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History's lesson for you-know-who... but we doubt that he's listening

October 18, 2018

ref :- "Carter's lesson for Trump : keep your hands off the Fed" , Opinion by Stuart Eizenstat,
The Financial Times

 

We love a bit of history... To those who question the value of studying the subject, the standard (and utterly correct) response is that we do so to learn from our mistakes of the past and to avoid making them again in the future. In which case, they might well say, we must be pretty poor students. Fair enough... the human race does indeed make the same mistakes time and again, but we should put that down to the shortcomings of the species rather than history's lack of relevance to the present and the future.

 

It certainly seems pretty relevant right now, as President Trump takes ever more brutal verbal swipes at the course of monetary tightening overseen by the Federal Reserve and its chairman, Jay Powell. Well, he has also just said that he knows a lot more about monetary policy than those put in place to conduct it, so we shouldn't really be surprised. But the markets don't like Mr Trump attempting to politicise the Fed. Recent accepted thinking is that it is imperative that the central bank maintains its independence even if that means putting a lid on things in defiance of a president seemingly intent on growth policies without restraint.

 

The longest-serving Fed chairman of all, William McChesney Martin, famously compared his job to removing the punchbowl just as the party was getting started  --  something akin to what Jay Powell is ever so gently doing now. Mr Martin plainly possessed a nice turn of phrase, but not necessarily the requisite "bottle" to go with it. Mind you, in fairness he was up against President Lyndon Johnson, a renowned bruiser. At the time President Johnson was financing the Vietnam War (for which he was very unpopular) and his "Great Society" domestic reforms (for which he didn't get enough credit), and was unwilling or unable to raise taxes to pay for them. Inflation was climbing sharply, for which the obvious remedy would be to raise interest rates. Now, we know that higher rates are political poison, electorally speaking. Mr Johnson summoned Mr Martin to his Texas ranch, and demanded  --  allegedly with threats of physical violence  -- that under no circumstances should the Fed hike rates. The Fed Chairman acquiesced... and continued to do so long enough for inflation to get out of control.

 

It remained that way under President Nixon, who made things worse with the tactics he employed to win re-election in 1972. He artificially got the inflation numbers briefly back in control by implementing various wage and price control policies, and got the Fed Chairman of the time, Arthur Burns, to stimulate the economy with easy money. Of course, once the election was won the policies were reversed and inflation took off once more.

 

There have been other, less blatant attempts to "influence" the central bank's monetary policy but the unhappy memories of those years mean that by and large it has become accepted that presidents should leave the Fed alone... until now, that is. Given the hugely strong growth in GDP and high levels of employment, it seems only reasonable that the Fed should be acting with an aim to prevent inflation becoming a problem, even if it's not one yet. In the current circumstances, the amount and the rate of tightening is hardly excessive... especially when setting off from such a low level. Not that he will, but Mr Trump should remember that. He should also grasp that it is his hugely stimulative policies (tax cuts, spending) and ramping up of the national debt, at a time when the economy was already going along very nicely, thank you, that has pushed the Fed into taking pre-emptive, anti-inflationary measures.

 

The author of this article, Stuart Eizenstat, was a policy advisor to Jimmy Carter, someone whose presidency has not been treated well by history. Perhaps we should expect Mr Eizenstat to have a more sympathetic view of that time than most. Post-Watergate and amidst all the trauma that resulted from it, the peanut farmer from Georgia stormed from nowhere to the White House largely on the back of NOT being a Republican and NOT being tainted by the sleazy crookedness that Washington had come to represent. It's hard to argue with the assessment that he lacked a number of the attributes required to do the job. But his reputation was holed beneath the waterline by two key factors : the opprobrium that resulted from the catastrophic attempt to rescue American hostages in Teheran (for which a large part of the blame must surely lie with the military), and spiraling inflation (which he inherited from the Nixon / Ford administration).

 

Whatever qualities he may have lacked, few would suggest that Mr Carter did not possess an essential decency about him, possibly unusual in politicians then and now. Or put another way, he was prepared to jeopardise (sacrifice ?) his own political prospects for the greater good  --  in this case, the fight against inflation. Against the advice of many, Mr Carter appointed arch hawk Paul Volcker as Chairman of the Fed knowing full well that his super-tough line on inflation would mean much higher interest rates  --  as we say, effectively political suicide. Fed Fund rates duly rocketed as high as 20%, and Jimmy Carter comprehensively failed to get re-elected. But the battle was being won... the victor of that 1981 election, one Ronald Reagan, inherited a scenario of falling inflation numbers and falling interest rates that helped usher in the period of growth of the Reagan years.

 

Mr Eisenstat's call is for Mr Trump to follow the example of Jimmy Carter and let the Fed get on with its job. We can but hope... but as for the chances of today's president ever taking the high road by sacrificing his own prospects for the greater good should the need arise? Well, that's a bit of a stretch...

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