Neon Liberalism #41: Is the Fed Okay?

Join Samantha and guest Maia Mindel as they talk about Trump's latest attack on the Federal Reserve, give some historical context for central bank independence, and struggle with the difficult question of how to balance technocratic expertise with democratic accountability. Plus some cats.

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Transcript

Samantha Hancox-Li [00:00:09]
Hi and welcome back to Neon Liberalism. This week, I want to talk about a very boring subject that has suddenly become very exciting, and that is central banking.

Central bankers are famously very boring people, very like among the most buttoned down of the whole federal workforce, never really prone to excitement, but for various reasons, they've rapidly moved to the center of this kind of roiling constitutional crisis that we're in the middle of.

And so to talk a little bit about what's happening, what it means, and what are central banks, I thought I should ask on an old friend of the podcast, Maia Mindel. Maia is an economist and a writer for The Argument among various other places, runs a Substack, Some Unpleasant Arithmetic, which is fascinating, and I strongly recommend it. So yeah, Maia, thanks so much for coming back on.

Maia Mindel [00:01:18]
Well, yeah, thank you for having me. And regarding central bankers being boring, it reminded me of a really old story about Jay Powell where they did a big profile on him during the pandemic. And it was really funny because one of his hobbies mentioned was that he plays guitar and goes cycling.

Samantha Hancox-Li [00:01:42]
Yeah, fascinating guy.

Maia Mindel [00:01:48]
He apparently has a private Twitter account, so who knows? He might see this?

Samantha Hancox-Li [00:01:53]
I was gonna say, has anyone figured out what his private Twitter account is?

Maia Mindel [00:01:59]
No, I think it's probably like JayP and a bunch of numbers, or like Jay06 and a blank profile picture of some landscape.

Samantha Hancox-Li [00:02:16]
So like I said, just genuinely very boring people. But to explain to our listeners what's been going on here last week, or I guess this starts well before last week. Basically, since he's taken office, Trump has been insistent that the Federal Reserve is biased against him, that they should be cutting rates, but they're not cutting rates because they hate him and that they're illegitimate and undemocratic.

And recently, he's escalated from rhetoric to action, and he has fired or attempted to fire—these days, who can tell really whether you've been fired or just may be fired—a member of the Federal Reserve Board of Governors, Lisa Cook.

It's kind of no surprise why he targeted Cook in particular. She's a Black woman, and when you look at Trump's purges, they've been pretty—I mean, like, for example, the purge of the Joint Chiefs of Staff was clearly they just fired everybody who wasn't a white man, so they're going after Cook for that reason. But they've kind of ginned up this specious argument. They've alleged that she committed mortgage fraud because she listed two different residences as primary residences on different loan applications, or something. I don't really know, but it's obviously pretextual.

So I'm curious if you have something to add about what's going on with this particular firing.

Maia Mindel [00:03:52]
Well, yeah, this quote unquote firing—I think the BBC put it in quotes, or the Financial Times. The important thing to note about Lisa Cook is that she was already caught up in the right-wing outrage cycle when she was first nominated, which was I think two or three years ago. She was appointed by Joe Biden, which is already a reason for suspicion in the world of MAGA.

And when she was nominated, I don't remember the specific person's name, but he was very quickly picked up by Chris Rufo, the allegation that she was committing academic fraud, and that many of her papers contained faked data. One of her papers has received somewhat more legitimate criticism about statistical techniques and whatnot, which is pretty common in economics. So that's not especially disqualifying. People have attacked basically every Nobel laureate this decade over the same things.

And there were questions about her relevant qualifications, because she's mostly been an economist that deals with issues of race, gender and innovation, and most of her papers are about that sort of thing. And so people were arguing whether she had relevant qualifications in terms of her expertise. That's obviously kind of pretextual.

The Rufo allegations never went anywhere. No one took them very seriously. I think the Minneapolis Fed, which was where she was doing research at the time, directly got involved and said that there wasn't anything substantial to them. And this was around the same time the President of Harvard was fired over—well, not fired, she resigned, but she was ousted over academic fraud allegations.

So she's already a character in that world, which I think is the defining reason why she was picked as a target. Well, one of the defining reasons. The other is her gender and race.

There's already a Fed governor who resigned, Adriana Kugler. Nobody really knows why she resigned, because her term is expiring in May. So there's been some hush-hush discussion of her being sort of pressured to resign informally. Something that's been talked about kind of openly on social media is that people are receiving a lot of threats and intimidation in the government, like political officials. So maybe it had to do with that. But I'm not really sure I buy it. I think it's probably personal reasons or health reasons.

Her term was expiring anyway, and Trump has already nominated someone, Stephen Miran, the chairman of the Council of Economic Advisors, the guy who came up with the idea of using tariffs to devalue the dollar.

So I think the important thing to note here is that Trump's nominations and appointments to the Fed have gone the same direction as his general rightward shift in conservative politics. He first appointed Powell, obviously, who was appointed by Obama to the Board. He appointed a few pretty standard centrist, center-right economists.

And he nominated two people in late 2020 that led to a lot of discussion around Trump and the Fed. He nominated a guy called Stephen Moore, who was a conservative columnist. He wasn't really qualified at all to be on the Fed, and he had a really long track record of just saying extremely weird things. He also basically had completely hypocritical views on the economy and on interest rates. He was basically a Republican partisan. And a woman named Judy Shelton, who was a gold standard believer and who also was kind of on board with the idea of devaluing the dollar and having a second Bretton Woods at Mar-a-Lago.

Samantha Hancox-Li [00:08:49]
The Mar-a-Lago Accords!

Maia Mindel [00:08:52]
The discussion at the time was that if Trump appointed someone unqualified to be the chairman of the Board when Powell's term expired—because it was before he lost the 2020 election—at the time, the discussion was whether the new chair would control monetary policy.

