Fed Must Stay Independent by Bailing Out the People

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/economics--politics/fed-must-stay-independent-by-bailing-out-the-people?post=121033&uid=4798

The Federal Reserve's independence is being threatened. The Fed brought this threat upon itself, because it did not trust Milton Friedman, but rather increased the wealth divide by pursuing QE instead. Had the Fed trusted Milton Friedman, it would have bailed out the people with Helicopter Money. At the very least, the Fed would have backstopped small  and medium business and pursued an expansionist policy with regard to the real economy and not just to save the banks.

The Fed is facing ideas put forth by Donald Trump and Steve Bannon. Bannon's ideas are very dark and I will comment further at the end of this article.

The Fed had already incurred the wrath of many because it liquidated the entire economy in the Great Recession as it took down the housing bubble. (It also liquidated the economy in the Great Depression).

It is difficult to know what POTUS and Congress controlled by the Republicans now want from the Fed. The new administration will likely not get the large infrastructure package it wants from Congress. If that turns out to be true, it will likely want more out of the Fed.

It may not want Fed to take down the stock market without making significant efforts to establish a floor under the full economy. The Fed failed to respond properly when the stock market crashed in the Great Depression and failed to respond properly when the housing market crashed in the Great Depression.

I have written about how the Bank of England seems much better prepared to keep the economy afloat while popping bubbles. I said this about the BOE compared to the Fed regarding the Great Recession. The BOE faced easy lending similar to liar loans in the USA:
It is pretty clear that the Bank of England, limited unemployment due to an expansionary monetary policy. One thing that could be said is that house prices did not decline like in the USA. It appears that UK monetary policy may have helped lessen the decline in house prices in the UK. The Bank of England acted with dispatch and the Fed did not.
The UK guaranteed loans to small and medium businesses. The US government and Federal Reserve did no such thing. That was a huge mistake and led to mass layoffs in the USA.
We know monetary policy between the subprime crash of 2007 and the HELOC crash in 2008, the USA did not have the Fed intervention in buying subprime paper. We know that subprime paper in the USA was forced back onto the balance sheets of the banks and then not supported by the Fed. It appears that the Bank of England did support continued lending in a way that the Fed did not. 
There is a risk in taking down bubbles. There is a risk in not taking down bubbles. How it is done makes all the difference. The UK is a much smaller country, but it appears that its citizens are treated much better than US citizens are treated by our central bank, which has international commitments and ties to rich elite outside this nation.

One can understand the frustration of the Trump administration. But, where the Trump demands could go wrong is in fostering uncontrollable bubbles pushed along by hot money from the international community. We can remember how that the dot com bubble burst and all that hot money was poised to possess the housing market, and it did so with a vengeance. Does Trump want to unleash that sort of frenzy, and seek Fed approval?

Trump has already picked a person who wants no more debt as budget director. His name is Mick Mulvaney and he has opposed every vote to increase the debt ceiling. He has said that the US could prioritize payments and just shut the government down. Now he is in a position to do just that. The debt ceiling debate will be on for March. 

One would think that Trump would prefer to keep some bubbles going and maybe even recklessly increasing a real estate bubble, in order to avoid worrying about the debt ceiling. I don't know that for sure but that would be a businessman's approach, to just get revenue way up. Teaser rates would have to be offered, and that would mean an end to Dodd-Frank.  

Getting the growth that he wants, would Trump want to go on the Steve Bannon goal, making way for an authoritarian approach and war in the middle east, and/or in China, and/or the final nuclear war? Bannon looks to the book, The Fourth Turning, for his road map.

The Fed pursued a policy of just helping the elite through mispriced risk in housing in the big RE bubble, which increased revenue for funding the George W. Bush wars. That opened the Pandora's Box. Now we are faced with, potentially, an even greater demand on the Fed. We read from Business Insider writer Linette Lopez, that Steve Bannon's beliefs are as follows from Time Magazine:
"Howe, too, was struck by what he calls Bannon's 'rather severe outlook on what our nation is going through.' Bannon noted repeatedly on his radio show that 'we're at war' with radical jihadis in places around the world. This is 'a global existential war' that likely will become 'a major shooting war in the Middle East again.' War with China may also be looming, he has said. This conviction is central to the Breitbart mission, he explained in November 2015: 'Our big belief, one of our central organizing principles at the site, is that we're at war.'"
To Bannon, Trump is just a tool to implement his vision which starts with internal growth and leads to lots of war. This is a very serious situation, potentially. But of course, Bannon is not the final decision maker. 

Keep in mind Bannon is now head of the National Security Council and promotes a White Supremacy section on the Breitbart websiteWatching his moves could prove to be an economic indicator. 

The Fed is facing a loss of independence by people in government who want white hot economic growth. 

In order to keep its independence, the Fed is going to have to appeal to Congress not to go along with Bannon's vision. The Fed is going to have to, in one way or another, bail out the people instead of just helping the banks and the elite. The Fed will have to convince Congress that it will help the people more.

Otherwise, Federal Reserve Bank of the United States will have created a new administration that could turn on the Fed in ways that it may never have thought possible. Could Trump and Congress abolish the Fed? Getting rid of a central bank generally results in financial chaos, as it did when President Andrew Jackson banished the last national bank, with a 7 year depression being the result.

But there are a lot of frustrated people in the USA and many point to the Fed as being a cold-hearted organization which shows no compassion towards the common man on the street. That reaction to the Fed is the real face of populism, and sound economics is not always preserved when emotion runs that high. It is the Fed's fault, you see. They thought they could get away with it since 1913, but now I am not so sure.


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