Tuesday, May 7, 2019

Trump and the Federal Reserve

Trump and the Federal Reserve

Trump keeps complaining the economy should do better. [as in “Trump frustrated on Fed, oil as he tries to juice economy” Washington Post, May 3, 2019] He thinks lower interest rates than the already low interest rates would pep up the economy and so he nominates two incompetents for Federal Reserve Board posts.

There are many ironies here. First, presidents do not manage the economy, the Federal Reserve does that. Congress sets government spending and taxes and business creates jobs. Presidents can be cheerleaders but remain on the sidelines to a remarkable degree.

Second, work in applied economics at the Federal Reserve requires more study of macro and monetary economics and more experience in application of these specialties than any other jobs in economics. In truth no one should be nominated for the Federal Reserve Board that does not have prior experience in banking and experience as professional staff before moving up through the ranks at headquarters in Washington or the regional banks.

Third, the economy continues to do extremely well by any standards, but especially so given the inequality of income and the dulling effect of two years of Trump tariffs. An economy is nothing but a flow of transactions and interest rates are a policy tool to help maintain that flow and avoid fluctuations in production, income and employment. Since inflation remains remarkably low at less than two percent with an expanding economy and rising employment, we can easily recognize interest rates are at the perfect rate.

Fourth, the two incompetents withdrew after enough Republicans signaled a NO vote. These same Republicans remain silent on Russian Interference in United States Democracy, but they draw the line at incompetents taking over the economy. It’s good to learn a few Senators will not always slobber on Trump; pandering has limits, even for Republicans.

Fifth, in a digital age with excellent economic information and just in time inventory management recessions do not occur by accident. The natural business cycle resulting from fluctuations in production and spending will continue to be mild and the Federal Reserve can deal with business cycles to keep economic fluctuations mild and barely noticeable as the last decade shows.

The 2008-2010 recession was not part of a natural business cycle. The economy collapsed after the banking industry looted the nation’s loanable funds for gambling in home mortgages. By selling and reselling mortgage loans packed as collaterized debt obligations they built a speculative bubble, which collapsed in a rush. It all happened after Congress and Bill Clinton repealed the regulations of the Glass Steagall Banking Act of 1934, thereby eliminating bank and banker restrictions on the use of loanable funds for their own speculative purposes.

Severe recessions like the one in 2008-2010 only occur because those with the power to make the right decision have their own agenda and choose to make the wrong decision. Given the rogues and scoundrels of 2019 it seems quite possible to occur again.

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