And it's a tradition, because the Board of Governors runs the Fed, but they don't directly decide on monetary policy themselves. Interest rates are set by the Federal Open Market Committee, which is one of the committees of the Fed. It's the most important one. The second most important one is on regulations, basically.

The chairman of the Open Market Committee is, by custom, the chair of the Fed. So Jay Powell is, Janet Yellen was, Ben Bernanke was, but it's not really required by law. And the Open Market Committee is the Board of Governors and the chair of the New York Fed. There's a bunch of regional Feds that are very, very not transparent at all.

The New York Fed is the one that's most closely linked with Wall Street and the banking sector, because New York is the financial capital of the US. And a few—I think three—rotating regional Fed chairs right now. You have Minneapolis, St. Louis, and I think, well, the other one I don't remember, but they're all located in major cities. They conduct economic studies, economic surveys of the region. They do have different levels of prestige. For example, New York, Boston and San Francisco are much more prestigious than the other ones, but I think that's just because those are much more desirable cities to live in than, say, Cleveland, which has its own Fed too.

Samantha Hancox-Li [00:11:17]
Okay, so what I'm taking away from what you're saying here is that the Fed has a variety of supervisory and regulatory responsibilities for the economy, handled by their own internal structure. But what I want to come back to is how we keep on saying, "Well, maybe she was fired and maybe she wasn't, quote unquote, fired," and explain a little bit what that's about.

Because the Fed is a creation of Congress, and the way it's been created, people are appointed to the Federal Reserve for a set period of time. And according to the law, according to the statute anyways, they can't be removed at the President's own discretion. That's just their term of office. And this has become a pretty highly contentious legal principle.

The Republican theory of the so-called unitary executive says that fundamentally Congress can't make laws like this, that everyone in the executive branch serves at the pleasure of the President. And this has been tested in a lot of ways recently.

In particular, Trump fired—not fired—Gwen Wilcox, who was sitting on the National Labor Relations Board, and basically he did this in order to deny the NLRB from having a quorum so that it couldn't make rulings about unions.

But in any event, Wilcox sued, and she said, "You can't fire me because, again, the law created NLRB as a quasi-independent agency. I don't serve at the President's discretion." A lower court said, "That's right. The law is very clear. You can't fire her. She's reinstated." And the Supreme Court issued a stay, not a final ruling on the case, but a stay of the lower court's order saying yes, the case can keep on going, but for the moment, she's fired.

And there's some fascinating reasoning in there that I want to read. Quote: "Finally, respondents Gwen Wilcox and Kathy Harris contend that arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve's Board of Governors or other members of the Federal Open Market Committee. We disagree. 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."

And if you stop and think about it, there's no argument there. They're just kind of blowing smoke about why the Federal Reserve is special, because the court clearly is asserting, "No, no, you know, all the other agencies, they're not independent. The president can fire anybody, but don't touch the Federal Open Market Committee," which I think is kind of a fascinating little turn from the Supreme Court. And I was wondering if you could try and talk about why you think that is.

Maia Mindel [00:14:16]
Well, the superficial justification is it's a fairly central, not entirely public entity. It has banks that sort of participate in its decision-making structure, and a bunch of private sector interests are represented, not in the national Fed but in the regional banks. That's changed somewhat recently, but traditionally, the presidents of the regional banks were local business owners and things like that. That's how Herman Cain was appointed head of the Kansas City Fed.

And the regional presidents are chosen by the Board of Governors without oversight from Congress or from elected officials, which is one of the major criticisms of the Fed—that these people who make up three out of eight members of the Open Market Committee, that's nearly a majority. Well, actually a majority counting the New York Fed, that's four. Well, nearly, because four of nine, but nearly a majority of the members of the Open Market Committee are just elected with zero accountability.

And so there is that kind of argument. And of course, the history there is just probably very specious, which is not unusual for the current Supreme Court. But the importance there is that the Federal Reserve is to the American economy what the Supreme Court is to the American Constitution, in a way.

Samantha Hancox-Li [00:16:00]
Yeah, that's interesting. It's an interesting way of putting it. And this kind of brings us to some of the more historical questions I want to ask here, because this phrase you use that they're the Supreme Court of the American economy is very striking.

And you'll see it these days when people list fundamental institutions of the overall liberal package of governance. One of the things they'll put on the list is you have to have an independent judiciary. You want a Supreme Court of some kind, you want a legislature, you want an independent central bank. And that's kind of what I want to talk about here is what that means exactly.

So I guess my first question for you is, what is a central bank? What does that actually do for the economy?

Maia Mindel [00:16:54]
Well, the central bank basically has the function of being—their main, most basic function is that they're the lender of last resort. So when a bank needs money, it has someone to ask for it. But in general, they're structured in a way that they set monetary policy. That's kind of a very generic term. What they do is they set interest rates.

The interest rates they typically set are the interest banks get if they deposit funds in the central bank. So that means that they can set a very low rate and incentivize banks to lend more money, or they can set a very high rate, and that disincentivizes them from lending, because it's more profitable to keep your money with the Fed.

For example, the Fed sets what's known as a funds rate, and it's overnight. You deposit your money today, you get it back tomorrow. And currently it's 4.25%—that's annual, of course. They don't get 4% a day, that would be a lot. But yeah, that's like 1,500% a year.

And it's kind of an open question and open debate how much central bank rates influence bank rates, because people don't borrow at the funds rate, they borrow at mortgage rates and at consumer and business rates. And the reason why that's a pretty complicated solution, because banks also factor in the economy, they factor in regulatory issues, they factor in the characteristics of the consumers that they have and the information that they have on them. So it's not really straightforward.

