michigan State economics professor Lisa Cook earlier this year. “That is what has gotten us out of the recession — let’s be clear — because Congress abdicated its responsibility for fiscal stimulus. The Fed has been doing all the heavy lifting getting us out of the recession.”
Cook is basically right about what happened. The Fed’s quantitative easing program, in which the central bank purchased trillions of dollars in bonds to boost the economy, helped make up for the austerity imposed at the state, local and eventually federal levels by a congressional refusal to spend money. But this independence from Congress isn’t political independence. Whatever it does, the Fed is always exercising political power. And this particular form of power ought to frighten a political party named after democracy: a small cadre of technocratic elites imposing their will on the public over the objections of the public’s elected representatives. It sounds like the sort of thing that would lead to plutocratic economic policies. It sounds like plutocracy.
The Democratic Party used to understand the Fed as a power center to be harnessed in pursuit of political goals. In 1977, activist economists and civil rights leaders including Coretta Scott King helped pass the Humphrey-Hawkins Act, which for the first time required the central bank to work toward full employment as a basic function of its operation. Congress forced the Fed to work for social progress. In the intervening four decades, party leaders ― along with establishment Republicans ― have become hypnotized by their fetish for technocracy. They have come to understand not only the Fed, but economic policy itself as a value-neutral mechanism best managed by the precise adjustment of dials and levers. But central banking is fundamentally a matter of political values ― one that can only be settled legitimately through the electoral process.