Fed Independence: The podcast challenges the notion of Fed independence, arguing that it is more of a political tool used by various factions to suit their agendas rather than a genuine separation from political influence.
Trump's Influence: The discussion highlights former President Trump's attempts to influence the Federal Reserve by trying to remove Fed Governor Lisa Cook, illustrating the ongoing political tug-of-war over the Fed's direction.
Historical Context: The podcast provides a historical perspective, noting that the Fed was not considered independent until the 1951 Treasury-Fed Accord, and even then, its independence is often more theoretical than practical.
Fed Structure: An explanation of the Federal Reserve's structure is provided, emphasizing the roles of the Board of Governors and the Federal Open Market Committee (FOMC), and how the Fed Chair's influence often dictates policy.
Ethics and Precedent: Recent resignations of Fed officials due to ethical breaches are discussed, questioning the precedent of removing Fed officials and the implications for Fed governance.
Monetary Policy Critique: The podcast criticizes the current system where monetary policy is managed by a quasi-independent body, suggesting that it lacks transparency and accountability to the public.
Alternative Views: The podcast entertains the idea that monetary policy might be better managed under direct public authority, as opposed to the current system, which is seen as opaque and unaccountable.
Key Takeaway: The overarching theme is a call to reconsider the structure and role of the Federal Reserve, advocating for either its reform or abolition to better align with democratic principles and economic stability.
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action podcast. Today I am going to be discussing this idea of Fed independence, as I'm sure many of you have seen, that's in the news now, not only because of Trump's long-running feud with Fed Chair Jay Powell, but now more recently, Trump trying to remove Fed Governor Lisa Cook from her position over allegations of uh mortgage fraud, I guess, is how you describe it. and then you know the the ensuing shock and horror from the establishment class over all of this. So let me summarize you know the big picture takeaway here. Yes, I agree with the critics that what Trump is doing is trying to muscle the Fed into doing what Trump wants, what he thinks would be good for his popularity and and so forth. I also agree that what Trump wants the Fed to do is not good economically for the US economy. All right. So, there's that element, too. Like, it's both the means and the ends, I think, are inappropriate. However, where I'm going to not just run with the critics and give them high fives and say, "Oh, yeah, I know this guy trying to violate Fed independence, am I right?" Is that the Fed is not at all independent. This is just a farce. This is it's sort of um analogous maybe to all of the establishment concern over democracy in foreign countries and how anytime there's some government that the US government isn't friendly with, they'll trot out a bunch of human rights abuses and this and that and we can't just stand idly by and that's why we need to go bomb these people. But of course, if there's some other government that is in the interest of the of the US authorities to to do business with them or to, you know, to do deals and whatnot because they are of strategic interest to whatever the ruling elite wants that week, then it doesn't matter if that regime commits all sorts of human rights abuse. In fact, we can be selling them the weapons with which they're violating human rights. No big whoop. Okay? So I'm saying it's the same thing here with this notion of Fed independence that uh actually and that analogy works really well, right? That I can be pointing out the hypocrisy and the crocodile tears and the fact that these people with positions of power and influence, you know, in the in the corporate media world particularly or people who have political uh power using this phrase, they don't really believe it. They don't care about Fed independence. No, they want the Fed to do what they want the Fed to do and they just trot out this notion of Fed independence when that suits their fancy and in other times they wouldn't. Okay. So, for example, um Elizabeth Warren has had a longunning vendetta against Jay Powell and when he came up for to be reappointed as Fed chair under the Biden administration, hang on, let me pause. Part of the irony with all this is that how did Powell become Fed chair in the first place? It was because he was originally nominated for that role by Trump in his first administration. And I think even at one point, I don't have the exact quote, but during Trump's laments over, oh yeah, this guy doesn't know what he's doing. He's too slow to cut. And D, he at one point said something like, "Yeah, I don't know how this guy ever got in that role." Or, you know, how he ever got in that position. And the answer to Trump's sort of rhetorical lament there was because you put him there, sir. Right. So, there's that. This is why this is kind of funny, among other things. But anyway, um the way the Fed pos chair position works is every four years you got to get re-uped for that particular role. And so that him getting reappointed happened under the Biden administration. And at that time, Elizabeth Warren launched a pretty public campaign saying he was dangerous, that he was too um you know, friendly with the big banks and you know was engaging in a deregulatory blitz and all this kind of thing. and she was one of Trump's guys and you couldn't be tr so you know she's allowed to do that as a senator and everything but my point is nobody was saying hey let's tone down the rhetoric here because you know this could really interfere with the Fed's independent scientific management of monetary policy to be calling him dangerous and so isn't that kind of hyperbole and don't no one talk like that all right so my point is is simply that it's these people who can't believe that the US president might occasionally share thoughts about Fed policy and the guy who's at in the helm that you know this is somehow a violation of the separation of powers or the end of the republic that no they wouldn't talk like that when it's a progressive Democrat lamenting that the Fed chair is being too austere and that the Fed cares more about big business and you know Wall Street than it does about the bluecollar worker in Main Street. Nobody that just that that's just Tuesday. Of course, progressive Democrats talk like that all the time. Like, as long as they don't call for literal death threats, that's that's a win. Okay. So, um that's kind of the context here of of what I want to accomplish in this episode. I just want to elaborate on some of these threads. Okay. So, um, the context here, just in case you don't know the particulars, I want you to at least understand on the surface why the critics think this is just open and shut. This is, you know, the f-word, not the short one, the the longer one that has to do with Mussolini, right? That um, for example, they Well, well, let me let me back up. The specific issue is Lisa Cook is on the board of governors and the way the Fed works. And by the way, if you want to see all this spelled out in a nice convenient, snappy form, go to my book, Understanding Money Mechanics, the free PDF the Mises Institute makes available that they they publish the book. So, Robert Murphy understanding money mechanics PDF. You search for that, you're golden. Um, but the way the Fed works is they have the board of governors and that is the group that now meets in Washington and that is the most powerful group pertaining to Fed policy and there's seven of those people and then it was technically what you are is your chair like when we think of who's the Fed chair oh it used to be Bernanki then it was yelling and now it's Powell that's you're the chair of the board of governors because in banking world, the word governor is more impressive than the word president. All right? I don't know why that is, but that just historically that that's been the case, right? That the leader of the bank was governor. And so actually if you look at the the structure of the Federal Reserve system right now, the regional Federal Reserve banks, you know, scattered across the country, the people who are in charge of those individual banks like, you know, the Boston branch or the San Francisco or the Chicago, those people are called presidents. All right? Whereas it's the board of governors is the one that is headquartered in DC. And so again, in that structure, the governors have more power than the presidents do. And um so there's the seven member board of governors and then there's the 12 member federal open market committee. So when you see the periodic press releases and they said ah after a two-day meeting the Federal Reserve decided to keep interest rates steady and blah blah blah and they issued this statement and D and they're watching conditions in the labor market. That's the Federal Open Market Committee that technically votes on Fed policy periodically. Okay. And the so the structure is that the seven member board of governors are always on the FOMC and then the other five is a rotating um sampling of the other regional Fed presidents. Okay. Okay. So, if you're a regional Fed president, but you're not on the board of governors, you occasionally may get to vote on federal on the Federal Open Market Committee in terms of influencing what the Fed's policy is, strictly speaking. You know, you have a vote, but you don't have a permanent vote. Like, you it's just, you know, you you rotate in and out with some of your your colleagues. Okay? Except for the New York Fed, that president is always a voting member, right? in deference to the fact that New York City is the financial center of the US. Okay. The board of governor's positions, they're they're nominated by the president and appointed. Those are 14-year terms and they're non-renewable. Somebody can end up being on the board longer if they were first appointed to fill somebody else's remainder. Right. So Powell himself, I believe I have this right, actually if if he doesn't resign or a drone doesn't take him out ahead of time, I think he will have been on the board of governors something like 16 years give or take because he was originally appointed to fill out I think it was Frederick Michigan had stepped down early and so Powell first was appointed to fill out Michigan's term and then was reappointed, you know, for his own term. It's kind of like with the US president that if you're like the vice president and get sworn in because something happened to the previous guy, you can still do two full terms yourself the way that the rules are right now. It's kind of like that. Okay. So, partly I went on this long detour just to explain the structure and so you can see on paper. Oh, and the other thing, too, is those 14-year terms, they're staggered, right? that in other words, it's not that every 14 years all seven of the board of governor uh members come up, you know, that they have to all step down and so then you completely reshape the board of governors from scratch at that point. Whoever happens to be president and that, you know, the people in the Senate are going to have a lot of power. No, it's they they periodically, you know, reach the end of their 14-year term and so at any given time, you're only replacing 17th of the board membership. Okay? So you can see how it's kind of similar to how the the Senate was structured in the Constitution where there's the six-year terms and they stagger it. So it was like every two years a third of them come up. So again, the point of that is to give some solidity and um you yes, you want there to be accountability that it's not that once people take over the Federal Reserve, nobody can touch them, but on the other hand, the idea was you want to shield them from the short-term political cycle, right? that once you get on there, you're there. I guess another example would be like the Supreme Court, except that's appointment for life. Okay. So, in all that context, now Lisa Cook was appointed under Biden. And so, she's on the board of governors, one of these 14-year, you know, highly powerful um positions. Only seven people are on at any given time. Another element is one of the seven just resigned. I think it was in early August. I think she I don't I I did research, you know, preparing for this. Also, I have an article coming out on this stuff, so that's why some of these details