Sunday, February 5, 2017

Review of Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider

The one good thing about Secrets of the Temple is the documentation of the Fed's strong influence over the business cycle, and therefore over presidential elections.

Being elected president at or near the top of the business cycle is bad news. When the cost of money eventually spikes and the economy suffers, people blame the incumbent president. This may be why Carter only had one term in office. (Very rare given the powerful incumbent advantage in elections.)

Conversely, Obama was elected at the perfect point in the business cycle: the bottom. He couldn't have had it any easier. The slow recovery actually served him extremely well - where would he have been without the ability to borrow a trillion dollars a year at low interest rates?

Now Trump enters office with very high asset prices - a "big fat bubble". Average hourly earnings are the hottest of the cycle (2.8% growth in December), which gives cover for tightening. It's a safe bet that there's not a single Trump supporter on the Federal Reserve Board of Governors. Raising rates (at the right moment) and causing a recession has a strong chance of defeating an incumbent president after one term.

Think about it, the Fed has three purposes. Bailing out the elite at the bottom of economic cycles, which is a put option that allows them to use more leverage. Choking off the economy when labor is starting to receive a share of economic growth (like now). And third, bouncing populist presidents from office. See this week's WSJ:

"The Federal Reserve is quietly tightening U.S. monetary policy—by means other than interest rates. Decisions made by the Fed years ago mean that the maturity of its $4 trillion-plus bond portfolio declines every day, a process that Fed Chairwoman Janet Yellen said in January has the same impact on benchmark bond yields as two short-term rate increases over the course of 2017. In a footnote to her most-recent speech, Ms. Yellen said that the maturity of the Fed’s portfolio is falling. The average duration of the Fed’s portfolio, excluding mortgage-backed securities, fell to just over six years last week from nearly 7.5 years at the end of 2013"
Unfortunately, this book isn't based on a solid theory of economics (like Austrian), and although it depicts the Fed as a "secretive temple," it does so in a typical journalistic power-adulatory way. The overall message is that the Fed does have enormous power, but it's exercised by and for technocrats and any conspiracy theories are wrong. But watch and see how hard it they are going to make things for Trump.

2/5

No comments: