Why Brexit is so much more problematic than the financial crisis of 2008

An interesting thread by David Hayward [@SimeonStylites] on Twitter today compared the severity of the crisis engulfing us with Brexit to the financial crisis of 2008.  Although the economic damage has been so far less, and more slow-moving, in may ways I think the difficulties we face now have the potential to be much worse.

For starters, during the financial crisis we had governments that were coherent entities and able to respond to events as they unfolded.  At present, both the opposition and the government cleave between more than one set of leave and remain factions.  No faction has supremacy.  Theresa May is to a large extent impotent to respond.  Conceivably, if the economic damage mounts as the end of the Article 50 period approaches, factions will start to unify around a course of action.  But this is by no means clear at present.

Second, during the crisis there was a basic consensus around a problem, and a set of solutions, and a reasonable degree of truth-telling about the issues.  Regulation of the financial sector had been too lax.  Risks had been allowed to build up in the financial system.  Ailing institutions had to be supported or resolved.  In future, regulation had to be tighter and risk monitoring more careful, extensive and intrusive.  We also needed counter-cyclical monetary and fiscal policy.  There were disagreements, and some telling of untruths about the necessary degree of counter-cyclicality of the latter.

During the Brexit process, by contrast, there has been a shortage of truth-telling, both about the costs and benefits of Brexit, and about important procedural matters [like what could and could not be renegotiated now;  conflation of the substantive aspects of the withdrawal agreement and the political declaration;  the ‘bollocks’ of Labour’s ‘six tests’;  what ‘No Deal’ means].  Technocratic assessments of the ways forward have been successfully tainted as, in Lord King’s words, a ‘project’ ‘designed to scare the country into voting Remain.’

Even absent the strategic incoherence caused by the factional struggle ongoing, therefore, the lack of truth-telling bodes ill for arriving at rational decisions to take us forward and improve matters from here on.

Part of the difficulty rests with the subject matter.  Although I caricature somewhat, during the financial crisis, there seemed a basic acceptance of the idea that although the authorities had failed us in managing the financial system, this was a subject that the authorities’ delegated experts were best placed to fix.  When the solution of tighter regulation was proposed, there was no disputing it.  Not so now.  Economic and technocratic aspects of the costs and benefits of leaving the EU have been relegated relative to other features, like national and cultural identity, on which it is not appropriate to delegate to decision-making elites.  And since the nation at large is divided on these questions, this adds to the paralysis.

As many others have remarked, furthermore, the financial crisis was not a constitutional one, even if it may ultimately have been implicated in today’s difficulties, which are constitutional.  Back then, given the issues at hand, the processes for decided were settled.  Not so now.

A final aspect aggravating the situation is the fact that, unlike during the financial crisis, there is another strategic entity [in this case the EU] greatly limiting our choice set.  The necessity of keeping open the border between Ireland and Northern Ireland, under current and foreseeable technology, pins us in a customs union with the EU, and in large degree pins us in circumstances of regulatory alignment with them.  The alternative to acceding to this is a potentially disorderly exit to very disadvantageous trading arrangements.   During the financial crisis the government was freer to choose.  It might have found itself similarly paralysed if some unstoppable external force had dictated that the UK either choose narrow banks or entirely unregulated banks, with no intermediate solutions allowed.

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If you can’t beat them, join them: Remainers try their hand at attacks on the civil service.

Anthony Adonis tweeted this yesterday:  Screen Shot 2018-10-24 at 18.55.54

Civil servants do not need this unsolicited advice, foghorned over Twitter.  The tweet comes out of nowhere, prompted by nothing in particular, and insinuates in a way full of foreboding by omitting reference to anything specific.  Presumably, if there were some specific allegation, it would have been made?