I went and dug up and they're kind of fresh in my mind. um the person who stepped down in August, thus making giving a vacancy already besides the Lisa Cook issue. Um it's I was trying to find out was there something behind the scenes going on cuz that person also I believe was an Obama Yeah, she or sorry not Obama Biden appointee. And so, um, you know, the issue is like that's why people are worried that Trump is right now trying to stack the Fed, right? That's the idea. Kind of like if, oh, you're going to stack the Supreme Court, like if you could get a bunch of justices to to leave during a presidential administration, then he could put all his people in there and really affect Supreme Court policy for the next blah blah blah years. Right? That's kind of the idea here that people are particularly concerned about what Trump's doing because he already gets to fill that vacancy with one of his people that the critics think are is going to be, you know, pro big business, pro the Trump agenda, and they don't like that. All right. And so specifically with Lisa Cook, in case it's not on your radar, you didn't really look into it, the issue is one of the officials running um a housing agency is alleging that Lisa Cook, you know, she's a PhD economist. She's came from academia and she's on the board of governors, one of these roles, and she was only recently put on there, too. So left to her own devices like she would be on there for a long time and so if they could knock her out now that that would be a huge shift in the composition of Fed policy the theory goes or the or the concern goes and so one of so one of you know Trump's subordinates in the executive branch is claiming that she falsified information on her mortgage applications saying that you know she had different residences and she claimed both of um as primary residences, right? When you can only have one primary residence in order to get a better rate or something, right? So, the point is and so the Trump administration's position is Yep. We agree with the critics. This Trump can't just fire somebody at will. You have to have cause, right? That's the the uh both sides stipulate that the Federal Reserve Act when it lays out, you know, what what is the Federal Reserve's composition, how do its officials get placed in the position and so on. Yep. The president has to nominate and the Senate has to confirm these board of governor positions, but the president can't just fire somebody at will, even though he in a sense is necessary for them to get on the board once they are approved and on the board and appointed and take over, you know, start working. the president can't just change his mind and get rid of him. And and again, the that makes sense on paper, right? If the whole point is you want there to be some stability and these people to have a sense of you know it's like getting tenure at a college or something that the the the function of that is you want these professors to be free to teach what they want to teach and not be worried that oh if I get into a dispute with the administration of my college they're just going to let me go and so I better you know make my my teaching reflect those realities right that's the idea so it would kind of defeat the purpose to have these 14-year terms and blah blah if the president could just fire you because you know he has indigestion on Tuesday. Okay. So the Trump administration stipulates, yeah, we agree there has to be cause and there is cause here. This lady is on, you know, the board of the Federal Reserve system and their job is to regulate banks. We can't have somebody in a position like this who we know falsified her mortgage application, you know, to benefit personally. like that's how can we have somebody you know regulating banks who acts like that and and everybody knows it too now. Okay. So the response from the defenders of Cook and really it's not so much the defenders of Cook but enemies of Trump is to say number one this is unprecedented. No president in history has removed a Fed uh board of governors member in this fashion. And two is they say she hasn't even been convicted, right? This is just one of Trump's people saying this. Like maybe she did it, maybe she didn't. And then also they might quibble about like in the grand scheme that come on, this is a minor thing. I think she's claiming that oh yeah, I just I didn't even realize I did that. It was, you know, there's lots of documents you sign when you're getting a house and I didn't I didn't even realize that's what I I had said that. Sorry. I won't do that again. My my mistake. Right. That's what her position is. is. And so they're trying to downplay the severity of it. I'm surprised they haven't linked it to the $500 million lawsuit judgment that Trump got in the New York courts for inflating the value of his Mara Laga properties. You know, that was a whole thing. And you know, Deutsche Bank coming in and say, "Yeah, yeah, we this is standard stuff when you do this kind of And we had our people appraise it that a lot of the same MAGA people who were going nuts over Lisa Cook claiming two homes as primary residence were also, oh come on, Trump exaggerating the value of his Mara properties for, you know, to get a better deal from Deutsche Bank. That's nothing. Come on. I can't believe we're wasting our time with Right. So I'm saying there's it's all all political with a lot of this stuff. But in any event, um, and so I I just I'm surprised I haven't heard people cite that maybe just because their their attention span's so short. But anyway, that's the the argument. So in push back to that, let me ex, you know, from the one hand concede, right? That if you're allowed to do that, even if you think in this case that the guy from the housing administration is telling the truth and she really did knowingly lie on her mortgage application to get a better deal. Still, that precedent is alarming. If if you're concerned about the executive, you know, they can start wars now without congressional approval. They're trying to impose tariffs without congressional say so even though technically isn't aren't tax is supposed to originate in the house and you know that. So anyway um that's the the way this is going in terms of just the standard. Oh yeah the executive branch is trying to get more and more power and doing whatever they can grabbing on any argument that works at the moment. So, I agree with that because whether you think Trump did it in this case down the road, if this thing stands, you could easily imagine a situation where the president wants the Fed to do something presumably act looser, you know, cut interest rates, pump more money in the economy, especially going into election. And they could, if this works, they could just ask one of their people in some regulatory body to just say something about, you know, like in other words, I need I need dirt on this person. Go find something. And they could they could get something. And even if it's tenuous at best if that's enough for the president to fire the person, replace them with somebody else, get the Fed policy they want to get reelected or whatever. And then down the road, what if it turns out that, you know, we looked at this allegation more and that person actually didn't hire a nanny without, you know, going through proper immigration, blah, blah, blah, and getting a green card and all that. And so maybe, you know, it turned out that was a completely bogus allegation and the president should not have and so we're going to reinstate her and put her back on the or him put him back on the uh the Fed board of governors because that was there was no reason to get removed like that. Oh, but the president already got reelected, right? they're not going to have a redo on the election in the scenario I just painted, right? So, there is a lot of danger in that um respect. Okay. What's the other side though? like why you know I' I've tried to steal man the concern and again just like with the foreign policy stuff where the US government if some foreign regime is you know killing civilians and doing crazy stuff and then the US government we can't stand idly by these human rights it's not that I'm in favor what that foreign government's doing I'm just pointing out the hypocrisy so same thing here right I agree with the critics I don't like what Trump is doing with the fed either and him wanting them to lower interest rates and inject more money into the system. As an Austrian libertarian economist, I'm thinking that's bad, right? So, I disagree with the means and the ends, as I've said, but the flip side is a lot of these people who are falling into their swooning couches over this stuff are hypocrites. This is a big farce. Okay. So, one thing is on the narrow claim that, hey, this is unprecedented. There's no time in history where the sitting president has removed um a a member of the board of Fed board of governors, right? But in the not too recent or sorry distant past after co is like 20 late 2021 and 2022 I think is when all three of these examples happened. three Fed officials had to resign because they were caught engaging in stock trades based on, you know, what was unusual Fed policy during the COVID era. And they knew, for example, like like two of the So, the guy specifically, if you want to go look it up, is Richard Clarita, who was not only on the board of governors, he was the vice chair, right? So, he wasn't the chair, but he was the the number two under Powell at the time, right? So, that's a very So, that person was clear the board of governors. And then the other ones were Robert Kaplan and Eric Rosenrren. They were um the presidents of the Dallas and Boston regional banks, Federal Reserve Banks, right? So they weren't occasionally they would be on the FOMC to vote, but they were not on the seven member board of governors. Okay? So it's not completely analogous to the Lisa Cook situation, but it's in the same ballpark. Okay? So again, it's not like I had to go back to 1957 or something. This is within the last what four years. three different Fed officials who one was a per, you know, permanent on the FOMC and two were occasionally on had to resign over ethics allegations because again they the Fed was like, you know, buying huge amounts of mortgage back securities and at least some of the guys they were like investing in REITs and things, you know, personally on their own account with access to inside information that the general public wouldn't have known that they knew because they're sitting on the, you know, in positions of Fed power, right? then you're not supposed to do that. So it's true that Trump or B well I guess it would have been Biden like he didn't No Trump one one of them it would have been when Trump was still I think no oh Biden never mind he didn't fire them they just had the decency to resign when they got caught like oh yeah this this doesn't look good I'm just going to resign okay so you could argue with this the reason Trump had to go this far is because other people in caught in Lisa Cook's position would have just resigned kind. Okay. Like I I don't know enough about the particulars and in the grand scheme, you know, I don't know how common it is for people to lie about primary residences on mortgage applications. All right. So again, you know, I don't know if that's like you got caught doing 75 in a 70 speed limit thing or you ran over a toddler, right? Those are both traffic offenses, but one's a lot worse than the other. So here, yes, I agree. You know, in terms of my gut reaction, getting caught trading on inside information that you have it because you're a Fed official seems more corrupt than somebody lying on a mortgage application. But still, they're both not good looks. And so the again, one counter response to the claim that oh, what Trump's doing is unprecedented is to say what Lisa Cook is doing is unprecedented. that she's forcing the president to have to fire her instead of just having the decency to step down. Right? So, there's that angle. Um, but beyond that though, you can see that something screwy about this whole narrative about the Fed independents and the board of governors and the Sack were saying thing they got their 14-year terms and it and and the reason is the thing that occurred to me as I was doing research on this topic and thinking about it is that why do we care so much about who the chair of the Fed is, right? that on paper the chair of the board of governors or the Federal Reserve just has one vote on the FOMC meetings. So yes, the chair of the board of governors, you know, back it was way back in the day it