There are only a few times when the Federal Reserve Board makes a difference. One was in 2008, when the banking system was collapsing.
Ben Bernanke, then the Fed chairman, not only cut interest rates with abandon, he went to the White House and asked President George W. Bush to rescue the banking system (what became known as the TARP).
The banking “bailout” was the single-most unpopular act of Congress in memory. But Bernanke made the case for it. Not because he thought it would make a good sound bite, and not to please his political patrons. Indeed, the TARP ultimately doomed Bernanke’s Republican Party in the fall campaign.
But Bernanke knew it was right. He knew it because he had spent his career, in academia and in government, in the serious study of monetary policy. He knew the Fed had failed to act aggressively during the Great Depression, and he wasn’t going to repeat that mistake.
That snippet of history should be all the U.S. Senate needs to reject Stephen Moore, whom President Trump has nominated for the Federal Reserve. Bernanke was the right expert at the right moment. Moore is not an expert. In fact, he epitomizes Trump’s loathing for experts.
Thursday’s news that Trump means to double down, and also appoint Herman Cain, a pizza magnate and failed presidential contender, to the board should disabuse the Senate of any idea that Moore is simply a one-off. Trump means to remake the 105-year-old agency into a partisan tool.
Moore is a television and op-ed pundit, with a master’s but not a doctoral degree. He has a habit of being wrong on monetary policy. For instance, in 2009, when the economy was in free fall, Moore was telling Glenn Beck that the Fed was creating “hyperinflation,” that dollars “aren’t going to be worth anything.”
With unemployment and home defaults soaring, hyperinflation was the opposite of the risks that the United States faced. The prediction turned out to be flat wrong.
In the past, Moore, a distinguished visiting fellow at the Heritage Foundation, has expressed qualified support for the gold standard. It’s worth noting that Cain is an adamant defender of the gold standard as well. The gold standard is the last refuge of monetary cranks, who define themselves in opposition to expertise.
Rather than have economists make difficult, subjective decisions about the money supply, they want to delegate policy to a totem. Emotionally, they answer to the same urge as Rick Perry, who, as governor of Texas in 2011, warned Bernanke he would be treated “pretty ugly” if the Fed chief ever set foot in his state.
Moore has said that the Federal Reserve Board members — his putative future colleagues — should be “thrown out for economic malpractice.” He singled out the chairman, Jerome H. Powell, for criticism. He said of the institution he now wants to help lead, “The Fed is the swamp.” (That’s from the guy who underpaid his taxes by $75,000.)
There is a long history of demagogues in the United States taking aim at experts. A surprising number have focused on monetary policy. Andrew Jackson, the seventh president, demonized the head of the Second Bank of the United States (the closest the country had in those days to a central bank), and vetoed the renewal of its charter.
The allure of the gold standard today is that it would sideline experts. It would put gold miners in charge, not the Federal Reserve. But the gold supply has very little relation to how much credit the economy needs. There is no science behind it; it is like trusting the economy to religion. In the 1920s, fidelity to the gold standard ruined Britain’s economy, and in the 1930s, residual fidelity to gold worsened the Depression in the United States.
Moore’s suggestion is not quite the gold standard; it is a cousin of the gold standard. He wants the Fed to tie the money supply to commodities prices (a basket of commodities, not just precious metals). This would have a perverse effect on the U.S. economy and on the dollar’s buying power — which statutorily are the Fed’s two concerns.
Commodity prices are volatile. They respond to wars, product disruptions and to mere rumor. They are speculative. Imagine, for a second, tying interest rates to the price of bitcoin. Fixing the money supply to the price of tin is not much better.
Moore’s idea is not new. Among others, Robert E. Hall, of the Hoover Institution, rigorously evaluated it and concluded, “A Commodity Standard Is Not Clearly Superior” to the present system. And that was in 1982, in the midst of the worst decade for central banks in modern times.
In defending his idea, Moore has shown a troubling disregard for facts. In a recent op-ed co-written in the Wall Street Journal, Moore referred to the “commodity-price rule used successfully by former Fed chief Paul Volcker.” To break inflation in the early ‘80s, he said, “Mr. Volcker linked Fed monetary policy to real-time changes in commodity prices.”
This is almost sheer invention. Volcker did raise interest rates — but he had no “commodity-price rule.” I checked Moore’s assertion with Alan Blinder, the former Fed vice chairman. Blinder’s comment: “That must be news to Paul Volcker.”
I checked. Mr. Volcker, gruff-voiced at 91, told me there was no such rule: “Commodity prices were one of many things we looked at.”
The weird thing about commodity-standard and gold-standard bugs (who inevitably invoke the fear of wheelbarrow inflation) is they are prescribing a remedy for a problem that doesn’t exist. Serious inflation in the United States hasn’t been seen in decades. Since World War II, the Fed has had only two troubling failures — the inflation in the 1970s, and the mortgage bubble in the 2000s. Each episode offers further reasons not to confirm Moore and, potentially, Cain.
In the 1970s, inflation got out of hand when the then-Fed chair, Arthur Burns, knuckled under to a first-term president worried about his reelection. Richard Nixon ordered Burns not to allow a recession, even at the risk of stimulating inflation. Burns complied. Nixon won, and inflation soared.
The run-up to the second debacle emerged in the 1990s. The Fed chair then, Alan Greenspan, was — far more than other Fed chiefs — an intensely political operator, who nurtured close relationships with administrations he served. Though not subject to crude Nixonesque (or Trumpesque) bullying, Greenspan was eager to mollify. His mistake was not so much low interest rates as an ideological resistance to regulating mortgages. Greenspan knelt at the altar of growth. Moore describes himself as a growth hawk.
The Senate should find these precedents troubling. Like Nixon, Trump is unhappy with the Fed for raising rates. He has tried to browbeat the Federal Reserve Board into submission through Twitter attacks on the Fed and on Powell, personally.
It’s hard to imagine that, if approved, Moore will be a voice for independence. Moore has pandered to the president by repeating Trump’s criticisms of the Fed. He has groveled to Trump by suggesting he deserves the Nobel Prize. With Arthur Laffer, he has written a fawning book, “Trumponomics.” Moore is also good friends with Larry Kudlow, Trump’s economic adviser.
Moore thus bids to become a new of kind of board member — a presidential lackey. Greg Mankiw, a Harvard economist who had Kudlow’s job in the Bush administration, said, in reviewing “Trumponomics,” that it was written in the voice “of the rah-rah partisan.” Were Trump to fill the board with partisans, the Fed’s prestige would collapse, and so would its ability to implement policy.
With Cain’s pending nomination, the prospect of a politically partisan Fed is no longer remote. Cain is a vocal Trump supporter. He did serve on the Kansas City Federal Reserve. While it’s common for businesspeople untutored in monetary policy to serve on local Feds, the governing board in Washington has been reserved for bankers and economists. Its culture has been nonpartisan. When Bernanke was nominated, most reporters did not know that he was Republican.
Before the Cain bombshell, Mark Gertler, an economist at New York University, emailed the opinion that “Moore is the least qualified Fed nominee I can ever recall.” The point isn’t that Cain might be worse, or equally unqualified. The point is that the Senate must stop Trump from ruining a great and vital institution.
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