Dear Mr. President: Please Make Good Choices

No, this isn’t a plaintive plea for the President to be mindful of his use of Twitter, or his comments, or the labels that he applies to those with whom he disagrees. Sadly, this President is beyond any hope of reforming such behaviors.

Nor does it refer to his judicial nominations, which have been nothing short of brilliant, at least from this anti-activist, Constitutional originalist’s vantage point. It doesn’t even refer to his cabinet picks, many of which have been quite good (Pompeo, Chao, Mnuchin), some of which have been quite bad (Tillerson), and others of which fell victim to forces beyond his or their control. To wit, Jeff Sessions was a decent choice for AG, but then came the Mueller investigation, and Sessions rightly (from a legal perspective) recused himself, which drew the ire and frustration of Trump, the consummate Washington outsider – all of which doomed Sessions’ future as AG.

Likewise, Kirstjen Nielsen wasn’t a bad choice for DHS Secretary, but with the Dems’ (and some key Republicans’) opposition to border security, no progress could be made. And with the media using photos of children in cages that were taken during the Obama administration to make the claim that BABIES ARE BEING RIPPED FROM THEIR MOTHERS’ ARMS!!! (never mind the fact that the Left couldn’t care one whit if a child is trafficked into sexual slavery; that doesn’t affect its ultimate collective aim of turning America blue), Nielsen was in a no-win situation. The same will prove true for the next DHS Secretary, until someone in this country wakes up and does something about border security.

(And as an aside, lest I be accused of being a racist, I’d feel the same way if Canada’s economy were the shit-show that is Mexico’s or Nicaragua's, and if our northern neighbors were overrun with drug cartels, aided and abetted by a corrupt government, and white Canucks were pouring across our northern border in the same numbers that we’re seeing on the southern border. It has nothing to do with race for me, nor is the central issue gang members or terrorists. It has to do, plain and simple, with sovereignty and the rule of law. Either you have those things or you don’t, and if you don’t, you’re not a country, you’re a human landfill for those nations who consider their poorest citizens nothing more than trash.)

No, I’m talking about the two worst decisions President Trump has made since his inauguration: the nominations of Herman Cain and Stephen Moore to the Federal Reserve Board of Governors. Neither is qualified to serve on the Fed, and either would be a liability in the role.

First, to Mr. Cain. I like the guy. He’s smart, and was a good businessman. He knows something of the inner workings of the Fed, having served on the board of directors of the Kansas City Fed bank. I generally agree with his political positions, though agreeing with one’s political positions should have nothing to do with determining whether that individual would make a good Governor of a truly independent Fed.

Next, to Moore. I know less of him, but he’s a supply-sider, as am I, so he must be okay. Unlike Cain, he also has a graduate degree in economics, though not a PhD (more on that later). However, he’s apparently not much of a student of the science. An advocate of using commodity prices rather than overall prices as a gauge of inflation – folly to most economists, including this one – he attributed a commodity price rule to former Fed Chairman Paul Volcker, who never advocated such a rule. Moreover, he referred to that rule as “the Volcker Rule.” The Volcker Rule actually relates to restricting commercial banks from investment trading activity; in other words, it would reinstate the Glass-Steagall Act, which was repealed in 1999, during the Clinton administration.

Finally, after Moore’s nomination to the Fed was announced, he said, “I’m kind of new to this game, frankly, so I’m going to be on a steep learning curve myself about how the Fed operates, how the Federal Reserve makes it decisions, and this is a real, exciting opportunity for me.”

Sorry, but my view of the Fed is that it’s one of those places whose motto should be, “You don’t get trained here, you get here trained.” Because one false move can affect the entire world and everyone in it.

Neither man is a PhD economist. Now, I should be the last person to say that one has to have a PhD in economics to hold a position as an economist. Armed with nothing but a generalist MBA with emphases in economics and finance, I held the title Chief Economist for a national, $35 billion financial institution. And over the course of my career, I’ve corrected the work of PhDs from Ivy League institutions.

However, when it comes to the Fed, I do believe its members should either be academic or private-sector economists, or career bankers, such as current Fed Chair Jerome Powell. I’ll get to the reason why shortly.

Powell was also a Trump nominee, and he was a brilliant choice to replace ivory tower academics like Janet Yellen and Ben Bernanke, who preceded him. He understands the banking system and how interest rates influence money movement and economic activity, but from a more practical vantage point.

The problem with a businessman like Cain, or a political pundit like Moore (Moore is to the right what Paul Krugman is to the left – an economist-cum-political commentator; only Moore is smarter than Krugman) is that all they want is lower rates, all the time.

I don’t have time to get into the whys and wherefores in this post, but I’ve commented on this plenty in the past: easy monetary policy (i.e., too-low rates) is more disastrous to an economy than tight monetary policy (higher rates). The latter can be paused or undone relatively quickly, while the former results in bubbles that wind up being catastrophic, with long-lasting after-effects, and are extravagantly expensive to extricate from. And the usual policy response to a burst bubble is even lower rates. It's a race to the bottom in which everyone loses.

Powell’s rate hikes last year were good policy, even if they caused turmoil in the markets (however, that was short-lived and had as much, if not more, to do with tariffs as with rates) and kept growth from being even higher than it was. Those rate increases kept the economy growing at a strong, sustainable pace (in a mature economy, annual output growth above 4% cannot be sustained without adverse consequences, no matter what any politician claims). More important, those increases paved the way for the Fed to begin unwinding its bloated balance sheet that was inflated by Bernanke’s incredibly risky quantitative easing strategy, which was always going to require the deftest of touches to reverse. In my estimation, Jay Powell is the best Fed Chair since Paul Volcker.

So whom would I appoint, were the decision in my hands? Though he’s no spring chicken, my first choice would be Thomas Hoenig, former CEO of the Federal Reserve Bank of Kansas City. In that role, he served on the FOMC, and was often the lone dissenting vote in the face of Bernanke’s flock of doves, arguing for less accommodative policy (in other words, he was against driving rates too low). He’s smart, knows the territory, and is a reasoned voice.

My other choice might be an academic, but not necessarily one from the usual institutions whose progeny populate the Fed. I don’t believe you need a pure ivory-tower academic from U. of Chicago (or, perish the thought, Princeton or Harvard, which produce only Keynesians). Another banker like Powell would be fine, if the right person could be enticed away from the hefty paychecks of the private sector. 

One thing is certain: neither Cain nor Moore is right for the job. Both are bad-faith nominations by Trump in an effort to punish Powell, and sway the Fed toward easier money. And that is neither necessary – because the Fed is in very capable hands with Powell at the helm – nor wise.