was, you know, Paul Vulkar and then it was Alen Greenspan and then it was Ben Bernani and Janet Yellen and now Powell that we associate those personalities and names with Fed policy in those years and you might just say, "Oh, it's just cuz the pe the public is lazy and they don't really um you know, they don't the the bandwidth to sit there and keep track of all the different members of the FOMOs. And no, it's more than that. I think it's correct to associate the Federal Reserve's policies in a given tenure with who the chair is at that time because if you look at the voting records, it is very often the case that when the Fed periodically meets and the FOMC votes that they all are unanimous in terms of their decision and then yes, the Fed chair is the is the public face of the Fed. goes out to the press conference and reports, you know, this is what we just decided over the last two-day meeting and blahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahah and and fields questions and whatever and I'm saying if if the votes were all over the place then you might view the fed share as being kind of like a jury foreman, right? Where yeah the when the judge says you know have you guys reached a decision and the foreman says yes we have your honor. We find that whatever or it goes and hands it to him. I forget how it works that there it's not that people think oh the the jury foreman basically can determine whether the guy's guilty or innocent that that no it's I mean there is some discretion there but technically the jury members can do what they want but I'm saying with with the FOMC it's not like that at least in practice because it's almost always unanimous or at best there's one dissenting vote and just to underscore how unusual it is In late July of this year, there were two members of the FOMC who didn't vote along with everybody else. And so they call that a dual disscent, you know, DU disscent, meaning two people dissenting from the consensus. And there were news articles about that like especially like in you know Bloomberg and CNBC where they were talking about that stuff for people who care about you know Fed watchers and and they pointed out that that was the first Fed meeting where there had been a dual descent in over 30 years right the Fed meets periodically every year and they were saying and there's 12 members typically you know there could be vacancies and things but in general it's you know 12 people voting at those FOMC meetings and their point was oh yeah the fact that two people deviated from what the Fed's decision was in late July this year. You have to go back 30 plus years for the last time that's happened. Okay, there have been other meetings where one person dissented, but even that, you know, is kind of unusual and and I, you know, remember there could be like um during the Obama years, you know, when they were doing the rounds of QE, there would be a few lone mavericks who would vote against, you know, continuing QE and they thought, we need we need to get ahead of the curve here and start tightening. And there would be interviews with that person like, "Oh, wow. You're going against Bernani and everybody else on the Fed. Why? What do you think?" Because Bernanki said this. What do you say? And that was a big deal. And so I'm just say like I'm trying to think of an analogy, but it'd be like if in the Senate if it was just almost always votes of 99 to one or 100 to zero and then once the vote was 98-2 on a particular bill and then that was the first time in 30 years that two members of the Senate had voted against their colleagues. That would be kind of weird, right? Like you wouldn't think, oh yes, the way our system works is it's this dispersed system where the the people in each of the 50 states sends their two representatives for the state over to this this uh you know part of the legislature. No, something would be screwy there. And and so likewise here why they call it the federal the Federal Reserve system, why they gave it that name was because they knew in the early 1900s when bankers and certain politicians were plotting behind the scenes to create the Federal Reserve, they knew that we we don't want to just have it be the Bank of America or the Bank of the United States the way earlier incantations or iterations had been called, right? be the way there's the Bank of England, the Bank of Japan and so forth, the Bank of France. The reason they said it's the Federal Reserve system is because they knew Americans do not like centralized power. And so that that was what led oh that's where we're going to have 12 regional banks scattered across the country in all the big cities and that the FOMC has this rotating thing where you know we get input from everybody. you know, even the smaller cities, you know, occasionally their president of their Federal Reserve branch goes and gets to vote on monetary policy. And so that's how we ensure representation from across the country. And it's not just all consolidating in the hands of some dictator run the and again you can see that's that's all a farce because in practice the Fed almost always goes with what the Fed chair wants. And in fact, um, if you go look at the commentary when when Bernani took over from Alen Greenspan, that was part of the issue is that like the way Greenspan ran his meetings is that he would he would speak lat, right? So they'd had the Fed meetings where they were going to eventually vote and the way Greenspan would run the meetings according to the accounts is he'd let everybody else go first and say what they thought and then he would give the final word and that was partly how he maintained discipline like to say this is what okay I've heard input from all you here's what we're doing whereas Bernanki deliberately did it the other way around that Bernanki you know being a college professor and whatever the the story was was more willing to court dissent and you know wanted to encourage a free flowing discussion so we could hear from all viewpoints so he would go first and then let people you know bounce ideas off of what he just said as opposed to trying to give the final word. All right, but even still there even in practice it was still the case that the FOMC under the Bernanki tendership um almost always voted unanimously or at best had one descent or two. Okay. So, but but again, I'm just trying to underscore this idea of like look at how the Fed works and so Trump coming in and trying to muscle in and replace one of these important members of oh gez you're on the board for 14 when that no it it what really matters is who's the chair of the Fed. That's really the issue because everybody else falls in line is the way it works in practice. Okay. Um, also even on its own terms, the Fed was not independent until 1951. Okay? So, if you go look this up at the, you know, Federal Reserve's official website, again, you don't, it's not that you have to go to, uh, the Gword Griffin website to get these details that they won't tell you. No, this is all open stuff that according to the way the Federal Reserve itself explains things, the Fed was totally a dutiful servant of the federal government of the Treasury during the two world wars and that the Fed functioned to monetize government budget deficits to fund the war effort and it didn't during the wars itself lead to out of control price inflation because it they just made it illegal. bill. They had price controls, but then when the wars wrapped up and they lifted the price controls, all of a sudden you had really bad consumer price inflation is that you know as people were legally allowed to raise prices in response to the boatloads of money the Fed had printed to pay for the wars. Okay. And so again, it's a standard history. The if you go look up the Treasury Fed accord of 1951 and look at the entry for that event on the Federal Reserve's own website telling you what went down, then you will see them explain, oh yeah, see what happened is at the end of the world war, second world war, the first 12 month stretch after price inflation, I think it was like 17%, something like that. And then the next 12 months it was like 9.5%. Okay. And so that's when people started thinking, you know, this is kind of crazy. The Federal Reserve really shouldn't be there just as a sidekick to the Treasury just printing money to buy their debt to, you know, to fund their deficits year after year. That's kind of look this is causing a problem. We need to have some independence to separate monetary from fiscal policy. And so that's what these this 1951 accord was was to establish that principle. All right. So again this this idea that you know you may have been led to believe that from the inception the central bank was supposed to be this independent scientifically run thing that had nothing to do with the government's budgetary and and no among other things the central bank is created by central governments to be their banker and to create money for them. Right? That's why governments create central banks in the first place. It's not cuz the politicians are all sitting around lamenting the volatility in GDP growth or you know, oh wow, we have to really smooth out the business cycle here because I care so much about the unemployment. That's that's not why they were central banks are created. And that's not why when Ron Paul says end the Fed, the establishment class goes to war with him is because they're so concerned that the technocrats at MIT and Harvard economics departments no longer can control monetary policy. That's not what's going on. And on that point, I remember it was just it was so funny when Ben Bernani is in power, you know, as Fed chair when the financial crisis hits in 2008. And in October of 2008, that's when the Fed, it already had like the authorizing legislation or whatever the terminology would be in place. the machinery had already been sub to do this, but they hadn't, it wasn't supposed to kick in for a while. They pulled forward the option to begin paying interest on reserves, right? So, so that up till that point, the Federal Reserve, if if commercial banks kept money parked in their reserve accounts with the Fed, they didn't earn any interest on those, right? And so that's why historically in normal times, the banks that kept reserves at the Fed would tend to be what was called fully loaned up. That they would only keep the minimum reserves required. And reserves can either be cash in the vault or balances on deposit with the Fed. that there were back then there were reserve requirements that you know based on how much you had in checking account balances for your own customers you had to have a certain amount of reserves. And so typically banks would only keep the minimum legal amount to satisfy the reserve requirements because they could, you know, intuitively if they create loans elsewhere they earn interest on that whereas they just keep the money parked at the Fed. They don't earn interest on that historically. And so but that changed in October of 2008 when the Fed began paying interest to banks who for the reserves parked with the Fed. And so I remember there were a lot of economists particularly like the ones I follow at the time guys like Scott Sumner whose thesis was the great recession was caused by central banks around the world being too tight. Right? that that's like in other words the reason the global economy was stuck in a rut in late 2008 2009 2010 was because central banks were too stingy and they didn't inflate enough. They were too tight with their policy. Right? Which if you go look at what happened all the central bank balance sheets and interest rates in that period you're like what are you talking about Scott? But that was his view. I'm not here to beat up on Scott right now. Okay. And I remember part of his worldview that just I thought was charming was he was looking at Ben Bernenkei's academic research like talking about you know his his work on the great depression and then some of the stuff I think that you know he was studying what happened with the lost decade in Japan or whatever and according to Bernanki's academic research you would Scott thought what the last thing in the world I would expect him to do is to in paying interest on reserves in October of 2008 when by these various metrics the Fed is being too tight according to Ser and so he couldn't understand why would they and so you know my point was well because the Fed is owned by the private banks and this is a way for the Fed to just give a huge flow of income to the banks now that the financial crisis hit and they got caught with their pants down plus all