Ben Bernanke, who was chair of the Fed for five years between the Bush and Obama presidencies, he did a lot of really important research here, and he won a Nobel Prize for it. So it's kind of a pretty major question still how much influence central banks actually have on interest rates.

But with higher interest rates, what's assumed is that there's a lower amount of credit being created, and that means that there's less inflation because there's less money circulating in the economy, and that there's less economic activity because businesses can't expand, consumers can't make big purchases, so they have to cut back on other things. And that increases unemployment and decreases inflation. And the opposite is true with low interest rates.

Of course, there are central banks that handle monetary policy differently. The central bank of Argentina, very famously, does not control interest rates. Instead, it controls the quantity of money directly, which is a whole other very technical discussion. I don't think people would be really interested.

Samantha Hancox-Li [00:20:16]
Yeah, fair enough. I'm not sure I could contribute much to that particular discussion. But this gets to what you're describing—what they call the dual mandate of the Fed, right? To maintain the price level, which is just another way of saying to keep inflation under control, but also to maintain unemployment at a low level. And they try to do both of these things by control of a single variable, which is this overnight funds rate that you're talking about. Is that right?

Maia Mindel [00:20:50]
Yeah.

Samantha Hancox-Li [00:20:53]
And so I guess to kind of get a sense of why this is so important, I'm going to ask you, what's it like when economies don't have central banks?

Maia Mindel [00:21:07]
Well, this is kind of like you have to go way back, because most countries today do have central banks, even if they have politically controlled ones, which is kind of what Trump wants. He wants a Fed full of loyalists to him.

But if you go back to the 19th century, which is kind of the last time this happened—of course, there's a lot of disagreement among economists, particularly libertarian economists, who just don't think that this is an accurate representation of this era—but the US had sort of a free banking era. It was a model that was implemented in a number of countries, most notably Argentina in the 1880s, and then it had a significant financial crisis in the 1890s.

What happens there is that banks individually create money, and they sort of decide based on how much they want to loan. And the problem is that they don't create their own money. They create money that other banks can also use. So it means that some banks can just create too much, especially if they're badly run or if they make bad forecasts of the economy. And in that case, you can have banks that don't have enough cash to support the loans that they made.

And this means that you get bank runs, which is when all of the consumers in a bank want to go in and get their money, basically. And so this was sort of assumed to be related to panic, because it was everyone rushing at the same time, and it felt pretty irrational for them to do that if they knew it would collapse their bank.

But the two economists who shared the Nobel Prize for this say it's rational because if you don't rush in—if you think that there could be a bank run and you don't rush in to get your money—you lose everything with 100% probability. And if you do rush in, you get at least some portion of your money.

And so this means that there are multiple ways, of course, to resolve this. One of them is what's known as the FDIC, which is basically an agency in the United States government that ensures bank deposits up to $250,000. So if you have $240,000 and your bank goes bankrupt, the government will just give you your money back. And that sort of is supposed to disincentivize a banking crisis.

And of course, these banking crises are very, very destructive. Because first of all, they spread really rapidly. People get really worried about their bank failing. And secondly, a lot of businesses are getting credit lines. A lot of businesses are financing their expansions. A lot of people are financing their mortgages. And it creates a lot of insecurity around who actually owns those assets and where. It creates a lot of contractual insecurities. It's not that people say, "Oh well, I get my house for free." Like, eventually you're going to have to pay for it back. And you just don't know what that looks like. So it depresses economic activity, and it's also just a very disruptive chain of events.

But obviously you could have free banking with very well regulated banks and not a central bank. So the question is kind of why you also need the central bank. And that goes way back in the history of money.

People think that money came from barter. So it solved the problem of barter, that I have three eggs and you have a loaf of bread, we can exchange them. But then you have two loaves of black bread or darker bread—I didn't remember the term, sorry—and I don't like those as much. So I say, "Oh, I'll only give you two eggs." And that's kind of the issue there.

But that's not really an accurate version. People would just say, "Oh yeah, well, you can have the eggs, you owe me for them." And money was sort of created as a way to not even exchange it actually during the transaction. So it's a way to have a clear value on how much you owe me for the eggs and what I could get and how much I'll get from you in return, which is kind of like barter, but without actually trading anything. And David Graeber has a famous book talking about debt, and that's kind of another part of it.

Samantha Hancox-Li [00:25:33]
Yeah, I was gonna say, systems of credit, whether or not actual coinage is being exchanged, is how historically people resolve these problems.

Maia Mindel [00:26:39]
Yeah, it's basically to make exchanges easier. And originally, it was made from things that people considered valuable. So obviously gold, the Aztecs exchanged certain types of cacao beans. There are other groups of people that use seashells. In China, they invented paper money. But it was more similar to this type of valuable money.

And that kind of gets you to a very old debate. Isaac Newton was central in this debate around whether the value of money came from the value of the material, which in this case in Europe was gold, or from sort of the power of the government behind it.

Because, for example, all throughout the medieval period and during the late Roman Empire, you'd have these moments where the Empire was spending all of this money, and they obviously didn't have enough coinage to, for example, pay the armies that they were assembling and using to fight. So they would take a coin that was 100% silver and reduce it to 80%, 90%, 10% silver, and pay the soldiers with it. And obviously this resulted in significant inflation.

But so that kind of could mean that the value of money came from the value of the material. But also, this happened during times of significant state breakdown. In the French Revolution, you had a period where the revolutionary government was doing the same thing with paper money. And what happened was that this paper money was backed by land, so the government was selling the land that was previously owned by the nobility and the crown. And obviously they had sold much more land than they owned, and people were using that money normally, because they kind of assumed that the government would lose the war and that the money would be worthless after the war.

And then it turned out that they started winning. And everyone was worried about inflation, because then the army would come back and they wouldn't have enough land for everyone. So the perspective that money is linked to the capacity of the government in some way, I think that's a more historically sound view. And also, obviously you have the thing where we've had around 50 years of paper money and inflation has only decreased, which shouldn't really be possible.

