With 107 days left before the presidential election and 182 to Inauguration Day, our nation is in unprecedented political turmoil.
What does that mean for the economy generally? What about household concerns such as interest rates or retirement account returns? No one really knows — but some conditions will hold, regardless of who wins in November.
Ultimately, if all other institutions fail us economically, it’s the global bond trade that can, and will, rescue us from damaging political interference in the market. They’re called “securities” for a reason, and when there is money to be made — but especially lost — traders will act spontaneously to make things right.
But first, let’s consider our current situation, and what brings us to this discussion.
Our situation is shot through with “uncertainty” — a circumstance in which we do not know what will happen. Uncertainty differs from “risk,” however. Risk also involves not knowing what will happen, but includes some information, such as on weather, climate, health, stock market patterns, gambling odds, or other variables, that allow estimates of statistical probabilities of different outcomes.
Uncertainty is when there is no such basis of any kind for predictions. That is precisely what we face now. We know there will be an election on Nov. 5. There should be an inauguration next Jan. 20. Before those dates, but primarily after, no one knows how critical events will play out.
But economically, on some issues, we can form expectations. One is that the Federal Reserve will not make major changes in monetary policy. Fear and uncertainty may roil financial markets. Bond and stock prices may gyrate, and with them interest rates. But only in the most dire circumstances, such as the real estate debt blowout of the late 2000s, will the Fed make significant, drastic changes.
This stability will continue post-inauguration regardless of who takes the oath. Pundits may punt about what Donald Trump or Joe Biden will do, particularly Trump, but our nation’s central bank was designed to be insulated from control by elected officials and from politics generally.
Both Biden and Trump are well-known commodities. But 99% of the uncertainty still centers on Trump. A Democratic win, whether by Biden or someone else, would mean cautious stay-the-course policies in virtually all policy areas, but especially the economy,
If Trump wins, multiple questions arise, based on his past behavior and current comments. Will he try to dictate Fed money and interest rate policies? Will he fire Chair Jerome Powell, whom he appointed, or other members of the Board of Governors to bring in his own lackeys? And, failing that, how, for example, would our central bank react if Trump succeeds in getting Congress to pass laws raising import tariffs to unprecedented levels, making drastic changes in other taxes or changing defense policies relative to NATO or the EU or Taiwan that would affect business and trade globally?
No one can predict what the Fed would do in a crisis. Both its reactions to a looming financial meltdown in 2008 and its unprecedented 25% increase of the money supply over the year following COVID’s 2020 outbreak were drastic, unprecedented and still controversial. Yet in both cases Fed acted on its own, not in response to orders or pressure from the White House or Congress.
Some “experts” suggest Trump will instruct the Fed to lower interest rates or will quickly replace Powell. Well, probably not. We can thank three people from history — and the amorphous bond market — for that.
Start with Carter Glass. This newspaper editor and publisher from Lynchburg, Va., served in the House of Representatives, as U.S. Treasury Secretary and as a senator. In 1913, he helped write the Federal Reserve Act and shepherded it through Congress. In the 1930s he oversaw banking reforms including Federal Deposit Insurance, the separation of commercial and investment banking and an overhaul of the Fed.
His key contribution was the structuring of the Fed into 12 independent regional banks — legally private corporations. They had a statutory mandate but were free from political control. This compromise solved divisions between conservatives who did not want anything headquartered in Washington, and those who feared anything based on Wall Street. Neither side wanted presidents to control the new institution.
In congressional reform of banking and finance during the 1930s, Glass was joined by Utah business owner Marriner Eccles. He had taken over the businesses of his father, an immigrant from Scotland, who was Utah’s first multi-millionaire. These included banks and Eccles understood the sector deeply.
The Fed had let the economy implode after 1929 because it was too decentralized. So the 12-bank structure was kept but a seven-member board of governors was created. These governors together with five of the 12 district bank presidents in rotation would make monetary policy. Great care went into designing a system of 14-year governors’ terms on a schedule so that no president could ever appoint a majority on the board. And the district presidents on the policy-making Federal Open Policy Committee answered to no politician.
Eccles was the first chair of the new board, acting effectively, but staying on too long. After the brief term of a faceless replacement, William McChesney Martin took over as chair. With an English degree from Yale, Martin was the greatest Fed chair ever and an unsung American hero. Serving from April 1951 to the end of January 1970, Martin oversaw two decades of growth and prosperity with low inflation.
Martin’s most important action was in his last year. Shortly after Richard Nixon’s inauguration in January 1969, Martin was summoned to the White House. He was told to step down so that Arthur Burns, a distinguished academic, could take over. Martin told Nixon to go pound sand. His term had another year to run, precisely because the law was written to prevent a new president from grabbing control of the money supply and interest rates. Nixon had no statutory power to fire him.
Powell should emulate Martin’s principled stand if Trump tries to fire him. The key problem, however, is that Nixon backed down and did not make it a public issue. There is no question that if Trump openly called on Powell or any other governor to leave the board, there would be a political and financial crisis. But governors should stand firm.
But even if Powell or other governors did acquiesce, there is yet one more check: The five district presidents on the policy-making FOMC are not subject to the executive branch in any way. They did block a key action by the Board of Governors in August 2008 as the financial debacle started. And they would block any kowtowing to any orders from the White House.
But the final check on overreaching power is the amorphous global bond market.
In his 1812 invasion of Russia, Napoleon Bonaparte was defeated by “General Winter.” Several presidents with big plans, including Bill Clinton, have been defeated by “General Bond Market.” Simply put, financial markets are naturally roiled by political adventuring — stock prices fall, interest rates rise and politicians pull back. Indeed, Clinton’s key policy adviser James Carville famously said, “If there was reincarnation … I would want to come back as the bond market. You can intimidate everybody.”
One can hate the global market centers of Wall Street and the City of London and Frankfurt and Basel, but international financial markets are the ultimate check on the powers of mercurial leaders. None of the conspiracy delusions of shadowy control are true or needed. It is actually the spontaneous reactions of thousands of banks and investors to reckless moves by any government that are the ultimate check on power. One can regret that generally, but depend on it now.
St. Paul economist and writer Edward Lotterman can be reached at [email protected].
