Donald Trump’s most important Fed appointment (Hint: It’s not the Fed Chair)

by Peter Conti-Brown — Friday, Feb. 10, 2017

Given the tumult of the opening weeks of the Trump Administration, the public is forgiven for not realizing that the Administration is woefully understaffed. But even in the flurry of personnel announcements from first the transition team and now the Administration, on the Federal Reserve—perhaps the most powerful of governmental agencies—we have had near radio silence. Of course, Fed Chair Janet Yellen is still at the helm and will be for another year. But two long-standing vacancies are available for the President immediately, and in them lies a key to understanding a fundamental relationship that should guide how we think about the Trump presidency and the very nature of financial and monetary system. While we have already heard from the President that wrestling magnate Linda McMahon has been nominated to lead the Small Business Administration and billionaire Wilbur Ross will lead the Department of Commerce, we have only some hints about whom might fill those important vacancies.

Why the lack of movement on the Fed? Faced with similar vacancies, then President-elect Obama moved relatively quickly. Daniel Tarullo was announced in the first group of regulatory appointments, in December 2008. Granted, that was during a financial crisis: President-elect Obama may have felt early enthusiasm for filling those vacancies that President Obama didn’t share. Obama has kept vacancies at the Fed’s Board longer than in any other time in history, including when Democrats controlled the Senate. It’s possible that President Trump will treat Fed vacancies with a similar disregard.

Possible, but I wouldn’t count on it. President Trump is likely to assert himself early in influencing the Fed, as is his right. But Fed defenders and critics should also take careful note: how he uses that authority will tell us much about whether the central bank will continue in its present form as a policy-making body steeped in traditions of expertise and independence, or whether it will become another arm for partisan and political warfare.

As he has with the rest of his economic appointments, the President sits at a cross-roads with respect to the Fed given the inherent incompatibility of economic coalition members. With admitted reductionism, I’ll call these halves Bannonist, in honor of Trump’s chief political strategist Stephen Bannon; and Priebusian, for his chief of staff Reince Priebus.

A Priebusian appointment is what one might have expected from a President Mitt Romney. Sure, a hypothetical Priebusian probably had a lot to say about the Bernanke and Yellen Fed during the last eight year, most of it negative. That Governor probably opposed the Fed’s monetary policies as too dovish and thought experiments with unconventional monetary policy too extreme. That would put the Priebusian in the mainstream of the Republican majority. But whatever those priors, a Priebusian Fed Governor is also an expert. He knows an awful lot about central banking, monetary policy, banking regulation, and the like. Perhaps he’s a political operator, perhaps not, but more likely he’s someone with undisputed credentials. If the President-elect appoints a Priebusian Governor, he sends a signal to the broader economy that while the election may mean a regime change coming at the Fed, the President is not going to dispute the central vitality of a central bank using its extraordinary powers consistent with its traditions of independence and expertise.

A Bannonist appointment is entirely different. A Bannonist is likely to be an economic nationalist who wants to drain the swamp. Maybe he’s got some ties to Wall Street—Steve Bannon himself is a former employee of Goldman Sachs, of course—but the posture is hostility toward the technocracy and its many conceits. A Bannonist is likely to be fond of Fed conspiracy theories, which are ubiquitous in popular discussions of the Fed and will have real purchase among those who view all technocratic decision-making with hostility. And a Bannonist is also likely to have no obvious expertise on these matters. I don’t mean that a Bannonist is unlikely to have a PhD in economics, although that is almost certainly true. A PhD in economics isn’t (and shouldn’t be) a prerequisite to be a superb central banker. I mean that a Bannonist won’t have experience in central banking really at all.

To be clear, there is merit to the argument that central bankers use their claims to independence and expertise as a mask for more ideological maneuvering. As I have written, how central bankers use the significant machinery of monetary policy to resolve uncertain questions necessarily reflects their ideologies and worldviews. They are political institutions embedded within the political system. This is why presidential elections matter so much to their governance, and rightly so. We can invoke Churchill in his celebration lament: democracy is a pretty terrible system for selecting these technocrats, except for everything else we’ve ever tried.

The point is that a Bannonist rejection of expertise and independence as pure applesauce is a dramatic and destabilizing overreaction. If central bankers don’t look like aeronautical engineers plotting a satellite’s orbit, neither are they the same as a Karl Rove or David Axelrod trying to do what is best for the political prospects of their sponsors. The institutional innovation of central banking is the ability to protect citizens from their own worst short-term instincts by protecting the integrity of the currency against laments that money should flow more freely and easily. That experts disagree doesn’t mean they aren’t exercising expertise.

Many Democrats will reflexively oppose a Priebusian candidate because she will be a Republican. I hope they don’t. Opposition may come after vetting—there are plenty of Priebusian candidates who, for a variety of reasons, shouldn’t be given the keys to that particular kingdom. But, as the saying goes, elections have consequences. The guide here should be Sen. Lindsey Graham’s approach to judicial nominations. Democrats to adopt the same approach for Fed appointments. It won’t be easy, of course, as the debates around the eminently qualified Supreme Court nominee Neil Gorsuch demonstrates: most Republicans haven’t followed this example when evaluating President Obama’s own highly qualified Fed appointments.