Samantha Hancox-Li [00:29:19]
This comes back to what you're talking about in terms of free banking, right? That yeah, you can have an institution. I could set it up on the corner, and I could say, "Yeah, you give me your cash, and I'll give you some pieces of paper that I've written some numbers on." And if people start accepting that as currency and making trades because my word is really good, and you can totally redeem these pieces of paper I'm handing out for your valuable materials, that can create its own medium of exchange. And that's the system we basically had in America at one point.

Of course, the problem is that I as an individual am prone to not being solvent enough in a way to guarantee the amount of money that I'm putting out for profit. And so really what you need at the end of the day is a state backstopping the currency, right? To say this gets back to the lender of last resort. I mean, I guess countries have had bank runs on the country, or something to that effect. That's an interesting question I'll ask you, who's an economist and might know things about this. Have we had that kind of problem for countries?

Maia Mindel [00:30:35]
My understanding is that it sort of developed from the gold standard, because basically, you have a mint that produced gold currency. That's where Isaac Newton worked, and that's why he was involved in this controversy between what's known as the metallists, who were in favor of metal, and the chartalists who are like no, it's state power.

And that word, if you've heard it in a recent context, is because Modern Monetary Theory adherents call themselves neo-chartalists, because they say that it doesn't matter how much currency the government issues—they don't call it printing money—because the government has the power and the resources to absorb it all back.

But if you need a lender of last resort, which is what these banks got, you needed—it was sort of analogous to the mint. The Bank of England existed mostly to solve this issue. It was like a conglomerate of all the major banks who loaned to each other in some ways. And the Bank of England was almost entirely a private bank, or was until probably World War Two.

But in the gold standard, the problem was that it was considered really, really inappropriate to change the parity of gold. And you could see it in the Great Depression where countries became really, really aggressive about not breaking the parity with gold, and that caused the economy a lot of problems. They started having higher and higher interest rates in the middle of a really serious recession.

Samantha Hancox-Li [00:32:32]
Yeah, because fundamentally, they could not control their own monetary policy. And I guess that's the other question I want to ask you about. Because we've talked a lot about the role of the bank as the lender of last resort, as creating a stable currency at all in some respects. But the other thing about the pre-banking era, or the era before the Federal Reserve, is that it's characterized by a really extreme business cycle, right? That there are pretty much constant boom and bust cycles on a scale that today we would regard as an economic catastrophe happening all throughout the 19th century. And so I'm curious, what's the role of the Federal Reserve or the central banks in dealing with that kind of issue?

Maia Mindel [00:33:30]
Well, obviously, without a central way to coordinate between private banks, you could have a dynamic where—because the main problem in banking is what's known as information asymmetry, which is that if you have a business proposal, you know about your business and your business acumen and whether or not it's a good idea more than the bank, because the bank can't specialize in every sector of the economy for every part of the country.

Of course, there were agricultural banks and industrial banks and very smaller and much more local banks, but they also had a lot less capital. So because you know more than the bank, that means that you can sort of trick them into loaning too much. And of course, this is profitable for the bank because it generates business. You first, at least for some period of time you pay, and then eventually there's a problem.

And something that's worth noting: in this period of time, the economy was a lot more agricultural. So the weather and natural disasters have much bigger impact on the economy. So you will have, for example, a farm disaster, and it will spread to the agricultural bank, and the agricultural bank will start having credit issues. And they will have borrowed money from other banks that suddenly start having issues themselves.

So what you will have is economic shocks, especially either from international trade or from the agricultural sector, spread really quickly to a lot of the economy and cause a lot of damage really quickly. So what you wanted was for some sort of stabilizing force there. And of course, that also meant that if banks suddenly started loaning too much money, and the economy sort of didn't enter a recession but stumbled along a bit, you'd eventually have really big bouts of inflation, which were pretty common, especially because agricultural disasters also manifested in higher food prices.

Samantha Hancox-Li [00:36:00]
Okay, so I think there are a lot of economic problems that central banks exist to solve. And like you said, pretty much every country these days has one. They can be structured a little bit differently, yada yada. But then there's this other thing. It's not just having a central bank, but having an independent central bank, and that's kind of taken to be the gold standard of economic management these days. And I was wondering if I could ask you why? What's the economic importance of central bank independence?

Maia Mindel [00:36:36]
Well, it's actually a pretty novel concept. It's around 50 years old, the idea that central banks should be run by apolitical technocrats. And that's obviously reflective of a much broader shift in economics, because economists used to consider themselves very politically involved because of the importance of economic policy, and started considering themselves more like scientists or engineers, that sort of thing, in the 70s and 80s.

But the reason why that sort of idea went into fashion was the great inflation, right? So there was a big oil shock in 1973 and that sort of brought prices much, much higher, persistently. But it really reflected longer running trends. If you look at broader monetary aggregates, broader inflation figures and the difference between demand and supply, basically, and potential demand, you see monetary issues in the mid to late 60s in the United States.

And also, for example, in Germany and Japan, you have big oil shocks. They didn't translate as big inflations the way that the United States had them. So it was an issue of monetary policy. And the issue there was—this has been really strongly debated how much was due to each factor—but the first was the chairman at the time, Arthur Burns. He was sort of a golf buddy with Nixon. I think he was close to the Treasury Secretary. He met the President very often.

And the idea was that the chairman of the Fed was like the chairman of the EPA or the chairman of NASA. He was sort of a political appointee.

Samantha Hancox-Li [00:38:41]
He was a member of the President's Cabinet.

