Stockholm (Ekonamik) – US President Donald Trump’s created an uproar amongst economists, politicians and financial analysts last week as Herman Cain’s nomination was added to the already controversial nomination of Stephen Moore to the Fed Board.
Herman Cain is the CEO of Godfather’s Pizza and was a presidential candidate in 2012. In the past, he was chairman of the Federal Reserve Bank of Kansas City Omaha Branch from 1989 to 1991. He was deputy chairman, from 1992 to 1994, and then chairman until 1996, of the Federal Reserve Bank of Kansas City. President Trump announced his nomination on April 4th. Both nominees are known to support President Trump’s demands for interest rate cuts.
Moore is a conservative economist, a visiting fellow at the Heritage Foundation and a member of the Wall Street Journal editorial board with very critical views of the Federal Reserve, with extremely close ties to president Trump, whose presidential campaign he advised. He was nominated in March.
Proponents of these nominations have argued that they will bring a breath of fresh air to the Fed, but detractors have argued his nomination politicises the Fed and could destabilise the institution. To his disadvantage, Moore is reported admitting he is not a “specialist in monetary policy”. While there is no apparent threat to Moore’s nomination, Cain is already expected to withdraw himself from contention after allegations of sexual harassment and rumours that even Senate Republicans were not comfortable with his nomination.
Reacting to the nomination, House Democratic Majority leader Nancy Pelosi described the nominees as “ill-suited,” “unqualified,” and the “worst” appointments the President could make, according to CNN.
The same type of concern led the Economist characterised this set of nominations as “a worrying new approach”. 2008 Nobel Laureate Paul Krugman described the two nominees as “ludicrous hacks”, going so far as commenting that “what seems to have recommended both men to Trump was their evident willingness to completely reverse their policy views when politically expedient. Both were hard-money men during the Obama years, demanding higher interest rates despite very high unemployment. Both have now taken to berating the Fed for failing to print more money in the face of low unemployment — because that’s what Trump wants.”
Meanwhile, the Wall Street Journal endorsed its former editor for his lack of credentials. “In these populist times, knowing too much economics means you’re out of touch, arrogant, and wrong. Few institutions have suffered the backlash against elitism and credentialism as much as central banks, which are mostly run by professional economists”, argued Greg Ip.
Economies fluctuate and the consensus is that the role of central banks is to moderate economic volatility. Its critics may see it as undermining growth, but the unconstrained pursuit of growth at any costs has led to plenty of disasters in the history of the world. An economy that overheats because of low interest rates is a dangerous beast to tame. More importantly, a central bank that is hostage to the political whims of its political overseers is no longer credible in its mission to control inflation. It may not be glamorous, but central banks should be places of intellectual and managerial excellence, not partisan hackery. The alternative is high or hyper inflation. As Krugman puts it, “You don’t have to be a gold bug or even an inflation hawk to see these demands as deeply irresponsible. Indeed, they sound a lot like the “macroeconomic populism” that has repeatedly led to economic disaster in Latin America, with Venezuela the latest example.”
This latest move from President Trump will add a disagreeing voice to an important committee. It will not shift US monetary policy overnight. However, it is yet another sign of shifting political customs. Investors should take note of it as such.
