In a what a reasonable person would consider a rather innocent post on X last weekend, Senator Mike Lee suggested that the Fed, as part of the executive branch, should not have blanket immunity from politics or the U.S. Constitution. Unfortunately, he signed off his post with the hashtag #EndtheFed. Elon Musk emphasized the point by replying “100%.”
Given Musk’s influence with President Trump, the post set off a bit of a firestorm in the financial community as some interpreted his agreement as an indication that President Trump would end the central bank’s independence. Unfortunately, as with many debates surrounding him, any sense of proportionality was soon lost – keeping a close eye on the Fed was quickly thought to be some creeping totalitarianism rather than necessary oversight of its influence outside of the interests of the American people as envisioned by the legislation that created it in 1913.
This is unfortunate for there are few American institutions so powerful yet so opaque. This is not to impugn the motivations of the Fed but rather their utter lack of humility about the vast unintended consequences of their use of the then shiny new toy for central bankers called a quantitative easing (QE) since the start of the Global Financial Crisis in 2008.
Given the fact that the Fed is comprised of a group of political appointees who are not directly accountable to the American people and has the ability to create money out of thin air, such extraordinary measures were only to be used in the context of “exigent circumstances” under the law that created it. Few would claim that the financial crisis in 2008 did not qualify, but too little discussion has been had in Congress, the White House, or the media about the Fed’s expanding remit and its desire to solve all the world’s problems – from social justice to climate change - long after the crisis had passed.
By 2011, there was a growing sense that the nation’s political dysfunction made the Fed “the only game in town” when it came to the economic health of the country. For their part, most politicians were all-too-happy to outsource any high-minded economic obligations to their constituents because their new self-given powers removed any real constraint on their tendency to spend money they don’t have. America’s total outstanding debt was a quaint $10 trillion at the end of 2008 and stands at almost $36 trillion today.
The folly of fixing the price of money for the better part of 13 years became obvious to an institution made up of hundreds of PhDs only after it realized that its primary responsibility – maintaining price stability - was being stymied by a Biden Administration willing to run budget deficits of 7% at full employment.
With the benefit of hindsight, forcefully keeping interest rates low from 2008 through 2021 led to a variety of economic sins and unintended consequences, not the least of which was that the average guy with a savings account received no compensation for his deposits for more than a decade while those wealthy enough to have leveraged investments like private equity reaped untold riches. In what must be seen as a supreme irony that members of the Fed have been loath to admit, such policies unintentionally led to the rise of populism that gave birth to Donald Trump’s extraordinary political career.
Low returns on safe assets also prompted many investors to search for higher yields in dangerous places – financially and geographically. People became accustomed to investing money in places like China with questionable private property rights and a reliable rule of law.
This misallocation of capital also led to a rise in the number of “zombie” companies – those with just enough money to continue operating and to service their debt but not enough to pay off their debt much less grow – siphoning capital away from more fundamentally sound competitors. For many large public companies, the Fed’s reliance on money printing made it easy for companies to generate profits through financial engineering rather than real engineering and capital investments that create real wealth in society.
Compounding the problem has been an unwillingness on the part of both Democrat and Republican administrations to fund our debt at longer maturities. As a result, America’s interest expense has skyrocketed as the Fed was forced to raise rates to combat inflation. Interest costs on America’s debt now exceeds its defense budget and will soon eclipse spending on Medicare as well.
All of this is not to say that the new Trump Administration should not welcome an independent central bank (and all indications are that they will) but that Congress, the media, and the public should stop treating the Fed as some sort of pride of supermen rather than an institution capable of harm and requiring oversight, even if that harm is unintentional. Although it is inconsistent with human nature, Presidents should welcome the existence and respect of a central bank focused on price stability. #EndtheFed may be politically popular in some quarters but would be bad policy. The Fed may not be the administration’s best friend at any given time in the short-term, but it may be its only friend in the end, providing necessary political cover for sound and restrained fiscal policy. Although a longshot, one can only hope that perhaps one day our elected officials might try the simplest and most efficient form of economic policy – free market capitalism.