It is the mirror image of the accusations by the Brexit Ultras that the civil service is run by ‘Remoaner Saboteurs’, of which the latest example in the genre was this:

Screen Shot 2018-10-24 at 21.05.00

‘Don’t do anything ethically dodgy’ we are intended to read thus: ‘As someone in the know I have good reason to suspect that ethically dodgy things are being done or may be done if I do not broadcast my warning.’  There is an explicit code of conduct for civil servants.  And a management and whistleblowing structure for enforcing it.  But for some reason we need a tweet from Lord Adonis to set things straight?

It ought not require saying, but Brexit is the official government policy [unless you believe some of the most extreme Brexit conspiracists’ explanation for why things have gone so badly].  And so civil servants should embrace it with the same enthusiasm and energy and initiative that they would bring to the evaluation and implementation of any other government policy.  Even if Brexit is, as I have often emphasized in these pages, a bad policy.  [At least in terms of economics].

Civil servants also have a right to look after their own careers, and try to exert as much influence on what they work on as they can, if their rewards from work depend on that.  But inciting a boycott – ‘have nothing to do with Brexit’ Adonis advises – will do nothing to help them do this and will probably poison the atmosphere, making it harder to manage work choices.

This intervention also harms the cause of those trying to halt or soften Brexit, by allowing the cause of unlawful [and therefore unpatriotic] sabotage to be laid.  So from Adonis’ perspective – he being a leading anti-Brexit campaigner – his comments are self-defeating.  It could also be regarded as somewhat ironic that a proponent of conservatism in the face of the Brexit revolutionaries – someone who wants to restore the pre-referendum status quo in the UK – should be trying to undermine the institution of the civil service that was a part of what made that status quo work.

We are not that many steps away from demands that civil servants be vetted for political fealty.  The UK is going to place very great demands on its civil service in the years ahead, however Brexit turns out; and a convulsion caused by a significant loss of faith in its impartiality would be very damaging.


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Next time do QE with a Treasury twist, not central bank money-printing?

This post writes up tweets I sent last night.  The case is not overwhelming, and maybe not even decisive, but it’s worth rehearsing the arguments for.  I’ll write this as though it were for a UK audience only, but the basic idea applies, with some qualifications, for other central banks too.

In the UK QE meant the BoE creating new money, electronic central bank reserves, and buying long-dated government bonds [government bonds that mean that you get your money back in a long time, like 10 years] from private sector holders.

We can think of this as a two step process [even though it was only 1 step in practice].  Step 1:  create new electronic money and buy a short dated government bond [often called a ‘Treasury bill’].  Step 2:  find someone who will swap the short-dated bond with you for a long-dated one.

Step 1 is – a few details aside – what the central bank does when it does monetary policy in normal times, when the central bank interest rate is away from the zero bound.  This is the step that is pointless at the zero bound, and necessitates QE in the first place.  Unfortunately, it’s exactly the step that was emphasized by the BoE when QE was first done [see Mervyn King speeches from the time, and other BoE communication, including educational material about ‘injecting money’].  The fact that the interest rate is zero is telling us that people are sated with whatever it is that makes money special and distinct from government bonds, leaving them both to be default risk free assets with the same yield.  So the central bank undertaking that trade leaves things as they were.  And hence is not stimulative.  An attractive feature of emphasising step 1 was continuity.  ‘We used to do monetary policy using the price of money, now we are using the quantity, but it’s basically the same thing.’  Stressing continuity was a worthy motive, but not at the expense of misleading to the extent that you stress the bit of a policy you privately think does not work.

Step 2 is what might just do something/ did something in the past.  Long-term government bonds are thought to be less liquid than short term bonds.  They normally trade at a discount relative to what we would guess given expectations about interest rates over the life of the bond.  Buying them compresses this discount, bidding up the price, and lowering the cost of finance for private sector entities.

Since step 1 is redundant, QE could have been done with step 2 only.  This would, most practically, be carried out by the Treasury’s Debt Management Office, and involve them selling short term bonds and using the proceeds to buy long.  This is often termed a ‘twist’, after ‘Operation Twist’ in the 1961 carried out by the Fed.

Would there have been any advantage in doing a twist-only QE?