those emergency lending facilities to prop up the value of so-called toxic assets and everything all to rescue the banks Whereas it, you know, the Fed could have tried to prop up individual homeowners who were underwater on their mortgage. They didn't do that. That'd be socialism. You can't do that. We're in a free market economy. You made a bad decision. You bought a house you couldn't afford. Sorry, but you got to get kicked out. Whereas, oh, you're a big investment bank and you're sitting on a bunch of mortgage back securities. Well, we can't have a fire sale. That could cause contagion. And so the Fed's going to come in and prop up those mortgage back securities to make sure we don't have a domino effect on the financial sector, right? All that stuff. Okay. So anyway, my point here is in case you're losing like like yes, that's interesting, Bob, but what's the point to fit in with the broader discussion here? I'm saying this notion that, oh, we need to insulate the Fed from political considerations and just have these technocrats go over here in the corner and just write out the first order oiler conditions for optimal growth over the next 50 years from the central planners. That's crazy. That's not what happens in practice. Even if you put in a PhD academic like Bernanki into that role, what he's going to do when he's in there is not what his peer-reviewed papers, journal articles said should be done in that situation. He's going to do what rescues the powerful people. So here, you know, talking about Trump and everything, it's it's not the people versus politics. It's certain factions in the banking world versus other factions. Like that's that's what the power struggle is over here. So it's it's not that anybody is going to run the Fed in the proper way for the general welfare because as an Austrian for one thing I would just say the proper thing to do would be to get rid of the Fed. The Fed, you know, it's an engine of inflation that by its very nature is going to spawn business cycles. But but my point is like so the people battling over it that it's not really they don't believe what they're saying to the public like this is all just theater. Okay. Okay. Let me um oh on that point too besides just my anecdotes you can also look at this objectively right in terms of just standard metrics. So, I I brought up this study recently when I was doing my case for repealing the Federal Reserve Act and getting rid of the Fed and so forth here on the Human Action podcast, but again, just to repeat, go look up, it's a great paper. It's George Seljen, Lawrence White, and Strapes. I I've always I know when I get his name right and then I I said it right in the in the zero hedge debate, I I checked. They have a thing. It was coming up on the Fed's 100redy year anniversary. So I think the paper came out in like 2012 or something because the Federal Reserve Act was originally signed in 2013. And so they had that published in the journal of macroeconomics. So it's peer-reviewed standard. Oh, what's the volatility of BIS of GDP or GMPP growth relative to trend during you know the prefed era by any metric GDP growth or GMPP growth was less volatile before the Fed than after the Fed's creation. And big example, the Great Depression happened 15 years after the Fed was inaugurated. Right? So clearly the Great Depression happens on the Fed's watch. Then in the early 2000s in Milton Friedman's 90th birthday party, Ben Bernani says to him at the time he was just on the board of governors, he wasn't chair, Ben Berneni says to Freriedman, you know, he gives us, you know, remarks on the 90th birthday above Milton Friedman and he says because he's sitting right there and I think Anna Schwarz was there too and they they Freriedman and Schwarz had written a monetary history of the United States that blamed the Federal Reserve for the Great Depression. Okay. And so alluding to that work, Bernanki says in the early 2000s, Milton, um, you're right, we did it. Meaning the Fed caused the Great Depression. He said, but thanks to your work, we won't do it again. And right as he was saying that, the Greenspan Fed was inflating the housing bubble. Okay, so that's interesting. Also, too, I don't have time. I'm looking at the clock here. I got to wrap up. There's a funny thing. If you go and look up um Ben Berneni Fed Independence, I think it was in 2010. He was over in Japan, I believe. And so there, you know, he's the chair of the Fed at the time, giving remarks to a bunch of bankers in Japan. And he's explaining why you it's so important to have Fed independence from the political authorities. And he said because if you didn't have that, then, you know, there would be pressure to inflate, you know, to keep the good times going and then that would spawn instability, right? Because you'd have these wild boom bus cycles. Okay? He actually used that phrase that there would be boom bust cycles if you didn't have Fed independence. But thank goodness we do have Fed independence and that's why we don't when obviously if you're familiar with Austrian business cycle theory it's the banking system that causes booms and busts and in particular the central bank knocks down all of the checks that the normal market economy would have on bank credit expansion. So the Federal Reserve in the US context actively exacerbates the boom bust cycle. And again, it's no surprise or coincidence that the worst economic calamity to hit the US happened after the Fed was formed, right? Which again is kind of weird. If the point of the Fed is to smooth out the business cycle, you might not have expected the worst economic crisis in US history to happen after the Fed was formed, but it did. Okay, finally here, let me just quickly play this quote from J. D. Vance. First, I do want to get your response to some breaking news and current events, uh, including President Donald Trump's attempt to fire Lisa Cook from the Federal Reserve's Board of Governors. He says it's over alleged mortgage fraud, but she has not been charged with a crime. Is this about forcing the Fed to cut interest rates? >> Well, a couple things here. So, first of all, I don't think anybody doubts that Lisa Cook committed some mortgage fraud, whether a local authority decides to prosecute or federal authorities prosecute her. Of course, the president doesn't get involved in those decisions, but she made a mistake and she potentially made a criminal mistake. And the question is, do we want a person who makes a mistake like that to be a person who sits on the Federal Reserve Board, which makes important monetary policy for the entire country? I think that position should be held to the highest possible standard. So whether it's criminal, whether it's intentional or not, we know that this is a person I think who doesn't meet the standard that we should expect for the Federal Reserve, which is why the president fired her. And he does have the legal right to fire her. And this goes into a second, I think, a much more fundamental question. Let's just say for the sake of argument that Lisa Cook had done absolutely nothing wrong. Isn't it a little preposterous to say that the president of the United States, the elected president of the United States, working of course in concert with Congress, doesn't have the ability to make these determinations. What people who are saying the president has no authority here, what they're effectively saying is that seven economists and lawyers should be able to make an incredibly critical decision for the American people with no democratic input. Like I thought the people controlled this country. The people made the determinations in this country through their elected representatives, including the president of the United States. I don't think that we allow bureaucrats to sit from on high and make decisions about monetary policy and interest rates without any input from the people that were elected to serve the American people. And I and I think that's fundamentally what this is about. Who makes the decisions about this country? Is it those the American people elect or is it unelected bureaucrats? And I feel very strongly that the president of the United States is much better able to make these determinations. And by the way, if the American people disagree with the president, they of course can throw out the president every four years and and throw in a new president. But you can't say that the American people that the democratic decision-making process has no influence over monetary policy. That's really really I think a an anti-democratic principle. All right. So, we've come full circle here talking now about the, you know, oh, the Trump officials trying to muscle their way in and take and so here again, I understand people who don't like populism and the complaint about Trump sticking his nose in or whatever and the idea that, oh, we're going to have Donald Trump that he knows what interest rates should be. That's crazy, right? I understand that sentiment. And so if you were going to react to that clip that we just played by saying, and that's why Ron Paul is right and the Fed, fair enough. But that's not what the people who were going nuts over that clip are saying. They're saying instead, oh, rather than have the president set interest rates, you should have interest rates set by a board of experts, you know, a lot of PhD economists, they're the ones who should be setting interest. When no, they shouldn't be setting interest rates. So JD Vance is right that bureaucrats shouldn't be doing it. I just disagree with him. when he says the president should be doing it, right? That that's not and and in fairness, JD Vance, he's not saying the president because he's so smart. He's saying because he's there as a representative that was elected by the people, right? And so on that narrow point, I'll just wrap up with this, folks. Uh you may be surprised. We'll we'll link to it. I'll also link to uh my case against the Fed that we made here. But Joe Serno, and I remember when he first made this case years ago, when I when I first became aware of it, maybe he published it a lot sooner, when he was talking about the modern greenbacker movement, he said something along the lines of, you know, given that we're going to have a central bank or or rather, excuse me, given that the federal government is going to be in charge of creating base fiat money, it's arguably better. like it it makes more sense politically but also just in terms of your theory of of how government should work given that it's going to exist that that should be under the control of the public authorities and everybody knows oh yeah the Congress and the president are responsible you know for monetary policy and so if you think there's too much inflation you know who to blame and you can vote them out if push comes to shove and that you know during their campaigns in addition to talking about foreign policy and whatever and what we're going to do with the with the budget deficit that the person running for president would say and also we're going to have you know under my administration the Treasury is going to commit to only printing such and such to keep price inflation with these that yeah that's not a good system. it would be better to have totally free market money in banking. But Joe's point was that's arguably better than the current system. So here I'm I'm just elaborating. I'm not saying Joe made these exact points. But what we have right now is like the worst of both worlds where the Fed is this quasi independent shadowy organization. A point I've made repeatedly in this during these discussions is in late 2008, Bernanki was called before a congressional committee explaining all the extraordinary new lending facilities and blah blah blah and how the just billions and billions of dollars in just a few months had been cycling through these facilities, you know, rolling over short-term loans to big financial institutions. and Congress, you know, somebody asked him, "Chairman Bernani, can you give us a list of who these institutions are that are receiving all these billions of dollars of short-term loans from you?" And he said, "No, I can't give you that list." Because if the public knew an institution had to come to this discount window or this, you know, new facility, term facility, whatever, that would be a signal that they were in trouble and there'd be a run on that bank. And so, no, I'm not going to. And so, just stop and think about that. Bernanke's Fed was creating, you know, boom, $85 billion dollars. AIG, boom. Um, just creating tens and tens of billions of dollars in a few weeks, handing them out to some of them, we learned later, were foreign banks. And it wasn't that Congress had to approve it. They couldn't even get a list of who you giving this money to. billions of dollars flowing around in a matter of weeks and Congress can't even see in real time who you giving this money to. So, if you don't think that's a crazy system, I don't know what to tell you. But certainly don't defend that system because you're worried about checks and balances and, you know, not having politics interfere with public-minded decisions and you need to have scientific management of monetary policy. That's crazy. All right. Well, that's a good place to wrap up in conclusion and the Fed. Thanks everybody. We'll see you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on nieces.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]