Maia Mindel [00:38:45]
Yeah, not the cabinet, but he was like an economic policy appointee that the President could consult with. And of course, the problem is that Burns was really this super political guy. If you listen to what he said before he even became chairman, he was also very ideologically opposed to tight monetary policy because he believed that higher interest rates would depress investment and would prolong inflation by making sure that the economy couldn't—by reducing supply.

And that's not really an accurate idea. It hasn't really been proven true, but that was sort of a very pervasive idea. There were also a lot of other opinions about how much the economy could produce, how inflation and wages were related, how unemployment and economic growth were related, that were all very incorrect. And there were a lot of issues in empirical data as well.

So this was sort of a time where most macroeconomic ideas were sort of being proven wrong, very, very visibly, because you had big increases in inflation at the same time as you had big increases in unemployment, which wasn't really supposed to happen.

Samantha Hancox-Li [00:40:20]
So this is interesting because I want to press you on this a little bit. There's a kind of standard story here, right? Where there was a time when the Chairman of the Federal Reserve was understood to be part of the President's team, and they should support the President's agenda.

And Alan Blinder in his fiscal and monetary history of the United States makes this argument that JFK just very clearly consulted with the Federal Chairman, like "I want you to raise rates because I have these beliefs about monetary stimulus." And Nixon does this thing where basically, prior to the run-up to the election, he says, "I want you to lower rates so you can juice the economy. We'll put on price controls so the inflation doesn't hit people. This will push my numbers up, and I'll get reelected," and then we'll unwind the whole thing after the election. And they do all that, and he does get reelected.

And so it's an era of somewhat, not absolute political but basically political control over the central banks, and this is regarded as bad, and it gave us the horrible stagflation of the 70s and 80s. And we're all saved by Volcker, who comes in kind of by accident from what I understand. He's just a name on a list. Nobody really knows much about him. He comes in and he's like, "I'm the chairman now. I'm going to do exactly what I think is necessary. You can all go pound sand." And then what he does works, and then afterwards, inflation is under control when no one else could get it under control before.

And now we have at last passed into the promised land of central bank independence, where there isn't political interference, and then the economy works better. So that's one story, but it sounds like you're telling a different story, where it's not really a story about political interference versus political non-interference. It's just a story of economists being wrong about how macroeconomics works. Is that right?

Maia Mindel [00:42:21]
Yes, but I'm not going to say that there weren't any political issues. First of all, there's a paper that just came out that is really interesting. It talks about how news coverage of Richard Nixon pressuring Arthur Burns sort of resulted in higher inflation. So there is definitely an issue where the Federal Reserve not being independent is an issue.

And you also see that countries that have less independent central banks, or central banks that have more turnover in their governors, or central banks that have the president firing the board members very often—that's sort of very closely correlated to how much inflation they have.

And the understanding there is that politicians are very short-sighted, because they face elections every two years or four years or five years. For example, in the United States and most presidential countries, it's two years. In parliamentary countries, it's five. And so that means that they will want to keep unemployment low at all times, and that will result in unnecessarily loose monetary policy.

You also have, of course, some more sophisticated arguments about how politics—because political control tends to change sides once every 10 years or so, like right now it seems that political cycles are a lot shorter—but that means that you will have very big changes in monetary policy in a very short period of time, which is not very ideal for economic stability.

But I think that the Paul Volcker story, it's kind of true and it's kind of wrong. The United States had had very loose monetary policy compared to the optimal monetary policy for around a decade at that point. So it really did take a lot of pain, so to speak, to bring inflation down. But he was also very personally well-respected, and that meant that the Reagan administration didn't want to push him around too much.

In 1984, Reagan meets with Paul Volcker. He doesn't actually say this himself—Volcker talks about it in his memoir—James Baker, the Treasury Secretary, comes in and he asks Volcker not to raise rates before the election because it could cost Reagan the White House. And Volcker, like inflation was coming down, so he wasn't really planning on it. But it's sort of like that wasn't a new issue.

It's sort of in the United States, at least, it's very much because Paul Volcker and then his replacement Alan Greenspan were so personally well-respected. And a lot of Greenspan's reputation comes from the fact that the economy really did really well in the 90s, and that there were a lot of calls at various points of his term for him to really aggressively tighten because unemployment was so low. And he said, "Well, inflation isn't going up, so we don't need to raise interest rates." And that sort of got him his reputation as the maestro.

But I think that central bank independence comes from also an intellectual climate that's very skeptical of elected governments. It's very skeptical in trade policy, because trade policy is very easily captured by local interests and local laws. And you will have the senators from the most competitive states come up and say, "No, we need tariffs to protect the steel industry here in Ohio."

And they're also very skeptical of active fiscal policy because of the potential for government debt to become an issue. And fundamentally, what you have is this sort of new macroeconomic consensus where you need very stable rules around when interest rates are going to go up, when they're going to go down, and that's going to reflect in inflation and unemployment being relatively stable.

And that works. I mean, inflation comes down. The global economy really stabilizes. And it's sort of understood that that was a correct idea, even though it has a pretty bumpy story. But I think that it's an idea that earned its place. It earned a prized place in our economic institutions because of its merits, which are very big.

Samantha Hancox-Li [00:47:25]
Yeah, so if I could summarize this kind of technocratic position, it's basically that the functions of the central bank that we've been talking about in terms of being a lender of last resort and setting interest rates in order to maintain employment and inflation, or to maintain the lack of inflation, whatever, aren't really matters of political debate, right?

There's no political question about where you should set them. Everybody wants the most employment and the least inflation. Nobody wants bank runs, and you should just trust the economists to find the exact right interest rate as best as anyone can and to do the right kind of lending. And any political interference is going to push us off this happy mean. Is that the position we're talking about here?

Maia Mindel [00:48:19]
Yes, I mean the basically, the position here is that because inflation and unemployment are sort of correlated—because lower unemployment pushes up wages, and that pushes up inflation, that's the traditional story. The real story is a lot more nuanced, but it's sort of the traditional story, and it's relatively true, at least in the long run.