Obviously it would have cut out the misleading central bank verbage about pumping money. They surely would not have talked about pumping money if no money was pumped.

It would also have avoided fuelling the political difficulties created by the misapprehension of actual QE as being about funnelling money ‘to banks’, or other undeserving parties.

This was what provided the motivation behind ideas like ‘People’s QE’.  PQE involved the BoE creating money and using it to buy things ‘for the people’ and not ‘for banks’, like environmental infrastructure, or similar.  It was based on a complete misunderstanding of QE.  Somehow failing to realise that the money creation would simply put money in the accounts of other private sector entities [just like bond buying does, remembering that pension funds hold a lot of those], and which, obviously, end up being deposits at banks.  And it was a misunderstanding, or perversion of the money-creation part, which was always intended to be temporary, and to be reversed later.

This connects with the second advantage, which would have been to avoid antagonising the other constituency either wilfully misunderstanding QE, or using it to pursue objectives in bad faith:  the group Krugman refers to as the ‘permahawks’.  These saw the step 1 money creation as bound to lead to an inflation catastrophe.  And of course they were proven wrong – or have been thus far.

A related group that seems to include many otherwise reasonable people contends that although the money creation in step 1 is not in itself going to lead to inflation catastrophe, if only it were reversed as promised, in fact the promise to reverse is not credible.  QE is therefore helicopter money by stealth.  Although that kind of helicopter money is the least useful kind, since HM relies to some degree on how it influences expectations, this does not persuade these QE sceptics.  And their scepticism is fuelled by the perfectly reasonable accounts of how the post-crisis financial environment requires central banks not to shrink their balance sheets back to pre-crisis levels.  [See comments by Bernanke, Broadbent and others].  These look like excuses for wanting to pass off helicopter money as non-reversed QE.

If QE had been done as a Treasury twist in the first place, there would have been no money creation to promise to reverse, or partially reverse.  The necessary swelling of central bank balance sheets to accommodate a new post crisis demand for money would have happened separately and naturally.

A third advantage may have been to avoid a problem that Larry Summers worried about during the crisis, that at the same time as the central bank was buying up long term bonds, the Treasury was tilting issuance into long term, taking advantage of a cheaper cost of finance, but essentially undoing some part of the stimulus intended.  If the Treasury had been the agent tasked with implementing the twist, [selling short and buying long], it would have been forced to make sure – indeed the policy request would have been defined such – that the twist was over and above normal issuance patterns.

Although it would have solved some problems, implementing QE solely via a Treasury twist might have created others.

For starters, it would raise questions about whether monetary policy stabilization policy was properly delegated to the central bank.  Requests made by the central bank of the Treasury to undertake a twist can be turned down, or not implemented, or not implemented in full, or could be bargained over in private.  Or even if they are not, there might be the expectation that these problems would obtain.

In the UK this danger would be mitigated by the fact that debt management is undertaken by an entity that is somewhat separate from the Treasury, constituted as the ‘Debt Management Office’.

And it is also worth noting that how QE was actually done bound the Bank of England and the Treasury together anyway.  The Bank insisted on an indemnity for the financial risks entailed in QE, and so to all intents and purposes QE was done on the Treasury balance sheet anyway, not the BoE’s.  And it was operated under a sequence of letters specifying what could be bought, and up to what limits, written at the discretion of the Chancellor.  QE anyway relied on Treasury cooperation, cooperation that could, in theory, have not been forthcoming, or been withdrawn at any time, or only sustained in return for something.

If we put this in the context of broad recommendations that I have made, along with Simon Wren Lewis and Jonathan Portes, that at the zero bound the BoE should be able to advise/instruct the Treasury to design a fiscal stimulus [with conventional bond-financed tax cuts or spending increases] to replace monetary stimulus that it judges is missing, then having an agency of the Treasury do twist-only QE on its behalf looks more natural.  One has the BoE advising on the increment to the stock of net debt, and the other has it advising on the maturity structure.

