Why Does Anyone Care What Jerome Powell Thinks About the Economy?

“This is the time to use the great fiscal power of the United States to….get through this with as little damage to the longer-run productive capacity of the economy as possible.” – Jerome Powell, in April of 2020

Let’s get it out of the way up front that credit conditions are tight at the moment. The sign of this truth is that interest rates are so low. Think about it, then think about it some more.

The paradoxical truth is that rates are low precisely because credit providers are generally only offering up credit to sure things. Big corporations that have myriad ways of accessing funds can generally borrow at low rates.

Housing too is seen as a low-risk lending concept. Figure that a house can be re-possessed. As much as media figures and pundits want to believe otherwise, most of those “sloppy” loans made leading up to 2008 ultimately performed. That banks were so imperiled way back when is a testament to how little room for error banks leave for themselves. They make loans that they expect will be paid back. Hard as it may be to grasp, low mortgage rates in the present, like the 2000s, were a sign of tight credit. Yes, banks were rushing away from risk.

Important about all of this is that the Federal Reserve can’t alter actual credit truths. The Fed is a rate follower. In moving to zero in March, the Fed was merely parroting what banks were already doing: limiting credit access to surer things. What’s fairly certain is matched with low rates. If credit were easier, banks would pay more for deposits that could be directed toward riskier, higher-rate paying endeavors.

And while it’s a waste of words to write this, an obvious driver of tight credit conditions has been a forced contraction of the U.S. economy by politicians on the local, state and national level. Yes, it’s true. In response to a virus, politicians suffocated that which has slayed all manner of illness and disease over the centuries: economic growth. As always, historians will marvel at the shocking foolishness of the political class.

Which brings us to the Fed’s Chairman, Jerome Powell. Those who choose not to understand economics believe the Fed can rewrite economic reality by fiddling with rates and so-called “money supply.” It can do no such thing. Borrowers of dollars are seeking access to real resources, along with human resources. The Fed can’t engineer easy access to either. Historians will similarly marvel that so many otherwise sentient people bought into the laugh line that the U.S.’s central bank could engineer good times.

Powell has offered up the viewpoint that job cuts by states could further lay a wet blanket on economic recovery. A thoroughgoing Keynesian, Powell views government spending as an economic stimulant. That he does raises some questions.

For one, why is it that Republicans who talk a big game about their deep belief in classical economic theory always appoint Keynesians to top economic positions? Steven Mnuchin plainly believes as Powell does, and then the last Fed Chair appointed by Republicans was Ben Bernanke. Though he politicked around Washington, D.C. and beyond as a supply-sider, and though he found all too many suddenly willing believers in and around the GOP whom he promised access too if confirmed, the reality loudly indicated in his speeches over the years was that Bernanke was similarly a Keynesian thinker. Oh well, some vote for Republicans in the naive hope that they won’t appoint individuals like Mnuchin, Bernanke and Powell.

The other question would be why anyone would care what Powell thinks? Is there some kind of unknown paper trail indicating insightful knowledge of the “economy”? The previous question can be quickly answered: no. Some might respond that Powell has an impressive private equity background, but so does Steven Rattner. So theoretically does Warren Buffett. George Soros is a great investor too. That they’re successful investors doesn’t mean they’re wise when it comes to economic policy. The skills are different.

Some will respond that Powell’s expressions about economic policy spring from the institution that employs more economists than any other in the world. The latter is true, but can anyone point to publications from the Federal Reserve over the years that helped those drowning in way too much free time to actually see around some proverbial corner? Fed economists by their own admission believe economic growth causes inflation, even though all evidence reveals the opposite. They literally think life-ending war stimulates growth because government buys lots of things! It doesn’t occur to them that government spending is a consequence of economic growth, as opposed to a driver.

So Powell and the economists in his employ think more government spending is necessary to keep the economy afloat? Such a view is silly. Governments can once again spend because they have access to the consequences of growth. To pretend that spending the consequence powers more growth is a monument to double counting. Furthermore, it presumes that politicians are better allocators of capital than are investors, and that government gets much more production out of human capital than would private businesses that would employ those who previously worked in government. None of what’s supposed is remotely serious.  

Still, it’s not just that Powell and the Fed turn the basics of growth upside down. The bigger question, at least for the purposes of this write-up, is why anyone would care what Powell thinks? And if the point is that we should care what those who work for Powell think, the response will be the same. If the Fed economists had a clue about what powered economic growth they almost certainly wouldn’t work at the Fed.

The likely answer is that some acknowledge Powell’s expressions as doltish, but the Fed can move markets. The latter is debatable, but even if true, it’s an indictment of government more than it being indicative of Powell’s smarts. We know from his statements that he doesn’t know much about economic growth, so why is someone in possession of such mediocre thought empowered by government in any way at all?