So because politicians and the public hold very incoherent positions on what they want—they want everything in one bag and for the bag not to be heavy, as The Simpsons said—because of that, there's sort of this desire not to give in too much to what the people want. And obviously, I think that's a valid position to take in a very sensitive manner, but it also results in an institution that's not undemocratic, but very unaccountable of the time.

Samantha Hancox-Li [00:49:34]
So I mean, yeah, Joe Weisenthal, host of the Odd Lots podcast, recently made this argument that really the debate we're seeing today about the Federal Reserve is about who the Fed should be accountable to—the President or Congress.

Because today, the Federal Reserve is democratically accountable, right? It's created by an act of Congress. Its members are, although with some exceptions, but are mostly appointed through the regular mechanisms of congressional appointment. And this is a kind of democratic accountability, but it's also kind of like freezing your credit card in an ice cube so you can't get at it too easily, right?

We're going to appoint these people ourselves, but we're going to appoint them for four-year terms or six-year terms, because we don't really want them to be subject to the same kind of electoral pressures, because this can lead to bad monetary policy. Whereas the Trump argument is like, "No, that's all bullshit, right? I want to have my hand on the lever right now. I want to lower interest rates right now, because I think that's going to be good for the economy." Is that kind of the situation that we're in here?

Maia Mindel [00:50:41]
Yeah, I mean, you have two really important tensions right now in MAGA, which is first that they're sort of against this sort of technocratic, independent expertise notion that's sort of been one of the through lines of the last decade.

The moment that sums it up comes from Michael Gove of the UK Government. And he said that people in this country have had enough of experts telling them what to think about Brexit. And that's sort of the mentality that this new populist right has. And it's also very focused on executive action, which is why they don't like these agencies that are accountable mostly to the legislature.

But they do have a kernel of truth in their complaint against central banking in the United States. The Federal Reserve has a lot of their decisions are very sort of shadowy and non-transparent. And the Board of Governors is not as unaccountable as the Supreme Court, but almost, because they have limited terms. And it's structured in a way that it's really, really difficult to influence it very much, which is, of course, important, but also relies a lot on the members having a code of honor. Multiple Board of Governors members have resigned due to improper stock trading in the last five years.

And also, of course, you have the problem where potentially there are 14, I think there are 14, or at least more than 10 regional bank presidents. So there's two to three times the amount of Fed authorities that are not elected by appointed officials. They're elected by business leaders.

And when Bernie Sanders talked about putting farmers and workers and unions in the Fed, obviously I don't really remember the specific policy he was talking about. It could have been just having union representatives in the Open Market Committee. But I think he also wanted farmers and unions to get involved in the regional Feds, where they have no authority, and they could very much considerably have it.

And there's also the fact that it's this kind of uncomfortable—but you talked about freezing the credit card, and that's kind of how a lot of modern economic policy is handled. A lot of institutional designs are handled, where it's like, well, if people want to pick up a gun and shoot themselves in the head, they can do that. But the gun is going to be disassembled, and they have to put it back together, and you have the bullets stored separately.

And that's sort of how it's applied for trade policy, which has all of these international rules and courts and systems, and it's very arcane. But you're not really allowed to take control over trade to the extent that the United States is currently doing, because it's understood to be bad, and it's bad for people. It's bad economics, but also it's kind of really undemocratic to have the WTO and all of these people that you've never heard of, not even once, tell you what you can't do as the elected government. Because if Congress passed a higher tariffs bill, it would also be against WTO rules.

So it's kind of this sort of—well, I mean, I'm not going to call it neoliberal, because that's not a really good term, but it's part of that shift in thinking, where government powers and government abilities were sort of locked beyond the control of the public.

Samantha Hancox-Li [00:55:08]
The golden handcuffs, right?

Maia Mindel [00:55:08]
Yeah, it's like, well, Quinn Slobodian has three separate books about this, because he talks about how trade policy and trade rules and these institutions are sort of designed to financially and economically integrate the world, which has been fairly good. I mean, obviously it's had its ups and downs, but it's integrated the world in a way that really constrains elected governments.

And it's integrated the world in a way that makes the Fed sort of the central banker of the entire world, because every country has to respond when the Fed raises or lowers rates, because that could destabilize their economies by making capital enter or exit very, very quickly.

And there's also—well, Slobodian has a second book about special investment zones and how that sort of creates a place where normal tax law doesn't apply and normal regulations don't apply, and that's how that's applied to entire sectors and things like that.

And the interesting one is that monetary policy is kind of part of this sort of anti-democratic neoliberalism that sort of evolved into the far right. Because the far-right thinkers say, "Oh, I started reading Hoppe. I started reading Rothbard. I started reading—I was reading following Ron Paul," who are very influenced by these mid-century thinkers who thought that people vote themselves into totalitarianism and you need to restrict economic policy and not concentrate too much power.

And so these people were very pro-gold standard, because it sort of limits how much money the government can print. And the Great Depression, which was caused by the government—this is Milton Friedman who says this, it's not some super left-wing guy. Milton Friedman's big contribution to economics, which is what made his name as one of the most important macroeconomists ever, is to say that the Great Depression was caused by the Federal Reserve being too politically weak to decisively act, by a lot of very unaccountable parts of the Fed, which were the regional banks, which were the ones that set interest rates, being completely uncoordinated and being completely unresponsive to the Federal Reserve itself, and by the United States also being incapable of organizing the entire world.

But the most important part is that the Fed was sort of handcuffed on how to respond because of the gold standard. So all of these people are like, "Yeah, we need the gold standard to stabilize the economy and sort of restrict the government even more."