An interesting thought experiment is:  Could ‘twist-only’ QE be done by central banks on their own?  The assets held by central banks tend to be off too short duration to begin with (almost necessarily, as they don’t want to be twisting back and forth as conventional monetary policy is fine tuned).  So the answer is:  Not without granting central banks the power to issue their own short term debt.  This is usually regarded as a non-starter, invoking the slippery slope argument ‘where would that end, what would they do with the money and wouldn’t that interfere with Treasury policy?’.  However, under adequately proscribed circumstances it surely could be done this way.  Undertaking a crisis operation using a new financial instrument would not have been ideal.   But even this objection could be overcome by having monetary policy done like this at all times.

This thought experiment gets us to one of the interesting questions surrounding QE, and in fact money and central banks in general:  if the central bank did issue its own short term debt, how differently would that stuff be viewed from government short term debt, and from money itself?

Answering those questions properly I am going to declare beyond the scope of this post, if not the entire blog, even if the presumption that QE, indeed conventional monetary policy, however operated, requires a provisional set of answers.

More prosaically, a few other points are worth making regarding how QE was actually implemented in other countries.

First, in late 2011/12, the Fed did do a twist-only round of QE.

Second, with regard to QE in the Euro Area, we have to remember that there would be 19 Treasuries to deal with.  The twist-only QE idea is not going to fly in a zone that prefers maximal central bank independence.  Credibility problems that exist between, say, the UK BoE and the Treasury, where the Treasury is headed by ministers who have recently reconfirmed the BoE mandate, are going to be magnified many fold when you have multiple Treasuries, none of whom may support the current ECB mandate, and some of whom may find it awkward to shorten the maturity of their outstanding debt, not an action normally contemplated when belts are already tight.

Third, the Bank of Japan has been piling into stocks, and long since abandoned BoE style QE as its sole focus.  What has twist-only QE got to do with them?

Three points.

The regular QE they did could have been done as twist-only.

Second, the stock purchases could have been made using bond issues rather than by creating money.

Third, taking a step back, the problem of regaining monetary control seems to have been for some time on a different scale there.  Even the most conservative of central bank oriented economists are tempted to conclude that helicopter money is a necessary tool for Japan.  In which case finding institutional wheezes to avoid the temporary money creation leg of QE is something of an academic exercise.  One hopes that they escape the zero bound with sufficient confidence that the idea once again becomes relevant, but we are not there yet.


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Guest post by Will Bott: on the democratic legitimacy of a second referendum

Here’s a guest post by Will Bott, also to be found on Twitter.

“If public opinion had shifted as much as many proponents of a second referendum claim, or certainly would like, there would be little question about the legitimacy of a second Brexit referendum. Faced with an overwhelming change of heart, few would claim that a previous vote should be considered forever binding on ourselves and future generations. Unfortunately, we probably do not find ourselves in such a situation. Rather, we find ourselves in one where demographic shifts and subtle but significant changes in particular voting blocks make a second referendum increasingly politically feasible and winnable, albeit likely by a narrow margin. This understandably leaves many remainers feeling uneasy: increasingly tempted by the idea, but still with some residual feeling that a second vote may be undemoractic. This piece aims to allay such fears. It will not claim that a second vote is politically possible (though this does seem increasingly likely); it will, however, claim that such a vote is both legitimate and consistent with the underlying principles of a pluralist liberal democracy.

The first question we might ask is where the legitimacy, validity or usefulness of an election or referendum comes from. Possible answers would be some combination of the following: representation of individual and collective interests, government accountability, legitimate exertion of political power coming through consent and facilitation of popular political participation or empowerment. Let’s leave aside the question of how convincing these ideas are individually, how they combine or should be prioritised. The point is that none of them arise from a single voting process, and all of these can be hindered, rather than served by any particular vote, depending on how the electorate is constituted, the legal and constitutional framework of the vote, and the question or policies on offer.

