What is the Federal Reserve Endgame?
Suborning the central bank will obviously have implications for monetary policy. But the power that could be exercised via regulatory and supervisory control of the banking system is even greater.
The attacks on Federal Reserve boss Jerome Powell have failed, so far. But this does not seem to have dissuaded administration officials. Adriana Kugler’s term on the Board of Governors was set to expire at the end of January, but she resigned early under mysterious circumstances. Lisa Cook’s term as governor should last until January 31, 2038, but the administration is attempting to fire her “for cause” after digging through her mortgage application history.1
The stated goal is to get “a majority” on the Fed’s Board of Governors, which would then be able to block the reappointment of all twelve presidents of the regional Reserve Banks. If the administration were able to do that—and were able to pick new Reserve Bank presidents by pressuring the independent directors of the reserve banks the way they pressured law firms and universities—they could potentially take over the entire Federal Reserve System.
While that would obviously have implications for monetary policy, the real prize is elsewhere.
Back in May, I had the privilege of attending the Hoover Institution’s annual monetary policy conference. While there were many valuable presentations, the one that stuck with me the most was given by Larry Summers. You can watch it here, starting around 45:30. In particular, I was struck by his warning about the dangers of what could happen if Federal Reserve’s regulatory and supervisory powers were suborned by people who believe that the purpose of government is to reward friends and punish enemies.2
I am going to quote at length from the official transcript (lightly edited, emphasis mine) because his words seem even more important now than then:
I want to say something about a consensus that seems to have emerged over the last 15 or 20 years, that I used to kind of buy into, and now I think might be misguided. And that is that monetary policy and the printing of money, or the setting of interest rates, because of the dynamic consistency problem, is a sacred thing from which independence needs to absolutely be there for the reasons that are commonly talked about. But financial regulation, that’s a political thing that needs to be accountable because it’s just another kind of policy like everything else…Maybe that’s right because there are all kinds of judgments involved in regulation. Maybe that’s right because the dynamic consistency problem that is the core of the case for monetary independence is much more present in that area than it is with respect to regulation, that’s possible.
But when we’ve got a government that extorts institutions, extorts law firms, extorts universities, on occasion, extorts companies entirely lawlessly, and bank regulators have, legally, the power to say “I’m not comfortable with risk controls at your bank, and I think your bank is a threat to fail in a dangerous way,”—so your bank is closed with far fewer safeguards than surrounds what the President of the United States is doing to law firms and to universities—when that power exists, and when leverage brought on financial institutions is basically the power to transfer resources, the power to lend is the power to give.
Anybody who doubted that just needs to consider the PPP program a few years ago. Are we sure that it’s such a great idea to say that it’s really important to ensure that financial regulation is politically responsive? Are we sure that that’s really more important than the monetary dynamic consistency stuff?
I’m not at all sure. There’s been this huge set of repeated demonstrations all over the world that the people hate inflation. And so doing inflationary things isn’t such brilliant short run politics. There are enormously sensitive markets. I’m for monetary policy independence, but gosh, when I think about where the excessive intrusion of politics could do damage, I’m not at all sure that this idea that financial regulation should be politically responsive, but the other stuff should be entirely insulated—because they’re of entirely different magnitude—I’m not sure that I’m completely convinced of that argument.
And so I think all of you, as you reflect on central bank regulation and the structures of central banking and the political institutions surrounding central banking, need to think about kind of a new thing—tyrant risk—as an aspect of the analysis. And I suspect in some contexts, it will drive towards somewhat different conclusions.
This, I believe, is the framework necessary for making sense of the current administration’s attempt to purge the Fed’s leadership. Other motivations are insufficient for explaining the extreme behavior we have witnessed.