And sort of a lot of the critics of central banking, a lot of the anger at central banking is part of this general populist anger about trade or immigration, about all these things that's sort of like—there are things that, you know, we elect one person, and the person can't do anything because there's all these bureaucrats who nobody voted for, who have enormous power, all of these international organizations.

And central banking is very internationalized, because you have the IMF and the World Bank very involved in how central banking is conducted. The IMF exists in large part to bail out central banks if they start failing. The Bank of International Settlements is like the central bank of central banks. And you show up to their meetings and the first person who gets to speak at every meeting is Jay Powell, because he's the most important person there.

Samantha Hancox-Li [00:59:19]
And I want to kind of—so I think a lot of this gets to something I talked about with the previous guest, Steve Randy Waldman, about like you were saying, the way that international trade was kind of deliberately taken out of the hands of national governments, in particular the role that international capital flows that you're talking about have constrained the ability of democratic polities to set their own monetary policy.

And this is the name for this way—a name that's been given to the system is the golden handcuffs by, I think, Dani Rodrik, where he said they're golden because they produce a lot of economic growth, but you can't actually get out of them.

And I guess my—so Waldman was pretty critical of the golden handcuffs as a system of international trade, a system of international movement. He thinks we don't need to just go back to the way things were after Trump. We actually do need to make some changes. And so I kind of want to ask you the same question about central banking. Do we just need to go back to totally professional, totally independent central bank, or are there real problems with the way that central banks have been run, and we should make some changes to the system?

Maia Mindel [01:00:21]
Well, obviously, there's been some problems. There's been problems in every institution. And ironically, the big issue that created this whole backlash to kind of everything was the Great Recession. And the Great Recession was caused by Alan Greenspan and later on, Bernanke, just being very, very incorrect about monetary policy.

You have—it's very dispiriting, because people think of the Fed as this chess with order, where everything is super organized and everyone is some high-minded theologian. And obviously, it's true. These people are very smart. They have a lot of expertise, and some of them are among the biggest monetary experts in the world. You've got people who've written multiple textbooks that economics students on the entire planet read.

But you also had a guy called, I think, Richard Kaplan. He was the president of the Dallas Fed. He was talking about how bailing out Lehman Brothers would cause hyperinflation because the water bottles that they served at the Board of Governors meeting were getting smaller.

Samantha Hancox-Li [01:01:32]
Yeah.

Maia Mindel [01:01:32]
So you have, obviously, their expertise is limited, and they're prone to making mistakes. Well, not prone, but they're capable of making mistakes. And there's a lot of sort of unaccountability from those mistakes. The Fed has only really acknowledged that they caused the Great Recession in like—Bernanke did it at Milton Friedman's birthday party. And he said, "Yeah, we did it. We're sorry."

Samantha Hancox-Li [01:02:13]
And then he did it himself again a few years later.

Maia Mindel [01:02:13]
Yeah, well, yeah. And there's also the fact that it's really hard to change the direction of the Fed. Bernanke definitely knew that it was a bad idea to do all these things. But he still had to speak for the Board. And the Board was made up of people appointed by George Bush and all of these governors who were appointed by nobody in particular, like Kaplan and Eric Rosengren. Bullard certainly was from the San Francisco Fed at the time.

And you also have the problem where it is a very unaccountable institution, because in some countries it's directly a private bank that the government sort of appoints its board. In other countries, it's a semi-private bank. And there's a lot of a big taboo around criticizing it in a way that makes it feel even less politically influenceable.

And in the late 2010s there was a lot of discussion around this, because there was a lot of discussion around race and gender and macroeconomic conditions. And that's sort of why I think Lisa Cook was selected. Because she's a person who talked about racial differences in the labor market. And I think one of the reasons she was brought in is because there was an idea that these very standard macroeconomists were very anti-inflation, and they would push for tight money in times that would hurt disadvantaged people and working people and people of color the most. And so they wanted to bring in voices who had expertise that was sort of complementary to that.

And that sort of already created a pretty major backlash. And so there's also been a major backlash to the Federal Reserve doing a lot more research on inequality and gender and race and diversity. The inequality in particular is a very, very important macroeconomic feature of the moment. But it doesn't reflect the political priorities of conservatives to have 10% of research papers mention inequality.

Samantha Hancox-Li [01:04:39]
Right. So I guess my question for you is, if unaccountability is a problem, are there things we could structurally—are there things we ought to structurally change about the Fed to improve accountability and improve macroeconomic management?

Maia Mindel [01:04:56]
Well, that's a really difficult question to answer, because you do really need a balance between democratic accountability and independence. Because Federal Reserve independence is a very important thing, and central bank independence is a very important thing. And I don't know if it came across, but it's really, really important to have an independent central bank, or otherwise your economy just melts down every three years.

But I do think that you need a more—not politically responsive, but more democratically responsive board. You currently have the seats you're appointed for, like, 12 years. It's pretty common for governors to just resign in the middle of their terms. And if you resign two years into a 12-year term, the next person will only get 10 years. And that sort of makes the appointments rotate really weirdly.

And it's sort of designed to disincentivize doing the Anthony Kennedy thing of resigning when there's a Republican president so you can get a Republican appointee. But it's also kind of—you're just tying up the hands of whoever comes next. Because Adriana Kugler, who resigned earlier this year, she was appointed like last year to fill a term where the previous person who served also resigned early and also was appointed by Trump. I think it was either Randall Quarles or Richard Clarida, who were both appointed by Trump.

And also you have the problem where a lot of these older, more established macroeconomists are very, very hawkish on inflation, and the last four US presidents have all been very dovish on inflation. And you've still not had—you had Volcker for like two years in 2021 and 2022.

Samantha Hancox-Li [01:06:22]
So you're just suggesting we should cut down on the length of Fed Governor terms?