Why is this? Imagine a vote on explicitly whether to disenfranchise some portion of the electorate, which happens to be in a minority. This is not hard to imagine, as it is has happened historically. Clearly we would see such a vote as (at least potentially) illegitimate, regardless of the size of the majority. It is for this reason that whether or not we believe in an explicit and written constitution, most people have some idea of the legitimate realm of political power and the realm of personal choice and freedom. At the very least we see certain decisions as better taken individually rather than collectively, and certain actions of a majority as oppressive rather than emancipatory. In a less dramatic way, we see this when thinking about the location of political decisions; it seems perfectly reasonable that some decisions are taken by the Scottish government rather than in Westminster, some by local councils rather than a national government, some by trade unions or school boards rather than distant parties who may happen to cast a vote in a putative election and indeed some not taken collectively at all. If we did want a more extreme example of the location and constitution of the electorate mattering, we might imagine the following: what if the government of the People’s Republic of China decided to hold a referendum on the annexation of Taiwan? One would scarcely argue that a billion votes in favour made it a fair or good course of action, even if Taiwan’s 23 million inhabitants were in fact given a vote.

Does this mean that election results can just be disregarded if they are deemed to be illegitimate? No, not at all. It means the meaningful question about what a democracy should look like is a systemic question, not one concerning an individual vote or some mystical notion of a popular will. It means that the real questions (and they are real, and difficult) are about the location of decisions, the constitution of the electorate, the realm of legitimate political action (should, as some left wingers argue, there be a ‘democratisation’ of the economy?).

Crucially, any functioning system will require in all or almost all cases that results are implemented. The point, however, is the reason for this is systemic rather than moral or specific: it is about having a system based upon rules which are respected, predictable and viewed as (at least partially) legitimate. The 2016 referendum had no such systemic status. There was no meaningful legal status of the referendum, what it meant for it to be implemented, or how this was to be done. This has a number of implications.

Firstly, it means that the usual reason to respect the result is simply not there. Not implementing the result would have no obvious systemic implications, would interfere with no future parliamentary elections, would set no legal precedent and would set little political precedent other than the one that legally undefined referenda do not have to be implemented. Unless we want to make the case that referenda are a good idea in general, the negative implications are not clear.

Secondly, it means that the significant democratic implications of the referendum flow from its practical consequences. These are anything but positive. Because of parliamentary arithmetic and the absence of a legally defined implementation process, Brexit has understandably led to an executive power grab, albeit one partially checked through legal challenged such as Gina Miller’s. Moreover, this absence of a clearly defined legal implication of the referendum means that the typical separation of opinion about a result and opinion about legitimacy of a result is not there. Brexiteers are not entirely wrong when they argue that criticism of Brexit may result in it not being implemented, in a way which would not be true of a normal parliamentary election result. It is in light of this that demogogues can envoke “the Will of the People”, and opponents as treasonous saboteurs. This is extraordinarily corrosive and damaging to the countries political culture and ultimately to any form of democratic pluralism.

Finally, we might consider the process itself. This was one where many of the most affected stakeholders were precisely those who were disenfranchised (EU citizens in the UK, UK citizens abroad), and where we might well even question whether their acquired rights could legitimately be up for question anyway. There is of course then the nature of the campaigns, dominated by flagrant lies, demonization of outsider groups, at times reveling in the thought of harm that might be brought to them (albeit with enough assurances to allow for the kind of cognitive dissonance we all face when wanting something somewhat morally transgressive), not to mention outright campaign finance violation etc.

These would not normally be sufficiently convincing arguments to do something which upended a system of repeated elections, but given that here this is not in question, a different question arises. Do we want these strategies to be rewarded politically, not just as effective, but as things we treat with deference? Do we wish that so much as to bind ourselves in future, in a way we would never normally do with a parliamentary election held every few years? Practicalities may well mean that in reality many decisions are irreversible. But this should not mean that we artificially impose additional moral restraints where practicalities imply no such necessity. Whether in reality a second referendum is achievable or desirable is a difficult question. But it should not be regarded as illegitimate; indeed, to fail to have one may well be uniquely corrosive to the political norms which make democracy worthwhile.”