Why the Fed Isn’t Really Independent
Summary
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to the Human Action podcast. Today I am going to be discussing this idea of Fed independence, as I'm sure many of you have seen, that's in the news now, not only because of Trump's long-running feud with Fed Chair Jay Powell, but now more recently, Trump trying to remove Fed Governor Lisa Cook from her position over allegations of uh mortgage fraud, I guess, is how you describe it. and then you know the the ensuing shock and horror from the establishment class over all of this. So let me summarize you know the big picture takeaway here. Yes, I agree with the critics that what Trump is doing is trying to muscle the Fed into doing what Trump wants, what he thinks would be good for his popularity and and so forth. I also agree that what Trump wants the Fed to do is not good economically for the US economy. All right. So, there's that element, too. Like, it's both the means and the ends, I think, are inappropriate. However, where I'm going to not just run with the critics and give them high fives and say, "Oh, yeah, I know this guy trying to violate Fed independence, am I right?" Is that the Fed is not at all independent. This is just a farce. This is it's sort of um analogous maybe to all of the establishment concern over democracy in foreign countries and how anytime there's some government that the US government isn't friendly with, they'll trot out a bunch of human rights abuses and this and that and we can't just stand idly by and that's why we need to go bomb these people. But of course, if there's some other government that is in the interest of the of the US authorities to to do business with them or to, you know, to do deals and whatnot because they are of strategic interest to whatever the ruling elite wants that week, then it doesn't matter if that regime commits all sorts of human rights abuse. In fact, we can be selling them the weapons with which they're violating human rights. No big whoop. Okay? So I'm saying it's the same thing here with this notion of Fed independence that uh actually and that analogy works really well, right? That I can be pointing out the hypocrisy and the crocodile tears and the fact that these people with positions of power and influence, you know, in the in the corporate media world particularly or people who have political uh power using this phrase, they don't really believe it. They don't care about Fed independence. No, they want the Fed to do what they want the Fed to do and they just trot out this notion of Fed independence when that suits their fancy and in other times they wouldn't. Okay. So, for example, um Elizabeth Warren has had a longunning vendetta against Jay Powell and when he came up for to be reappointed as Fed chair under the Biden administration, hang on, let me pause. Part of the irony with all this is that how did Powell become Fed chair in the first place? It was because he was originally nominated for that role by Trump in his first administration. And I think even at one point, I don't have the exact quote, but during Trump's laments over, oh yeah, this guy doesn't know what he's doing. He's too slow to cut. And D, he at one point said something like, "Yeah, I don't know how this guy ever got in that role." Or, you know, how he ever got in that position. And the answer to Trump's sort of rhetorical lament there was because you put him there, sir. Right. So, there's that. This is why this is kind of funny, among other things. But anyway, um the way the Fed pos chair position works is every four years you got to get re-uped for that particular role. And so that him getting reappointed happened under the Biden administration. And at that time, Elizabeth Warren launched a pretty public campaign saying he was dangerous, that he was too um you know, friendly with the big banks and you know was engaging in a deregulatory blitz and all this kind of thing. and she was one of Trump's guys and you couldn't be tr so you know she's allowed to do that as a senator and everything but my point is nobody was saying hey let's tone down the rhetoric here because you know this could really interfere with the Fed's independent scientific management of monetary policy to be calling him dangerous and so isn't that kind of hyperbole and don't no one talk like that all right so my point is is simply that it's these people who can't believe that the US president might occasionally share thoughts about Fed policy and the guy who's at in the helm that you know this is somehow a violation of the separation of powers or the end of the republic that no they wouldn't talk like that when it's a progressive Democrat lamenting that the Fed chair is being too austere and that the Fed cares more about big business and you know Wall Street than it does about the bluecollar worker in Main Street. Nobody that just that that's just Tuesday. Of course, progressive Democrats talk like that all the time. Like, as long as they don't call for literal death threats, that's that's a win. Okay. So, um that's kind of the context here of of what I want to accomplish in this episode. I just want to elaborate on some of these threads. Okay. So, um, the context here, just in case you don't know the particulars, I want you to at least understand on the surface why the critics think this is just open and shut. This is, you know, the f-word, not the short one, the the longer one that has to do with Mussolini, right? That um, for example, they Well, well, let me let me back up. The specific issue is Lisa Cook is on the board of governors and the way the Fed works. And by the way, if you want to see all this spelled out in a nice convenient, snappy form, go to my book, Understanding Money Mechanics, the free PDF the Mises Institute makes available that they they publish the book. So, Robert Murphy understanding money mechanics PDF. You search for that, you're golden. Um, but the way the Fed works is they have the board of governors and that is the group that now meets in Washington and that is the most powerful group pertaining to Fed policy and there's seven of those people and then it was technically what you are is your chair like when we think of who's the Fed chair oh it used to be Bernanki then it was yelling and now it's Powell that's you're the chair of the board of governors because in banking world, the word governor is more impressive than the word president. All right? I don't know why that is, but that just historically that that's been the case, right? That the leader of the bank was governor. And so actually if you look at the the structure of the Federal Reserve system right now, the regional Federal Reserve banks, you know, scattered across the country, the people who are in charge of those individual banks like, you know, the Boston branch or the San Francisco or the Chicago, those people are called presidents. All right? Whereas it's the board of governors is the one that is headquartered in DC. And so again, in that structure, the governors have more power than the presidents do. And um so there's the seven member board of governors and then there's the 12 member federal open market committee. So when you see the periodic press releases and they said ah after a two-day meeting the Federal Reserve decided to keep interest rates steady and blah blah blah and they issued this statement and D and they're watching conditions in the labor market. That's the Federal Open Market Committee that technically votes on Fed policy periodically. Okay. And the so the structure is that the seven member board of governors are always on the FOMC and then the other five is a rotating um sampling of the other regional Fed presidents. Okay. Okay. So, if you're a regional Fed president, but you're not on the board of governors, you occasionally may get to vote on federal on the Federal Open Market Committee in terms of influencing what the Fed's policy is, strictly speaking. You know, you have a vote, but you don't have a permanent vote. Like, you it's just, you know, you you rotate in and out with some of your your colleagues. Okay? Except for the New York Fed, that president is always a voting member, right? in deference to the fact that New York City is the financial center of the US. Okay. The board of governor's positions, they're they're nominated by the president and appointed. Those are 14-year terms and they're non-renewable. Somebody can end up being on the board longer if they were first appointed to fill somebody else's remainder. Right. So Powell himself, I believe I have this right, actually if if he doesn't resign or a drone doesn't take him out ahead of time, I think he will have been on the board of governors something like 16 years give or take because he was originally appointed to fill out I think it was Frederick Michigan had stepped down early and so Powell first was appointed to fill out Michigan's term and then was reappointed, you know, for his own term. It's kind of like with the US president that if you're like the vice president and get sworn in because something happened to the previous guy, you can still do two full terms yourself the way that the rules are right now. It's kind of like that. Okay. So, partly I went on this long detour just to explain the structure and so you can see on paper. Oh, and the other thing, too, is those 14-year terms, they're staggered, right? that in other words, it's not that every 14 years all seven of the board of governor uh members come up, you know, that they have to all step down and so then you completely reshape the board of governors from scratch at that point. Whoever happens to be president and that, you know, the people in the Senate are going to have a lot of power. No, it's they they periodically, you know, reach the end of their 14-year term and so at any given time, you're only replacing 17th of the board membership. Okay? So you can see how it's kind of similar to how the the Senate was structured in the Constitution where there's the six-year terms and they stagger it. So it was like every two years a third of them come up. So again, the point of that is to give some solidity and um you yes, you want there to be accountability that it's not that once people take over the Federal Reserve, nobody can touch them, but on the other hand, the idea was you want to shield them from the short-term political cycle, right? that once you get on there, you're there. I guess another example would be like the Supreme Court, except that's appointment for life. Okay. So, in all that context, now Lisa Cook was appointed under Biden. And so, she's on the board of governors, one of these 14-year, you know, highly powerful um positions. Only seven people are on at any given time. Another element is one of the seven just resigned. I think it was in early August. I think she I don't I I did research, you know, preparing for this. Also, I have an article coming out on this stuff, so that's why some of these details I went and dug up and they're kind of fresh in my mind. um the person who stepped down in August, thus making giving a vacancy already besides the Lisa Cook issue. Um it's I was trying to find out was there something behind the scenes going on cuz that person also I believe was an Obama Yeah, she or sorry not Obama Biden appointee. And so, um, you know, the issue is like that's why people are worried that Trump is right now trying to stack the Fed, right? That's the idea. Kind of like if, oh, you're going to stack the Supreme Court, like if you could get a bunch of justices to to leave during a presidential administration, then he could put all his people in there and really affect Supreme Court policy for the next blah blah blah years. Right? That's kind of the idea here that people are particularly concerned about what