Maia Mindel [01:07:17]
They should allow for more flexibility in direction and more flexibility in how these governors sort of handle their timing. I don't really think that it's a really difficult problem to solve institutionally, and a lot of it comes from the fact that I don't think that people understand monetary policy very well.

I think people respond to it very poorly. Obviously, everyone has seen the poll where voters believe that higher interest rates cause higher inflation. But I think that saying, "Oh, well, the survey agrees with me" is a bit stupid, because surveys of business owners say that they think the minimum wage will increase unemployment and it doesn't increase unemployment. So it's really hard.

And there's also the fact that being democratically accountable to the legislature is one thing, and being democratically accountable to the president is another thing, because the legislature is more representative of all the groups in society. And there's this congressman, Jamie Raskin, who says that Congress isn't a co-equal branch, it's the superior branch. The two branches are inferior to Congress.

Samantha Hancox-Li [01:08:45]
That's something I absolutely believe, by the way.

Maia Mindel [01:08:45]
Yeah, I believe that too, that the legislature should be able to exercise more control over administrative agencies, because otherwise you're going to get all this frustration built up in this period. Of course, I do think that a lot of this frustration hasn't really been about the institutions themselves. Because obviously, nobody really cares how Centers for Disease Control are structured. People care about the outcomes that these institutions produce.

And having a Fed that is very cloistered and unresponsive and that can't really answer to anyone for its mistakes is the problem. If you have prolonged recessions and also bouts of inflation, you lose trust and credibility.

And there's been a paper at Jackson Hole, which sounds like a very weird name, but it's a place in Wyoming. They hold the big monetary policy conference there. The governors of all the major central banks go there. Jay Powell gives a big speech. He gave a big speech where he was talking about how the Fed is starting to think about cutting rates, which was major news.

And there was a paper introduced which was about monetary policy. What it says is that when the Federal Reserve faces oil price increases, food price increases, natural disasters, it can choose not to respond, and it can just let go. And that's optimal, right? Because the Federal Reserve can't print oil. It can't give oil to gas stations. So raising or lowering interest rates will make no difference on inflation, because it's the price of oil.

And that's why they made that mistake in the 2000s. Inflation grew a lot because food and oil prices were going up because of Chinese economic growth. And the Fed sort of interpreted that to mean that there were inflationary pressures, and they raised rates from like 1% to 5% in three years. And the problem there was there was no increase in core inflation, in the inflation of the things that they could impact.

And so this created a very big downturn that sort of dragged down all the banks with it, because a lot of people borrowed money and then couldn't afford to pay their mortgages anymore. And the Fed never really answered for that. And then there was a decade of low growth and sort of these cultural pathologies come from persistently low economic growth, higher inequality, etc.

And that sort of produced a backlash against the Fed. But if the Fed was more democratically accountable, I think that they would make fewer mistakes like that. But the paper at Jackson Hole, the argument that it makes is that the Fed can sort of just not part of the situation if they have credibility. So you do really need a credible and reliable central bank. And if you're constantly making big mistakes that nobody is made responsible for, you do end up producing the backlash and producing the distrust that results in your institution being sort of attacked.

Samantha Hancox-Li [01:12:21]
No, I think that's exactly right. I mean, fundamentally, like you said, these are difficult issues, because macroeconomics is not a simple question. If it was a simple question, people would get it right all the time. And you just have to look at history and see people getting it wrong constantly to disastrous consequences. So you need that level of professional expertise. But I think, like you've been saying, we also do need some level of democratic accountability. And we don't always have that in our economic institutions today. And how to balance those two things? That's a very difficult question. So thank you so much for coming on Neon Liberalism to try and chew on some of these matters. It was a pleasure, as usual.

Maia Mindel [01:13:06]
Well, I'm glad to be invited. My closing statement has to be that, first of all, you cannot have a politically controlled central bank under any circumstances. And second of all, that the current attempt to take over the Fed isn't a reform attempt of fixing the issues with the regional banks. It's Trump trying to crack down on people who disagree with him having any political power whatsoever.

Samantha Hancox-Li [01:13:37]
No, I think that's quite right. To clarify, for my own part, I absolutely do not think that Trump has answers to any problems. Basically, I think he just has more problems and a personal obsession with power and control that is only going to lead us to disaster.

Maia Mindel [01:13:58]
Yeah. And I mean, I do want to pull up on a more optimistic note, which is that in macroeconomics, one of the big testing grounds, quote unquote, for neoliberalism was Chile. Because, obviously I'm not going to say that was a good thing. It was a pretty bad thing. It didn't result in any economic growth.

But Pinochet sort of got his economic program from a group of economists who had a massive tome where they said, "These are ideas for reforming the economy." He sort of went with them. Obviously he ended up departing because it wasn't very successful in some aspects. He renationalized copper and some other industries which they were very opposed to, these Chicago Boys, they called them.

But that sort of tells you that if you come up with ideas on how to reform the government, you need to pull out your own ideas about how to solve this. Because if Trump or whoever actually breaks the Fed and actually politically compromises it, you're going to need a new way of doing monetary policy.

So I think starting to think about that question—like, what does monetary policy look like after Stephen Miran and all these random Fox Business hacks and Judy Shelton and Ivanka have all been appointed to decide interest rates and there's 0% because Trump is in office? Once you have to fix that, you need a solution, because the alternative is just going to be the same thing that already exists and that people end up getting mad at.

So I think the evidence shows that if people start having this discussion and start talking about it, you can actually try to find a more balanced approach between independence and accountability and a more balanced macroeconomic policy that doesn't result in so much anger and disappointment at the Fed.

Samantha Hancox-Li [01:15:48]
No, I think that's exactly right. So yeah, thanks so much for coming on, Maia. I'll see you around.

Maia Mindel [01:16:17]
Yeah, thank you for having me. Bye.