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Brexit was not really a neoliberal project, whatever that is

Simon Wren Lewis argues in a recent post that Brexit was a ‘neoliberal project’.  That the driving force was a form of free-market utopianism.

I have doubts about the project of diganosing Brexit as a neoliberal project.

For starters, there are the Lexiters.  They see the EU as the neoliberal agent, strengthened by the agents of Europe’s companies ganging up on the workers.  They want to break free from the EU to intervene more, not less in markets.

Then there are the nationalists and nativists.

Nationalists want to break free because they have a preference for the sovereignty abstraction;  and a nostalgia for the UK’s imperial past as a great player on the world stage.  That was not about pursuing open markets, but about flexing muscles and imperial preference.

Nativists want to keep out foreigners, especially ones that don’t look like ‘us’.  This is an impediment to free markets.  They are happy to pay for that ‘privilege’.  And they will turn on business – which mostly favours open markets – if it tries to thwart them.  These strains of opinion are not usefully termed ‘neoliberal’, despite the legacy of a particularly elastic use of that term.

In follow up discussion of Simon’s post, ‘Property Spotter’ tweeted that even some of those advertising a preference for free markets are feigning it [the example of Dan Hannan was given].

One sense in which Simon’s headline may be right is this:  it was an accidental product of the behaviour of those in government who favoured something like the rough status quo before the referendum, in both the Labour and Conservative parties.

That is, in both governments, there was:  1) genuflection to anti-immigrant views in the UK, 2) common cause with those creating the archetype of the Brussels bureaucrat, (and it’s opposite, the failure to articulate the positive aspect of rule harmonisation), 3) more genuinely felt opposition to the labour market protections upheld by the EU.

The objective of this discourse was to try to make sufficient common cause with eurosceptic factions to sustain a governing coalition, but without threatening EU membership.  ‘We hate it all too but we can fight it from within’.

Of course the tactic, which included failing to articulate the business benefits of EU membership, backfired.

If you find it helpful to turn this argument into something involving the term ‘neoliberal’, then Brexit was a neoliberal project because UK neoliberals failed to articulate what EU did for neoliberalism.

All that said, because of the particular elasticity with which the term neoliberal is used, the debasing of the term by those on the left who seem to adopt it as a coalition building term to campaign against something bad in the status quo, I don’t see that we get farther by encoding our Brexit diagnoses using sematics like ‘neoliberal’.

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Will Ireland back down over the border?

I discussed this briefly with ‘Oscar D Torson’ on Twitter.

It must be the hope of the government and all Brexiters that this is what happens – Ireland backing down.  With no modification of the united EU and Ireland position, the government, and whoever succeeds it, has to concede to leaving the EU in name only, or to erecting a regulatory and customs border around Northern Ireland at the Irish Sea.  Or face the economic disruption of No Deal, which might be catastrophic, not only in economic terms, but in political terms for whoever is deemed responsible for bringing it about.

There is what at first might seem a paradoxical quality to the Irish position, as some noted – if I recall correctly Dan Davies was one – in that in order to ensure that the border between the North and South of Ireland stays open, they are threatening to refuse to sign a deal, which means that it would close.

The question as to whether Ireland might back down naturally arises from this paradox.  Another way to keep the border open is not to threaten to close it.

The question also arises from the fact that since the conflicting positions on this became clear, things have moved on.  A rational outsider assessing the UK as a strategic competitor is bound to pick up some changes.

I can think of a few.  Theresa May ‘lost’ the 2017 General Election, in the sense that she lost the ability to figure out her own preferred position amongst those discussed by her party’s competing factions.  This leaves the government as not really a government in the conventional sense, but simply a clearing house for competing discussions amongst the Tory Party factions.  The government might not, if it had control, really want ‘No Deal’, but there is nothing it can do to enforce the implementation of whatever strategic play is necessary to avoid it.