Trump's doing because he already gets to fill that vacancy with one of his people that the critics think are is going to be, you know, pro big business, pro the Trump agenda, and they don't like that. All right. And so specifically with Lisa Cook, in case it's not on your radar, you didn't really look into it, the issue is one of the officials running um a housing agency is alleging that Lisa Cook, you know, she's a PhD economist. She's came from academia and she's on the board of governors, one of these roles, and she was only recently put on there, too. So left to her own devices like she would be on there for a long time and so if they could knock her out now that that would be a huge shift in the composition of Fed policy the theory goes or the or the concern goes and so one of so one of you know Trump's subordinates in the executive branch is claiming that she falsified information on her mortgage applications saying that you know she had different residences and she claimed both of um as primary residences, right? When you can only have one primary residence in order to get a better rate or something, right? So, the point is and so the Trump administration's position is Yep. We agree with the critics. This Trump can't just fire somebody at will. You have to have cause, right? That's the the uh both sides stipulate that the Federal Reserve Act when it lays out, you know, what what is the Federal Reserve's composition, how do its officials get placed in the position and so on. Yep. The president has to nominate and the Senate has to confirm these board of governor positions, but the president can't just fire somebody at will, even though he in a sense is necessary for them to get on the board once they are approved and on the board and appointed and take over, you know, start working. the president can't just change his mind and get rid of him. And and again, the that makes sense on paper, right? If the whole point is you want there to be some stability and these people to have a sense of you know it's like getting tenure at a college or something that the the the function of that is you want these professors to be free to teach what they want to teach and not be worried that oh if I get into a dispute with the administration of my college they're just going to let me go and so I better you know make my my teaching reflect those realities right that's the idea so it would kind of defeat the purpose to have these 14-year terms and blah blah if the president could just fire you because you know he has indigestion on Tuesday. Okay. So the Trump administration stipulates, yeah, we agree there has to be cause and there is cause here. This lady is on, you know, the board of the Federal Reserve system and their job is to regulate banks. We can't have somebody in a position like this who we know falsified her mortgage application, you know, to benefit personally. like that's how can we have somebody you know regulating banks who acts like that and and everybody knows it too now. Okay. So the response from the defenders of Cook and really it's not so much the defenders of Cook but enemies of Trump is to say number one this is unprecedented. No president in history has removed a Fed uh board of governors member in this fashion. And two is they say she hasn't even been convicted, right? This is just one of Trump's people saying this. Like maybe she did it, maybe she didn't. And then also they might quibble about like in the grand scheme that come on, this is a minor thing. I think she's claiming that oh yeah, I just I didn't even realize I did that. It was, you know, there's lots of documents you sign when you're getting a house and I didn't I didn't even realize that's what I I had said that. Sorry. I won't do that again. My my mistake. Right. That's what her position is. is. And so they're trying to downplay the severity of it. I'm surprised they haven't linked it to the $500 million lawsuit judgment that Trump got in the New York courts for inflating the value of his Mara Laga properties. You know, that was a whole thing. And you know, Deutsche Bank coming in and say, "Yeah, yeah, we this is standard stuff when you do this kind of And we had our people appraise it that a lot of the same MAGA people who were going nuts over Lisa Cook claiming two homes as primary residence were also, oh come on, Trump exaggerating the value of his Mara properties for, you know, to get a better deal from Deutsche Bank. That's nothing. Come on. I can't believe we're wasting our time with Right. So I'm saying there's it's all all political with a lot of this stuff. But in any event, um, and so I I just I'm surprised I haven't heard people cite that maybe just because their their attention span's so short. But anyway, that's the the argument. So in push back to that, let me ex, you know, from the one hand concede, right? That if you're allowed to do that, even if you think in this case that the guy from the housing administration is telling the truth and she really did knowingly lie on her mortgage application to get a better deal. Still, that precedent is alarming. If if you're concerned about the executive, you know, they can start wars now without congressional approval. They're trying to impose tariffs without congressional say so even though technically isn't aren't tax is supposed to originate in the house and you know that. So anyway um that's the the way this is going in terms of just the standard. Oh yeah the executive branch is trying to get more and more power and doing whatever they can grabbing on any argument that works at the moment. So, I agree with that because whether you think Trump did it in this case down the road, if this thing stands, you could easily imagine a situation where the president wants the Fed to do something presumably act looser, you know, cut interest rates, pump more money in the economy, especially going into election. And they could, if this works, they could just ask one of their people in some regulatory body to just say something about, you know, like in other words, I need I need dirt on this person. Go find something. And they could they could get something. And even if it's tenuous at best if that's enough for the president to fire the person, replace them with somebody else, get the Fed policy they want to get reelected or whatever. And then down the road, what if it turns out that, you know, we looked at this allegation more and that person actually didn't hire a nanny without, you know, going through proper immigration, blah, blah, blah, and getting a green card and all that. And so maybe, you know, it turned out that was a completely bogus allegation and the president should not have and so we're going to reinstate her and put her back on the or him put him back on the uh the Fed board of governors because that was there was no reason to get removed like that. Oh, but the president already got reelected, right? they're not going to have a redo on the election in the scenario I just painted, right? So, there is a lot of danger in that um respect. Okay. What's the other side though? like why you know I' I've tried to steal man the concern and again just like with the foreign policy stuff where the US government if some foreign regime is you know killing civilians and doing crazy stuff and then the US government we can't stand idly by these human rights it's not that I'm in favor what that foreign government's doing I'm just pointing out the hypocrisy so same thing here right I agree with the critics I don't like what Trump is doing with the fed either and him wanting them to lower interest rates and inject more money into the system. As an Austrian libertarian economist, I'm thinking that's bad, right? So, I disagree with the means and the ends, as I've said, but the flip side is a lot of these people who are falling into their swooning couches over this stuff are hypocrites. This is a big farce. Okay. So, one thing is on the narrow claim that, hey, this is unprecedented. There's no time in history where the sitting president has removed um a a member of the board of Fed board of governors, right? But in the not too recent or sorry distant past after co is like 20 late 2021 and 2022 I think is when all three of these examples happened. three Fed officials had to resign because they were caught engaging in stock trades based on, you know, what was unusual Fed policy during the COVID era. And they knew, for example, like like two of the So, the guy specifically, if you want to go look it up, is Richard Clarita, who was not only on the board of governors, he was the vice chair, right? So, he wasn't the chair, but he was the the number two under Powell at the time, right? So, that's a very So, that person was clear the board of governors. And then the other ones were Robert Kaplan and Eric Rosenrren. They were um the presidents of the Dallas and Boston regional banks, Federal Reserve Banks, right? So they weren't occasionally they would be on the FOMC to vote, but they were not on the seven member board of governors. Okay? So it's not completely analogous to the Lisa Cook situation, but it's in the same ballpark. Okay? So again, it's not like I had to go back to 1957 or something. This is within the last what four years. three different Fed officials who one was a per, you know, permanent on the FOMC and two were occasionally on had to resign over ethics allegations because again they the Fed was like, you know, buying huge amounts of mortgage back securities and at least some of the guys they were like investing in REITs and things, you know, personally on their own account with access to inside information that the general public wouldn't have known that they knew because they're sitting on the, you know, in positions of Fed power, right? then you're not supposed to do that. So it's true that Trump or B well I guess it would have been Biden like he didn't No Trump one one of them it would have been when Trump was still I think no oh Biden never mind he didn't fire them they just had the decency to resign when they got caught like oh yeah this this doesn't look good I'm just going to resign okay so you could argue with this the reason Trump had to go this far is because other people in caught in Lisa Cook's position would have just resigned kind. Okay. Like I I don't know enough about the particulars and in the grand scheme, you know, I don't know how common it is for people to lie about primary residences on mortgage applications. All right. So again, you know, I don't know if that's like you got caught doing 75 in a 70 speed limit thing or you ran over a toddler, right? Those are both traffic offenses, but one's a lot worse than the other. So here, yes, I agree. You know, in terms of my gut reaction, getting caught trading on inside information that you have it because you're a Fed official seems more corrupt than somebody lying on a mortgage application. But still, they're both not good looks. And so the again, one counter response to the claim that oh, what Trump's doing is unprecedented is to say what Lisa Cook is doing is unprecedented. that she's forcing the president to have to fire her instead of just having the decency to step down. Right? So, there's that angle. Um, but beyond that though, you can see that something screwy about this whole narrative about the Fed independents and the board of governors and the Sack were saying thing they got their 14-year terms and it and and the reason is the thing that occurred to me as I was doing research on this topic and thinking about it is that why do we care so much about who the chair of the Fed is, right? that on paper the chair of the board of governors or the Federal Reserve just has one vote on the FOMC meetings. So yes, the chair of the board of governors, you know, back it was way back in the day it was, you know, Paul Vulkar and then it was Alen Greenspan and then it was Ben Bernani and Janet Yellen and now Powell that we associate those personalities and names with Fed policy in those years and you might just say, "Oh, it's just cuz the pe the public is lazy and they don't really um you know, they don't the the bandwidth to sit there and keep track of all the different members of the FOMOs. And no, it's more than that. I think it's correct to associate the Federal Reserve's policies in a given tenure with who the chair is at that time because if you look at the voting records, it is very often the case that when the Fed periodically meets and the FOMC votes that they all are unanimous in terms of their decision and then yes, the Fed chair is the is the public face of the Fed. goes out to the press conference and