Topic: Finance, Banking & Monetary Policy

More Unconstitutional Executive Branch Actions

Imagine that your company’s board chairman, against the wishes of the board of directors and in contravention of the corporate charter, hires an interim CEO. Despite that illegal action, the interim CEO disciplines you in some manner. Would that discipline be any more legitimate if, two years later, the board finally agrees to hire the CEO, who then retroactively approved his own previous actions?

This is what’s happened at the highest levels of government. When Congress created the Consumer Financial Protection Bureau (CFPB) as part of the larger Dodd-Frank financial reform, it specified that the director was to be appointed by the president “by and with the advice and consent of the Senate.” This placed what’s called an Appointments Clause limitation on the director’s position. Four years ago, President Obama named Richard Cordray the CFPB director—after Elizabeth Warren’s expected appointment met significant political resistance—during what the president erroneously believed was a Senate recess. (You’ll recall that the Supreme Court unanimously invalidated the National Labor Relations Board appointments Obama made at the same time.)

“Boss” Aldrich and the Founding of the Fed

America’s Bank, Roger Lowenstein’s 2015 book on the founding of the Fed, is, as I said in reviewing it for Barron’s, both well-written and well-researched.  Few pertinent details of the story appear to have escaped Lowenstein’s notice. However, in assembling and interpreting these details, Lowenstein appears not to have entertained the slightest doubt that the Federal Reserve Act, for all the political maneuvering that led to it, was the best of all possible means for ending this nation’s periodic financial crises.

Instead of turning a critical eye toward the 1913 Act, Lowenstein writes as if history itself were a reliable judge.  What it has condemned he condemns as well; and what it has favored he favors.  Consequently he treats all those persons who contributed to the Federal Reserve Act’s passage as right-thinking progressives, while regarding those who favored other solutions to the nation’s currency and banking ills as so many reactionary bumpkins.

That some strains of triumphalism should have found their way into Lowenstein’s account of the Fed’s origins is hardly surprising.  Though research by economic historians and others supplies precious little support for it, the view that the Fed has been a smashing success is, after all, a well-established element of conventional wisdom, and one that Fed officials themselves never cease to promote.  Nor have those officials ever devoted more effort to doing so than in the course of celebrating the Fed’s recent centennial.  Even a much more hard-bitten journalist than Lowenstein could hardly have been expected to resist setting considerable store by an institution so universally (if undeservedly) hallowed.

Still, one might have expected a note of skepticism, if no more than that, to have found its way into America’s Bank.  Lowenstein was, after all, writing about an institution that was supposed to end U.S. financial crises once and for all, and doing so in the wake of a crisis at least as bad, in many respects, as those that inspired its creation.  (Those who suppose that the Fed did all it could and should have done to combat the recent cataclysm are encouraged to read this, this, this, and this.)  He had, furthermore, encountered the many arguments — and most were far from being plainly idiotic — of pre-1913 experts who favored other reforms, as well as those of some of the pending Federal Reserve Act’s critics, who predicted, correctly, that it wouldn’t be long before its results would acutely disappoint those of its champions who sincerely yearned for financial and economic stability.

Why Are Interest Rates So Low?

Since the financial crisis of 2007-09, and especially in recent months, Europe and the United States have seen zero and even slightly negative short-term nominal interest rates, and sub-zero risk-free real interest rates.  In June I participated in a conference on “Zero Interest Rate Policy and Economic Order” at the University of Leipzig, organized by Gunther Schnabl (U Leipzig), Ansgar Belke (U Duisburg-Essen), and Thomas Mayer(Fossback von Storch Research Institute).  The topic faced participants with the need to make a key judgment call: Are ultralow rates the new normal, i.e. are they long-run equilibrium rates determined by market fundamentals, or are they so low because of ultra-easy monetary policies and other policies?  In Wicksell’s terminology, is the real “natural rate” currently below zero, or are central banks holding market rates below the current natural rate? We cannot directly observe the natural rate, but we can look for indirect indicators.

GE Capital: Smaller Is Just Better

Earlier this week, the Financial Stability Oversight Council (FSOC) removed GE Capital from its list of systemically important financial institutions (or SIFIs).  How big a deal is this?  Big.  And not so big.  And a little bit scary.  Let’s back up a bit to see why.

FSOC is a new entity created by Dodd-Frank.  Its members are the heads of the federal financial agencies, with the Secretary of the Treasury serving as Chair.  In comparison to other similar bodies, which only advise the president, FSOC has broad authority to act.  Chief among its tools is the ability to designate an entity as a SIFI, and to impose stringent oversight and regulatory requirements on it thereafter. 

The SIFI designation and attendant oversight have been promoted as a means to end Too Big to Fail.  Many people, myself among them, have questioned how labeling entities as systemically important and putting them under greater oversight can possibly end Too Big to Fail.  Isn’t a SIFI designation essentially the same as slapping a big “TBTF” label on the thing?  Well, here’s where GE Capital’s story gets scary.

