Attacks on Trump’s Fed Nominee Reveals the Central Bank’s Fatal Bias
Why do GOP Senators Shelby and Toomey believe that a candidate for the Fed cannot have conservative views?
Last week, the Senate Banking Committee met to consider the nomination of Dr. Judy Shelton to the Federal Reserve Board. The hostility toward Dr. Shelton was bipartisan—senators challenged her independence from President Donald Trump and characterized her thinking as too far outside the mainstream to trust with the nation’s economy.
Yet whether or not Dr. Shelton is “independent” of Trump is a red herring. The Fed is the most political and politicized agency in Washington, as evidenced by the work of its Washington staff to vilify Dr. Shelton. Moreover, the Fed’s willingness to facilitate the Treasury’s massive fiscal imbalances seems to be without limit. The biggest threat to Fed independence is the increasing tendency by Congress to treat the agency as a piggy bank whose resources can be tapped to fund pet projects, seemingly at zero cost to the budget.
The real objection to Dr. Shelton is that she is a conservative who believes in free markets and, yes, has good things to say about gold as a monetary asset. Since FDR did away with the gold standard in 1933, the U.S. economy has been on a relative currency standard based on, well, nothing. For this reason, it is possible to compare the dollar favorably to fraudulent “crypto currencies” such as bitcoin. The only difference between the dollar and the bitcoin as a means of exchange is that the former has been declared legal tender in the United States and has gained a huge following offshore.
The Fed’s Board of Governors in Washington, which was created two decades after the advent of the central bank, is a decidedly New Deal institution where only left-of-center views are tolerated. Some brave souls working at the regional reserve banks manage to pursue a relatively conservative line, but ideas like the gold standard and, more importantly, holding the Federal Reserve Board accountable for its actions are unwelcome. As Walker Todd noted in his classic 1995 monograph “The Federal Reserve Board and the Rise of the Corporate State,” the Fed has a long history as a proponent of economic policies that are antithetical to democratic, free markets:
The Federal Reserve Board led the way in Hoover’s rethinking of liberal orthodoxy in the crucial year running from the summer of 1931 through the spring of 1932. The outcome of the Board’s endeavors was an astonishing array of economic recovery initiatives that scholars have classified, retrospectively, as corporate statist in nature, involving direct Federal Government assistance to private industry and business-labor cooperation enforced by governmental intervention. These changes persisted and generally were amplified during the Roosevelt administration’s first year (the “First New Deal”); the departure of Eugene Meyer as governor of the Board in early 1933 apparently did not diminish the Board’s willingness to pursue the planning initiatives undertaken during the First New Deal.
Not only did the Fed actively assist the FDR administration during the 1930s with its confiscation of gold, it became the guardian of liberal economic orthodoxy. Within the administrative state, the Fed exists as the analog of the Soviet-era economic planning agency GOSPLAN, exercising control over the government’s economic research budget and thereby stifling a free exchange of ideas when it comes to monetary policy.
The anti-conservative tendencies of the Federal Reserve Board are well known within the system. Paul Volcker, for example, led the rescue of the big banks in the 1980s by allowing an expansion of off-balance sheet lending. He took extraordinary measures to prevent the nominations or appointments of respected economists and free market advocates like W. Lee Hoskins and Jerry L. Jordan to head other Reserve Banks. Both Hoskins and later Jordan were appointed to the Cleveland Reserve Bank’s presidency after Volcker’s departure in 1987.
Hoskins in particular was the antithesis of Volcker, an unrepentant exponent of conservative, sound money theory who advocated making zero inflation a national goal. He eventually left the Cleveland Fed to become president of the solid Huntington Bank in Columbus, which interestingly was among the last institutions to approve new bank loans for Chrysler in 1992.
In the 1990s, Hoskins and other free market exponents believed that ill-managed banks should be allowed to fail and that federal deposit insurance was hurting rather than protecting the financial system by allowing banks to take excessive risks that were in effect subsidized by the American taxpayer. Dr. Shelton agrees with these views. But this perspective, which represented mainstream American economic thought before the New Deal, is at odds with the Volcker view of avoiding “systemic risk” via public subsidies for large banks and other more generalized types of government intervention in the marketplace.
Dr. Shelton represents a breath of fresh air in an institution that for too long has been in the grip of a strange, neo-Keynesian, socialist tendency that is far from the American mainstream. The malady affecting the Fed today is its consistency in following failed policies such as “quantitative easing” and other types of direct market intervention. The unwarranted and poorly argued attacks on Dr. Judy Shelton are typical of the faulty reasoning and intellectual bias that seems to infect the media and Congress, particularly the Republicans, on the topic of Fed independence.
Members of the Senate, for example, take issue with the fact that Dr. Shelton might change her mind after considering new data. The bigger issue—and as someone who worked at the Fed of New York during the Volcker and Corrigan eras, I can speak from first-hand experience—is that conservative views on matters of money and political economy remain unwelcome.
So bravo to President Trump for nominating an intelligent and thoughtful conservative woman to the Fed Board of Governors. And shame on the media and Senators Richard Shelby and Pat Toomey for not defending this courageous lady. When asked to respond to written questions for this article, neither Toomey nor Shelby responded. Is this really the same Pat Toomey who chaired the Club for Growth? Why does he now believe that a candidate for the Fed cannot have views that diverge from the mainstream?
In the world of central banking and economics, the tyranny of the consensus has become unbearable. The world is currently held hostage by a group of unelected central bankers who have decided that they must save the world from deflation via hyperinflation and open market purchases of private stocks and bonds. Despite the accumulating evidence that these policies are not helpful and may in fact be damaging to the global economy, no dissent from the Fed’s monetary gospel is tolerated—even by Republicans, who in theory should know better.
Christopher Whalen is an investment banker and chairman of Whalen Global Advisors LLC. He is the author of three books, including Ford Men: From Inspiration to Enterprise (2017) and Inflated: How Money and Debt Built the American Dream (2010). He edits The Institutional Risk Analyst, and appears regularly on such media outlets as CNBC, Bloomberg, Fox News, and Business News Network. Follow him on Twitter @rcwhalen.