reports, you know, this is what we just decided over the last two-day meeting and blahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahah and and fields questions and whatever and I'm saying if if the votes were all over the place then you might view the fed share as being kind of like a jury foreman, right? Where yeah the when the judge says you know have you guys reached a decision and the foreman says yes we have your honor. We find that whatever or it goes and hands it to him. I forget how it works that there it's not that people think oh the the jury foreman basically can determine whether the guy's guilty or innocent that that no it's I mean there is some discretion there but technically the jury members can do what they want but I'm saying with with the FOMC it's not like that at least in practice because it's almost always unanimous or at best there's one dissenting vote and just to underscore how unusual it is In late July of this year, there were two members of the FOMC who didn't vote along with everybody else. And so they call that a dual disscent, you know, DU disscent, meaning two people dissenting from the consensus. And there were news articles about that like especially like in you know Bloomberg and CNBC where they were talking about that stuff for people who care about you know Fed watchers and and they pointed out that that was the first Fed meeting where there had been a dual descent in over 30 years right the Fed meets periodically every year and they were saying and there's 12 members typically you know there could be vacancies and things but in general it's you know 12 people voting at those FOMC meetings and their point was oh yeah the fact that two people deviated from what the Fed's decision was in late July this year. You have to go back 30 plus years for the last time that's happened. Okay, there have been other meetings where one person dissented, but even that, you know, is kind of unusual and and I, you know, remember there could be like um during the Obama years, you know, when they were doing the rounds of QE, there would be a few lone mavericks who would vote against, you know, continuing QE and they thought, we need we need to get ahead of the curve here and start tightening. And there would be interviews with that person like, "Oh, wow. You're going against Bernani and everybody else on the Fed. Why? What do you think?" Because Bernanki said this. What do you say? And that was a big deal. And so I'm just say like I'm trying to think of an analogy, but it'd be like if in the Senate if it was just almost always votes of 99 to one or 100 to zero and then once the vote was 98-2 on a particular bill and then that was the first time in 30 years that two members of the Senate had voted against their colleagues. That would be kind of weird, right? Like you wouldn't think, oh yes, the way our system works is it's this dispersed system where the the people in each of the 50 states sends their two representatives for the state over to this this uh you know part of the legislature. No, something would be screwy there. And and so likewise here why they call it the federal the Federal Reserve system, why they gave it that name was because they knew in the early 1900s when bankers and certain politicians were plotting behind the scenes to create the Federal Reserve, they knew that we we don't want to just have it be the Bank of America or the Bank of the United States the way earlier incantations or iterations had been called, right? be the way there's the Bank of England, the Bank of Japan and so forth, the Bank of France. The reason they said it's the Federal Reserve system is because they knew Americans do not like centralized power. And so that that was what led oh that's where we're going to have 12 regional banks scattered across the country in all the big cities and that the FOMC has this rotating thing where you know we get input from everybody. you know, even the smaller cities, you know, occasionally their president of their Federal Reserve branch goes and gets to vote on monetary policy. And so that's how we ensure representation from across the country. And it's not just all consolidating in the hands of some dictator run the and again you can see that's that's all a farce because in practice the Fed almost always goes with what the Fed chair wants. And in fact, um, if you go look at the commentary when when Bernani took over from Alen Greenspan, that was part of the issue is that like the way Greenspan ran his meetings is that he would he would speak lat, right? So they'd had the Fed meetings where they were going to eventually vote and the way Greenspan would run the meetings according to the accounts is he'd let everybody else go first and say what they thought and then he would give the final word and that was partly how he maintained discipline like to say this is what okay I've heard input from all you here's what we're doing whereas Bernanki deliberately did it the other way around that Bernanki you know being a college professor and whatever the the story was was more willing to court dissent and you know wanted to encourage a free flowing discussion so we could hear from all viewpoints so he would go first and then let people you know bounce ideas off of what he just said as opposed to trying to give the final word. All right, but even still there even in practice it was still the case that the FOMC under the Bernanki tendership um almost always voted unanimously or at best had one descent or two. Okay. So, but but again, I'm just trying to underscore this idea of like look at how the Fed works and so Trump coming in and trying to muscle in and replace one of these important members of oh gez you're on the board for 14 when that no it it what really matters is who's the chair of the Fed. That's really the issue because everybody else falls in line is the way it works in practice. Okay. Um, also even on its own terms, the Fed was not independent until 1951. Okay? So, if you go look this up at the, you know, Federal Reserve's official website, again, you don't, it's not that you have to go to, uh, the Gword Griffin website to get these details that they won't tell you. No, this is all open stuff that according to the way the Federal Reserve itself explains things, the Fed was totally a dutiful servant of the federal government of the Treasury during the two world wars and that the Fed functioned to monetize government budget deficits to fund the war effort and it didn't during the wars itself lead to out of control price inflation because it they just made it illegal. bill. They had price controls, but then when the wars wrapped up and they lifted the price controls, all of a sudden you had really bad consumer price inflation is that you know as people were legally allowed to raise prices in response to the boatloads of money the Fed had printed to pay for the wars. Okay. And so again, it's a standard history. The if you go look up the Treasury Fed accord of 1951 and look at the entry for that event on the Federal Reserve's own website telling you what went down, then you will see them explain, oh yeah, see what happened is at the end of the world war, second world war, the first 12 month stretch after price inflation, I think it was like 17%, something like that. And then the next 12 months it was like 9.5%. Okay. And so that's when people started thinking, you know, this is kind of crazy. The Federal Reserve really shouldn't be there just as a sidekick to the Treasury just printing money to buy their debt to, you know, to fund their deficits year after year. That's kind of look this is causing a problem. We need to have some independence to separate monetary from fiscal policy. And so that's what these this 1951 accord was was to establish that principle. All right. So again this this idea that you know you may have been led to believe that from the inception the central bank was supposed to be this independent scientifically run thing that had nothing to do with the government's budgetary and and no among other things the central bank is created by central governments to be their banker and to create money for them. Right? That's why governments create central banks in the first place. It's not cuz the politicians are all sitting around lamenting the volatility in GDP growth or you know, oh wow, we have to really smooth out the business cycle here because I care so much about the unemployment. That's that's not why they were central banks are created. And that's not why when Ron Paul says end the Fed, the establishment class goes to war with him is because they're so concerned that the technocrats at MIT and Harvard economics departments no longer can control monetary policy. That's not what's going on. And on that point, I remember it was just it was so funny when Ben Bernani is in power, you know, as Fed chair when the financial crisis hits in 2008. And in October of 2008, that's when the Fed, it already had like the authorizing legislation or whatever the terminology would be in place. the machinery had already been sub to do this, but they hadn't, it wasn't supposed to kick in for a while. They pulled forward the option to begin paying interest on reserves, right? So, so that up till that point, the Federal Reserve, if if commercial banks kept money parked in their reserve accounts with the Fed, they didn't earn any interest on those, right? And so that's why historically in normal times, the banks that kept reserves at the Fed would tend to be what was called fully loaned up. That they would only keep the minimum reserves required. And reserves can either be cash in the vault or balances on deposit with the Fed. that there were back then there were reserve requirements that you know based on how much you had in checking account balances for your own customers you had to have a certain amount of reserves. And so typically banks would only keep the minimum legal amount to satisfy the reserve requirements because they could, you know, intuitively if they create loans elsewhere they earn interest on that whereas they just keep the money parked at the Fed. They don't earn interest on that historically. And so but that changed in October of 2008 when the Fed began paying interest to banks who for the reserves parked with the Fed. And so I remember there were a lot of economists particularly like the ones I follow at the time guys like Scott Sumner whose thesis was the great recession was caused by central banks around the world being too tight. Right? that that's like in other words the reason the global economy was stuck in a rut in late 2008 2009 2010 was because central banks were too stingy and they didn't inflate enough. They were too tight with their policy. Right? Which if you go look at what happened all the central bank balance sheets and interest rates in that period you're like what are you talking about Scott? But that was his view. I'm not here to beat up on Scott right now. Okay. And I remember part of his worldview that just I thought was charming was he was looking at Ben Bernenkei's academic research like talking about you know his his work on the great depression and then some of the stuff I think that you know he was studying what happened with the lost decade in Japan or whatever and according to Bernanki's academic research you would Scott thought what the last thing in the world I would expect him to do is to in paying interest on reserves in October of 2008 when by these various metrics the Fed is being too tight according to Ser and so he couldn't understand why would they and so you know my point was well because the Fed is owned by the private banks and this is a way for the Fed to just give a huge flow of income to the banks now that the financial crisis hit and they got caught with their pants down plus all those emergency lending facilities to prop up the value of so-called toxic assets and everything all to rescue the banks Whereas it, you know, the Fed could have tried to prop up individual homeowners who were underwater on their mortgage. They didn't do that. That'd be socialism. You can't do that. We're in a free market economy. You made a bad decision. You bought a house you couldn't afford. Sorry, but you got to get kicked out. Whereas, oh, you're a big investment bank and you're sitting on a bunch of mortgage back securities. Well, we can't have a fire sale. That could cause contagion. And so the Fed's going to come in and prop up those mortgage back securities to make sure we don't have a domino effect on the financial sector, right? All that stuff. Okay. So anyway, my point here is in case you're losing like like