Trump Investigates Jerome Powell

Yesterday, the New York Times published a story revealing that the U.S. Attorney's office for the District of Columbia — led by former Fox News television judge Jeanine Pirro — has opened a criminal investigation into Federal Reserve Chairman Jerome Powell. Powell is being investigated due to allegations that he lied to Congress during testimony regarding renovations to the central bank's Washington, D.C. headquarters. Powell has long been the target of cult leader, convicted felon, and failed President Donald Trump's anger due to Powell's determination to fulfill the Bank's mandate to act independently rather than acquiescing to Trump's demands to lower interest rates. Using Powell's testimony as a pretext to put legal pressure on the Chairman is another indication of the lengths that Trump is willing to go to establish his absolute control over all organs of the U.S. government. Moreover, this move puts the U.S. economy in significant danger.

I am sure that many, if not most, readers of this blog have a solid understanding of the history and role of the Federal Reserve. But for those who don't, the Federal Reserve was created by the Federal Reserve Act of 1913. The Federal Reserve was intentionally set up to be independent from both congressional and presidential control based on the theory that independence "facilitates a less political, longer-term perspective to monetary policymaking that generally leads to better long-run economic outcomes, such as lower inflation." This independence has at times led to friction with presidents whose political goals may differ from the economic objectives of the central bank. Trump has been particularly at odds with the bank and Powell, often criticizing Powell for not being sufficiently aggressive at lowering interest rates.

In Trump's second term, he has used the Department of Justice as his private law firm, decimating the department's previous independence. At Trump's bidding, the DOJ has opened criminal investigations of Trump's enemies such as former FBI director James Comey and New York attorney general Letitia James. Trump also attempted to fire Lisa Cook, a governor at the Federal Reserve, whom Trump has accused of mortgage fraud. The Supreme Court prevented Cook from being ousted until it can hear the case later this month. The investigation of Powell is another example of Trump using the DOJ as a weapon in his personal and political vendettas.

Trump's efforts to impose his authority over the Federal Reserve have been one of the few topics that has led to significant pushback, even among allies. The Supreme Court has allowed Trump to take over most independent agencies, expressing strong support for the theory of an unified executive. However, the Court appears to have drawn the line when it comes to the Federal Reserve. When two officials of independent agencies, Gwynne Wilcox of the National Labor Relations Board and Cathy Harris of the Merit Systems Protection Board, sued Trump to prevent his removal of them, the Supreme Court sided with Trump. However, in its decision, the Court went out of its way to stress that the ruling did not apply to the Federal Reserve and stood behind the bank's independence, writing:

The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.

Even the normally pro-Trump Wall Street Journal Editorial Board criticized Trump's legal attacks on the Fed. Republican Senator Roger Marshall was so unwilling to support Trump that he suggested that Trump was simply "trolling." Another Republican, Senator Thom Tillis, criticized the push to end the Fed's independence and said that "It is now the independence and credibility of the Department of Justice that are in question." Tillis even went so far as to threaten to oppose the confirmation of any nominee for the Fed until the matter is resolved.

As for Powell, he released a remarkable video statement saying that the investigation should be seen in the context of the administration's "threats and ongoing pressure." He went on to say that "This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation." He also stated that "public service sometimes requires standing firm in the face of threats" and promised to continue serving with integrity. Consider for the moment that, in addition to everything else that is going on, Trump has ignited open warfare between himself and the central bank chairman.

Economist Jason Furman noted that other countries that have prosecuted or threaten to prosecute central bankers as a form of political intimidation include Argentina, Russia, Turkey, Venezuela, and Zimbabwe. Furman also showed that inflation rose to 86% in Turkey after Recep Tayyip Erdoğan installed a loyalist who would do his bidding as central bank governor.

As Furman points out, the history of central banks losing their independence is not a good one. Normally, the economic outcomes are near disastrous. Three former Federal Reserve chairs, Ben Bernanke, Alan Greenspan, and Janet Yellen, signed a statement saying that the investigation is an "unprecedented attempt to use prosecutorial attacks to undermine" the Federal Reserve's independence. They noted that central bank takeovers by political leaders have "highly negative consequences for inflation" and other economic indicators. The more cynical among us might suggest that, regardless of their political or legal philosophies, Supreme Court judges, senators, and others have investment portfolios that they would rather not see devastated. 

Trump has managed to intimidate both the Senate and the House of Representatives into almost complete subservience. With the compliance of the Supreme Court, he has taken control of almost all independent agencies. The Court itself, which has three Trump appointees and a solid conservative majority, has done little other than enable Trump's transition of the U.S. into a dictatorship. In that environment, it is not surprising that Trump would want to dominate one of the last vestiges of independence that remains. However, Trump clearly has a very specific motivation beyond simple hunger for power. He is obsessed with lowering interest rates. Lowering interest rates too aggressively generally leads to inflation. Ironically, Trump's promise to lower inflation was one of his most successful campaign issues. Why then would Trump fixate on a policy that will almost certainly increase rather than reduce inflation? I have some thoughts.

In March I wrote a blog post titled, "What Might be Motivating Musk" in which I noted that Elon Musk, who at that time was serving as Shadow President and who continues to have significant influence with Trump, was, as Trump is now, obsessed with interest rates. I noted that the super-rich, like Musk, have very little income and, therefore, don't pay much in income tax. Musk has been forced to borrow billions of dollars for his business activities and, therefore, interest rates are more important to him than tax rates.

While I didn't mention it in that post, Musk is a well-known practitioner of the "Buy, Borrow, Die" strategy employed by many billionaires, including Trump supporters such as Larry Ellison, Ronald Lauder, and Stephen Schwarzman. These individuals own very large assets, often in the form of corporate stock. If they sell those shares, they are forced to pay capital gains taxes. To avoid those taxes, they use their assets as collateral to obtain lines of credit. They then live off the borrowed money. However, lines of credit, like any loan, come with an interest rate. That creates an additional incentive for the extremely wealthy to prioritize low interest rates.

If Trump is, in fact, attempting to impose a policy of low interest rates that will harm the country at large while benefiting him and his close circle of supporters, that would be consistent with the theory of "neo-royalism" that I have been discussing. According to this theory, the crucial ruling entity is no longer the government or the nation-state, but rather hierarchal cliques that surround a ruler. This theory explains Trump's behavior very well. It is quite easy to believe that Trump, Musk, Ellison, and a small number of others would pursue a policy that personally benefits them while being detrimental overall.

Make no mistake about it. The fight between Trump and Powell is very bad for the economy. More so if Trump wins. All major stock futures indexes are down sharply. Gold hit an all-time high today. If Trump begins manipulating interest rates for his and his clique's benefit, the stock market will be destroyed. The one silver lining coming out of news of the investigation into Powell is that Powell is fighting, and others, including Republicans, are coming to his defense. But this might all be for naught as Powell's term expires in May anyway, and Trump is certain to appoint a lackey who will jump when told. With any luck, the reaction to the investigation will motivate Senators to refuse to confirm anyone who is unlikely to act independently. However, that is probably a pipe dream.