Brexit and Beyond

In this post, I will stray a bit from monetary issues but not too far.  The British people voted last Thursday (June 23rd ) to exit the European Union.  How should that decision be viewed by classical liberals?  Do Americans have a stake in the outcome?

The political classes on both sides of the Atlantic are appalled at the voters’ decision.  The peasants have risen up in revolt and their decision cannot be allowed to stand.  There are already calls for a political mulligan in the form of a second referendum.  Others have called for the British Parliament to nullify the vote.  Both suggestions reveal the low regard for democratic decision making among Britain’s and Europe’s political elites.  No one can predict the outcome at this point.

Let us pause for a moment and consider what the vote’s outcome says about the prescience of the ruling class in Britain, on the Continent and, yes, over here.  (President Obama interjected himself into the vote and appeared dumbstruck last Friday when British voters rejected his advice.)  Political leaders pretend to be wiser and better able to look into the future and discern what is best for the people.  But almost to a person, they were unprepared for the referendum’s outcome.  That speaks both to their distance from the people they claim to represent and their ability to forecast events even 24 hours in advance.  So much for the wisdom of the elites.

Venezuela’s Death Spiral, Dollarization Is The Cure

With the arrival of President Hugo Chávez in 1999, Venezuela embraced Chavismo, a form of Andean socialism. In 2013, Chávez met the Grim Reaper and Nicolás Maduro assumed Chávez’s mantle.

Chavismo has not been confined to Venezuela, however. A form of it has been adopted by Rafael Correa – a leftist economist who became president of a dollarized Ecuador in 2007.

Even though the broad outlines of their economic models are the same, the performance of Venezuela and Ecuador are in stark contrast with one another.

The most telling contrast between Venezuela’s Chavismo and Ecuador’s Chavismo Dollarized can be seen in the accompanying chart of real GDP in U.S. dollars. We begin in 1999, the year Chávez came to power in Venezuela.

The comparative exercise requires us to calculate the real GDP (absent inflation) and do so in U.S. dollar terms for both Venezuela and Ecuador. Since Ecuador is dollarized, there is no exchange-rate conversion to worry about. GDP is measured in terms of dollars. Ecuadorians are paid in dollars. Since 1999, Ecuador’s real GDP in dollar terms has almost doubled.

To obtain a comparable real GDP for Venezuela is somewhat more complicated. We begin with Venezuela’s real GDP, which is measured in terms of bolívars. This bolívar metric must be converted into U.S. dollars at the black market (read: free market) exchange rate. This calculation shows that, since the arrival of Chávez in 1999, Venezuela’s real GDP in dollar terms has vanished. The country has been destroyed by Chavismo.


Venezuela is clearly in a death spiral. The only way out is to officially dump the bolívar and replace it with the greenback.

Yes, the Federal Reserve Has a Diversity Problem

Federal Reserve Chair Janet Yellen recently appeared before the Senate Banking Committee to deliver the Semiannual Monetary Policy Report to the Congress. A handful of Senators queried Yellen as to the lack of diversity among both the Fed staff and the members of the Federal Open Market Committee (FOMC).

Here, for example, is the exchange between Senator Warren and Yellen (paraphrased, as I heard it):

Warren: Diversity is very important. Studies show gender diversity in leadership makes for stronger institutions. I’m not surprised there’s a stunning lack of diversity at our biggest financial institutions. The Fed’s leadership diversity is somewhat better, but not a whole lot better. … Does lack of diversity among regional Fed presidents concern you?

Yellen: Yes, I believe it’s important to have diverse groups of policy makers who can bring different perspectives to bear. It is the responsibility of regional banks’ Class B and C directors to to conduct a search and identify candidates for regional Fed presidents. The Board reviews those candidates and we insist the search be national and every attempt is made to identify a diverse pool of candidates.

Warren: But what about the outcome? When a new regional Fed president is selected by the regional Fed board that person must be approved by you and others on the Board of Governors before taking office. The Fed Board recently reappointed each and everyone of these presidents without any public debate or any public discussion about it. If you’re concerned about diversity, why didn’t you use these opportunities to say enough is enough? Let’s go back and see if we can find qualified regional presidents who also contribute to the overall diversity of the Fed’s leadership?

Yellen: Well we did undertake a thorough review of the reappointments … [etc., etc.]

Warren: [Interrupting] But you’re telling me diversity’s important and yet you just signed off on all these folks without any public discussion about it. …The selection process is broken. Congress should take a hard look at reforming the regional Fed selection process so that we can all benefit from a Fed leadership that reflects a broader array of backgrounds and interests.

While it is tempting to dismiss such questions as mere identity politics (I’m waiting for Trump to complain about bringing in the Fed Vice Chair from Israel), the Fed has increasingly over time come to look less and less like the rest of America.

Should this matter, at least in terms of monetary policy? I believe it should.