yes, that's interesting, Bob, but what's the point to fit in with the broader discussion here? I'm saying this notion that, oh, we need to insulate the Fed from political considerations and just have these technocrats go over here in the corner and just write out the first order oiler conditions for optimal growth over the next 50 years from the central planners. That's crazy. That's not what happens in practice. Even if you put in a PhD academic like Bernanki into that role, what he's going to do when he's in there is not what his peer-reviewed papers, journal articles said should be done in that situation. He's going to do what rescues the powerful people. So here, you know, talking about Trump and everything, it's it's not the people versus politics. It's certain factions in the banking world versus other factions. Like that's that's what the power struggle is over here. So it's it's not that anybody is going to run the Fed in the proper way for the general welfare because as an Austrian for one thing I would just say the proper thing to do would be to get rid of the Fed. The Fed, you know, it's an engine of inflation that by its very nature is going to spawn business cycles. But but my point is like so the people battling over it that it's not really they don't believe what they're saying to the public like this is all just theater. Okay. Okay. Let me um oh on that point too besides just my anecdotes you can also look at this objectively right in terms of just standard metrics. So, I I brought up this study recently when I was doing my case for repealing the Federal Reserve Act and getting rid of the Fed and so forth here on the Human Action podcast, but again, just to repeat, go look up, it's a great paper. It's George Seljen, Lawrence White, and Strapes. I I've always I know when I get his name right and then I I said it right in the in the zero hedge debate, I I checked. They have a thing. It was coming up on the Fed's 100redy year anniversary. So I think the paper came out in like 2012 or something because the Federal Reserve Act was originally signed in 2013. And so they had that published in the journal of macroeconomics. So it's peer-reviewed standard. Oh, what's the volatility of BIS of GDP or GMPP growth relative to trend during you know the prefed era by any metric GDP growth or GMPP growth was less volatile before the Fed than after the Fed's creation. And big example, the Great Depression happened 15 years after the Fed was inaugurated. Right? So clearly the Great Depression happens on the Fed's watch. Then in the early 2000s in Milton Friedman's 90th birthday party, Ben Bernani says to him at the time he was just on the board of governors, he wasn't chair, Ben Berneni says to Freriedman, you know, he gives us, you know, remarks on the 90th birthday above Milton Friedman and he says because he's sitting right there and I think Anna Schwarz was there too and they they Freriedman and Schwarz had written a monetary history of the United States that blamed the Federal Reserve for the Great Depression. Okay. And so alluding to that work, Bernanki says in the early 2000s, Milton, um, you're right, we did it. Meaning the Fed caused the Great Depression. He said, but thanks to your work, we won't do it again. And right as he was saying that, the Greenspan Fed was inflating the housing bubble. Okay, so that's interesting. Also, too, I don't have time. I'm looking at the clock here. I got to wrap up. There's a funny thing. If you go and look up um Ben Berneni Fed Independence, I think it was in 2010. He was over in Japan, I believe. And so there, you know, he's the chair of the Fed at the time, giving remarks to a bunch of bankers in Japan. And he's explaining why you it's so important to have Fed independence from the political authorities. And he said because if you didn't have that, then, you know, there would be pressure to inflate, you know, to keep the good times going and then that would spawn instability, right? Because you'd have these wild boom bus cycles. Okay? He actually used that phrase that there would be boom bust cycles if you didn't have Fed independence. But thank goodness we do have Fed independence and that's why we don't when obviously if you're familiar with Austrian business cycle theory it's the banking system that causes booms and busts and in particular the central bank knocks down all of the checks that the normal market economy would have on bank credit expansion. So the Federal Reserve in the US context actively exacerbates the boom bust cycle. And again, it's no surprise or coincidence that the worst economic calamity to hit the US happened after the Fed was formed, right? Which again is kind of weird. If the point of the Fed is to smooth out the business cycle, you might not have expected the worst economic crisis in US history to happen after the Fed was formed, but it did. Okay, finally here, let me just quickly play this quote from J. D. Vance. First, I do want to get your response to some breaking news and current events, uh, including President Donald Trump's attempt to fire Lisa Cook from the Federal Reserve's Board of Governors. He says it's over alleged mortgage fraud, but she has not been charged with a crime. Is this about forcing the Fed to cut interest rates? >> Well, a couple things here. So, first of all, I don't think anybody doubts that Lisa Cook committed some mortgage fraud, whether a local authority decides to prosecute or federal authorities prosecute her. Of course, the president doesn't get involved in those decisions, but she made a mistake and she potentially made a criminal mistake. And the question is, do we want a person who makes a mistake like that to be a person who sits on the Federal Reserve Board, which makes important monetary policy for the entire country? I think that position should be held to the highest possible standard. So whether it's criminal, whether it's intentional or not, we know that this is a person I think who doesn't meet the standard that we should expect for the Federal Reserve, which is why the president fired her. And he does have the legal right to fire her. And this goes into a second, I think, a much more fundamental question. Let's just say for the sake of argument that Lisa Cook had done absolutely nothing wrong. Isn't it a little preposterous to say that the president of the United States, the elected president of the United States, working of course in concert with Congress, doesn't have the ability to make these determinations. What people who are saying the president has no authority here, what they're effectively saying is that seven economists and lawyers should be able to make an incredibly critical decision for the American people with no democratic input. Like I thought the people controlled this country. The people made the determinations in this country through their elected representatives, including the president of the United States. I don't think that we allow bureaucrats to sit from on high and make decisions about monetary policy and interest rates without any input from the people that were elected to serve the American people. And I and I think that's fundamentally what this is about. Who makes the decisions about this country? Is it those the American people elect or is it unelected bureaucrats? And I feel very strongly that the president of the United States is much better able to make these determinations. And by the way, if the American people disagree with the president, they of course can throw out the president every four years and and throw in a new president. But you can't say that the American people that the democratic decision-making process has no influence over monetary policy. That's really really I think a an anti-democratic principle. All right. So, we've come full circle here talking now about the, you know, oh, the Trump officials trying to muscle their way in and take and so here again, I understand people who don't like populism and the complaint about Trump sticking his nose in or whatever and the idea that, oh, we're going to have Donald Trump that he knows what interest rates should be. That's crazy, right? I understand that sentiment. And so if you were going to react to that clip that we just played by saying, and that's why Ron Paul is right and the Fed, fair enough. But that's not what the people who were going nuts over that clip are saying. They're saying instead, oh, rather than have the president set interest rates, you should have interest rates set by a board of experts, you know, a lot of PhD economists, they're the ones who should be setting interest. When no, they shouldn't be setting interest rates. So JD Vance is right that bureaucrats shouldn't be doing it. I just disagree with him. when he says the president should be doing it, right? That that's not and and in fairness, JD Vance, he's not saying the president because he's so smart. He's saying because he's there as a representative that was elected by the people, right? And so on that narrow point, I'll just wrap up with this, folks. Uh you may be surprised. We'll we'll link to it. I'll also link to uh my case against the Fed that we made here. But Joe Serno, and I remember when he first made this case years ago, when I when I first became aware of it, maybe he published it a lot sooner, when he was talking about the modern greenbacker movement, he said something along the lines of, you know, given that we're going to have a central bank or or rather, excuse me, given that the federal government is going to be in charge of creating base fiat money, it's arguably better. like it it makes more sense politically but also just in terms of your theory of of how government should work given that it's going to exist that that should be under the control of the public authorities and everybody knows oh yeah the Congress and the president are responsible you know for monetary policy and so if you think there's too much inflation you know who to blame and you can vote them out if push comes to shove and that you know during their campaigns in addition to talking about foreign policy and whatever and what we're going to do with the with the budget deficit that the person running for president would say and also we're going to have you know under my administration the Treasury is going to commit to only printing such and such to keep price inflation with these that yeah that's not a good system. it would be better to have totally free market money in banking. But Joe's point was that's arguably better than the current system. So here I'm I'm just elaborating. I'm not saying Joe made these exact points. But what we have right now is like the worst of both worlds where the Fed is this quasi independent shadowy organization. A point I've made repeatedly in this during these discussions is in late 2008, Bernanki was called before a congressional committee explaining all the extraordinary new lending facilities and blah blah blah and how the just billions and billions of dollars in just a few months had been cycling through these facilities, you know, rolling over short-term loans to big financial institutions. and Congress, you know, somebody asked him, "Chairman Bernani, can you give us a list of who these institutions are that are receiving all these billions of dollars of short-term loans from you?" And he said, "No, I can't give you that list." Because if the public knew an institution had to come to this discount window or this, you know, new facility, term facility, whatever, that would be a signal that they were in trouble and there'd be a run on that bank. And so, no, I'm not going to. And so, just stop and think about that. Bernanke's Fed was creating, you know, boom, $85 billion dollars. AIG, boom. Um, just creating tens and tens of billions of dollars in a few weeks, handing them out to some of them, we learned later, were foreign banks. And it wasn't that Congress had to approve it. They couldn't even get a list of who you giving this money to. billions of dollars flowing around in a matter of weeks and Congress can't even see in real time who you giving this money to. So, if you don't think that's a crazy system, I don't know what to tell you. But certainly don't defend that system because you're worried about checks and balances and, you know, not having politics interfere with public-minded decisions and you need to have scientific management of monetary policy. That's crazy. All right. Well, that's a good place to wrap up in conclusion and the Fed. Thanks everybody. We'll see you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on nieces.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]