But the Fed is more important than to waste opposition on mainstream candidates with the relevant expertise to accomplish their assigned tasks, assuming they survive a reasonable vetting. A Priebusian Fed Governor probably hasn’t cheered Democratic initiatives, but he has an undisputed expertise. If the appointment that President Trump announces qualifies in that way, then the work of congressional accountability, not congressional obstruction, should begin.

If, on the other hand, the President appoints Bannonists to those open vacancies, it’s essentially a declaration of war against the idea of independent central banking, as tangled as that label can be. At that point, the hard-money types in the Republican coalition, Democrats virtually everywhere, and perhaps especially Fed insiders will be on notice: if they value the idea of expert decision-making in the central bank, then the stakes couldn’t be higher. As the dust settles on this first generation of President Trump’s cabinet appointments, we should not let these two seemingly obscure appointments go unnoticed. They will be among the most important the President will make.

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About Peter Conti-Brown

Conti-Brown is an assistant professor at The Wharton School of the University of Pennsylvania. A historian and a legal scholar, Conti-Brown focuses on central banking, financial regulation, and public finance.

Cite As: Author Name, Title, Yale J. on Reg.: Notice & Comment (date), URL.

4 thoughts on “Donald Trump’s most important Fed appointment (Hint: It’s not the Fed Chair)

  1. Joe Crescenzi

    Without a crystal ball to rely upon, I see the likelihood of a nominee of a “Bannonist/Priebusian” hybrid. This nominee would be eminently qualified though with classical Chicago/Austrian beliefs. Bannon especially realizes that the President’s inaugural speech, which focused upon the problems Main Street faces and a promise to return Power to the People, requires a severe and drastic change in monetary policy.
    The new face of the Federal Reserve will likely be focused on moving to a strict and tight policy to mimic a gold standard as Greenspan had done prior to 1995, possibly even give greater public credence to tracing a long term path back to convertibility.

    Reply
  2. Bob

    During the debates Pres. Trump said he thought Ron Paul had some very good ideas. Hopefully Pres. Trump will follow Dr. Paul’s advice and appoint Austrian Economists and “End The Fed.” It’s not in the Constitution. The Treasury Dept. is empowered to mint money. Which means gold or silver coins. This would restrain the Fed’s disastrous inflation inducing fiat currency. The Fed and most other Central Banks are responsible for all the financial bubbles. They are created by keeping interest rates artificially lower than the free market would and longer too. We know this thanks to Ludwig von Mises, Friedrich A. Hayek many other Austrian Economists and by observing economic history. As Hayek stated: “The curious task of economics is to demonstrate to mean how little they really know about what they imagine they can design.”

    Reply
  3. Dwain Dibley

    Conti-Brown let me ask you; can you identify the specific section in law that grants to the Fed and the banking system the authority to create money?

    Seeing as how our monetary system is a legal tender monetary system, which necessarily means our money is a product of law, could you point out the specific section in law that designates the bank administered accounting entries that are claimed to be money, are in fact, a U.S. legal tender money, or a legal money of any type?

    Considering the fact that there is a total of $1.5-Trillion of U.S. legal tender money in circulation around the globe, with about $280-Billion of that in circulation within the U.S. and $76-Billion of that held in U.S. bank vaults, which covers the $1.9-Trillion in demand deposits as well as the $9.3-Trillion in savings deposits, as well as all commercial transactions, would you assess the Fed’s monetary policy as being too tight or too loose?

    Considering that all deposit accounts legally represent a debt liability of the banks, owing cash upon demand as well as over time, would you consider the banning of cash either an $11-Trillion gift to the banks or a debt jubilee for the banks, as they would no longer have to pay their deposit account holders the cash they owe? Didn’t the Fed and banks pull this ‘banning cash’ stunt once before when the cash was gold?

    Thank you for your time and consideration.
    You can email me your response if you prefer, or leave your response on my blog.

    Reply
  4. Gary D Anderson

    To get to the point, it appears the Republicans are toying with another housing bubble. The Fed always liquidates aggressive bubbles. That is not a requirement of central banks. The BOE is much more helpful to small and medium businesses in a downturn than the liquidating Fed was in many recessions and especially in the Great Depression and Great Recession. The Fed must accommodate the economy. If that is an end to Fed independence then I say good. I am not for a housing bubble, but if there is one, the Fed must protect the people. It has a horrible record of doing that. It likes to liquidate and push the wealth to the top. That is wrong, wrong, wrong.

    Time for the Fed to keep its independence by accommodating the citizens of the United States. We are on to you Fed. As I wrote at my website, you can document Fed behavior versus BOE behavior. The BOE is not heavy handed towards its citizens.

    I am not a fan of Donald Trump. But if he does decide to push easy money, he needs to get an agreement from the Fed not to liquidate the economy if the easy money regime crashes.

    Reply

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