Moreover, two of the factions in and outside of the party are happy about the situation.  The Brexit ultras – who previously scoffed in the strongest terms that No Deal might be a possible outcome, fantasising confidently about ‘the easiest trade deal in history’ [I think that was David Davies on the FTA with the EU [sic]] and the queue of 3rd party applicants for trade deals – have come to positively embrace No Deal, and are engaged in information warfare on the subject on a near Trumpian scale.  For them, it is useless to try to get them to compromise [eg on ‘Chequers’] holding No Deal as a sword over their heads, as they have decided that that is their preferred option, for now.

On top of that, the Labour party itself having multiple internal views on this, prefers not to try to seize the initiative on the topic and is happy to let the government accrue the costs of seeming to be in chaos, and, presumably, the eventual economic costs of no deal.

So, Irish policymakers can conclude that even if at one time there were a rational agent concerned for the welfare of UK citizens, and contemplating the implications of the Irish/EU threat to follow through with No Deal if the backstop is not signed up to on the border issue, that agent is no longer there, and so there is little or no possibility of the UK backing down.

A fall in the probability of the UK backing down reduces the expected payoff from threatening not to back down yourself [at least in this isolated one-off game, and therein lies obvious caveats to this line of thinking].  And that obviously increases the chance of backing down.

Nevertheless, Ireland has its own political calculations to mull, and these are bound up with the longer term constitutional settlement between the UK, itself and Northern Ireland, concerning questions that cannot be weighed so easily by looking at tables breaking down trade by destination.

As Oscar put it in our exchange ‘a border closed due to UK intransigence may be better than one that is part closed because of something Ireland agreed to.’

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Will the Fed Trump the President or vice versa?

Donald Trump has been at it again, criticising the Fed over its policy of gradually normalising interest rates.  Commentators are wondering what exactly the Fed will do in response.

Some worry that the Fed will cave in;  and indeed interpret a fall in the dollar coincident with Trump’s remarks as suggesting that this view is shared widely in the markets.

Why would it cave in?  Perhaps to give itself an easy life in its interactions with Congress;  to reduce the likelihood of future campaigns to ‘Audit’ it, or change its mandate.  This seems highly unlikely.  The returns to loyalty appear too uncertain and thin.  Powell himself might well be content with only one term, working hard at a job with low pay.  The White House has almost no influence over most of the other FOMC appointments.

Another possibility is that the Fed would raise rates faster than it intended previously, just to make a point.  A concern is that the fall in the dollar might prompt it to do just that.  A show of force to demonstrate that the Fed sets rates, and not the White House.  I doubt it would do this.  It would be hard to argue that this was consistent with its mandate.  Short term macro performance as judged by the mandate would be being set aside for a very uncertain return in terms of anchoring expectations around the event that the Fed is doing its job unhindered.

Raising rates might nonetheless be the consequence of the President trying to pressure the Fed into reducing them.  If this did/does produce a higher probability of lower rates in the minds of market participants, higher rates would be necessary to choke off the lower longer term real rates, anticipated higher spending and inflation that would follow.    Tighter policy would be needed until enough evidence has accumulated for those who had up-weighted the event that the Fed would cave in to revise their expectations again.  From this perspective, if you are a President who knows that the Fed is unlikely to listen, trying to make them hear you can be highly counter-productive.

From the perspective of the Fed, and the institution of central bank independence, an episode wherein the Fed is shown to carry on doing its job [and raising rates in response might well, as I explained, constitute doing its job] might be beneficial, reinforcing the belief, or reminding observers, that it takes more than the disapproval of a President to taint monetary policy.

A weaker dollar and lower expected future rates – which seemed to follow from Trump’s remarks – may not necessarily imply that markets think the Fed is going to cave in, however.  That could simply point to worries about economic policy generally, deriving from unpredictability or incompetence of the White House, and a fall in spending [and thus inflation and the Fed policy rate] that would follow.



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