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The War with the Fed Begins

2017 February 3

As I predicted, the Fed / Trump war has begun (Pdf). (Letter from House Rep. McHenry)

I am writing regarding the Federal Reserve’s continued participation in internal forums on financial regulation. Despite the clear Message delivered by President Donal Trump in prioritizing America’s interests in international negotiations, it appears the Federal Reserve continues negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability or the authority to do so.

This is unacceptable.

The secretive structures of these international forums must also be reevaluated. Agreements like the Basel III Accords were negotiated and agreed to by the Federal Reserve with little notice to the American public, and were the result of an opaque decision-making process.

I have exactly zero sympathy for the Federal Reserve. They have spent 40 years sandbagging US wages and pretending that high unemployment was full employment; deliberately fueling the stock market when it would have fallen otherwise, and when elected parts of the government tried to improve the wages of ordinary people beyond what the Fed thought was acceptable, the Fed would undo what they had done.

Trump and Republicans are not the ones I’d want taking on the Fed, but the Democrats refused to do it. Nor do I agree with McHenry on what the Fed has done wrong (higher capital requirements are good), but I do agree that the Fed has repeatedly overstepped itself and needs to be brought to heel. It’s a pity it will be done by these people for these reasons, but c’est la vie.


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13 Responses leave one →
  1. Richard permalink
    February 3, 2017

    BTW, Trump can replace Yellen as Fed chair next year. Yellen may still stay as a board member, though traditionally, Fed chairs do not.

  2. February 3, 2017

    This seems to be entirely about international cooperations (which have problematic aspects, of course), not about deliberate choking of the US economy through interest hikes designed to block “wage push inflation”. It’s not clear whether this is going to work out to “bringing the Fed to heel” or merely making what it’s currently doing worse in a domain of action other than domestic liquidity.

  3. Tom permalink
    February 3, 2017

    Fire them all, Trump has the Congressional Votes, then replace them with his own Governors.

  4. Ian Welsh permalink*
    February 3, 2017

    The part of the international cooperation he is objecting to is higher capital requirements so that less lending is available.

    While I think that’s a bad idea, it’s clearly about letting banks lend more, which is in Trump’s interest so long as it doesn’t cause another collapse.

  5. Creigh Gordon permalink
    February 3, 2017

    Banks hate increased capital requirements because they directly reduce ROI. Obviously, it also reduces their ability to absorb losses. It has nothing to do with whether they can lend or not, since the Fed always supplies all the money banks could possibly use at its target rate.

  6. Creigh Gordon permalink
    February 3, 2017

    Clarification: Reduced capital requirements reduce the bank’s ability to absorb losses.

  7. February 3, 2017

    Things done for the wrong reason will have bad consequences, one should make Trump the loser – and reform the Fed when in power. The Fed have repeatedly been used to collect Republicans, despite it being the Democrats who actually gave it power – partially because bankers are conservative by nature.

    ( https://symbalitics.blogspot.com/2017/02/love-and-war-10_3.html Love and War 10)

  8. Tom permalink
    February 3, 2017

    @Stirling

    If the right thing is done for the wrong reasons, it is still the right thing to do and will have good consequences.

    Breaking the Fed will allow ordinary Americans to finally break out of the stagnation they have been forced to reside in.

  9. Hugh permalink
    February 3, 2017

    This seems to expose more of the contradictions of the political classes toward the Fed. It is supposed to be independent, as long as it does what is good for banks, the rich, and the elites, as opposed say to what is good for everyone else. “Independent” in political discussions should set off your BS meter as fast as “free” does in economic ones.

    Not that it does, but the Fed is supposed to be the prime regulator of banks and banking. Domestically, this is a joke. Most money creation takes place through the regional Feds, and the regional Feds are straightup private banking cartels. Internationally, the Fed acts as the world’s central bank as the dollar is the world’s reserve currency and Fed policy is used to keep it that way. Since the 2008 meltdown, it has done this primarily through liberalizing its swaps policy, making it easier for other central banks to get their hands on dollars which they can in turn lend out to cover dollar-denominated paper. Overall this lowers costs and allows for increased risk taking.

    Not sure why McHenry should have a hair up his ass about Basel III. In a low interest rate environment, capital requirements seem to me mostly smoke and mirrors.

    As for “transparency” and the Fed, I thought that was more a libertarian issue, but as far as I know McHenry is just your standard pro-bank Republican conservative asshole. Wonder how transparent he is about his campaign finances and who owns him. Hint: the US banks.

    Anyway, I think Ian is right that Trump is bringing all the anti-regulation trolls out of the woodwork and the goal here isn’t about transparency but de-regulation. I say this because Basel III is not a treaty. It is a voluntary framework. And the Fed’s capital requirements were actually higher than those in Basel III for systemically important financial institutions (SIFIs).

  10. Hugh permalink
    February 3, 2017

    And just because I didn’t know where to put it. The economy did not add 227,000 jobs in January. It lost 2.948 million nonfarm jobs (public and private). This is because the economy always loses a huge number of jobs after the Christmas holidays. 2016 was about 130,000 to 140,000 worse though than 2014 and 2015. Private sector jobs lost were 2.407 million, slightly better than 2015 and slightly worse than 2014. In other words, within range.

    It is something that continually pisses me off that the media and politicians treat the seasonally adjusted numbers as real. They aren’t. They represent a smoothing of data/reality and are themselves not indicators but predictions of future economic activity which are then taken as the basis for making predictions about future economic activity.

  11. Ché Pasa permalink
    February 3, 2017

    And the chaos spreads.

    “Let all the poisons that lurk in the mud hatch out.”

  12. Some Guy permalink
    February 4, 2017

    This is a straw in the wind maybe, but not enough to really give us guidance on how the critical showdown on rates is likely to play out. Patience, patience, all will be made clear in time, but this isn’t the time.

  13. RJMeyers permalink
    February 5, 2017

    @Tom

    Only true for a standalone action, not true for a “right” action designed to enable a bunch of “wrong” actions.

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