For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. You might wonder how such people, who have never been in the business world, who have never met a payroll, would deal with real-world economic problems; the answer, in both cases: superbly.
In particular, both Bernanke and Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and on the political right in general. And their intellectual and moral courage has been completely vindicated by events.
Given this track record, you might expect to see either Yellen reappointed or an equally qualified technocrat take her place. But remember, we’re living in the age of Trump, which means that we should actually expect the worst.
It seems safe to assume that Trump himself understands nothing about monetary policy. True, he’s pronounced on the subject fairly often, but not in any coherent way. One day he praises low interest rates for boosting the economy; the next he denounces them for hurting the incomes of the middle class. So trying to guess his Fed choice from his policy views is a mug’s game.
What he’s more likely to do is what he’s done with many other appointments: defer to congressional Republican leaders — leaders who, on matters monetary, have been wrong about everything.
When the financial crisis struck in 2008, it was essential that the Fed engage in aggressive monetary expansion — loosely speaking, print lots of money. There are circumstances in which that kind of action would be inflationary, but economists (like Bernanke and, well, yours truly) who had studied the subject understood that this wasn’t one of those times. Indeed, inflation stayed quiescent even as the Fed quadrupled the monetary base.
But congressional leaders fought these necessary measures every step of the way. Most notably, Paul Ryan, who gets his ideas about monetary policy from Ayn Rand novels, berated Bernanke, claiming that his policies would debase the dollar and lead to runaway inflation.
Writing with John Taylor, one of the people whose name is being floated as a possible Fed chairman, Ryan went so far as to suggest that the Fed’s policies were part of a politically motivated attempt to bail out President Obama’s fiscal policies. And so on.
And it goes more or less without saying that none of the people who kept warning that the Fed would cause terrible inflation have admitted having been wrong, or learned anything from the experience.
What all this means is that if congressional Republicans play a large role in selecting the next Fed chair, they’ll insist that it be someone who has been wrong about everything for the past decade.
Kevin Warsh, a former Fed governor widely considered a favorite for the job, certainly fits the bill. He warned about inflation in the midst of global economic collapse; he argued vigorously against doing anything, monetary or other, to fight 10 percent unemployment; he warned that the United States was about to turn into Greece, Greece I tell you. And he has shown no hint of being chastened by the failure of events to play out the way he expected.
Now, I don’t know who Trump will actually pick to head the Federal Reserve. It might actually end up being someone smart, knowledgeable and honest. Hey, there’s a first time for everything.
But surely it’s possible, even probable, that the Federal Reserve, like other government agencies, is about to get Trumpified, that one of American policy’s last remaining havens of competence and expertise will soon share in the general degradation. And won’t that be fun when the next crisis hits?