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Who should Trump appoint to the Fed?

Earlier this year I wrote a piece (Government, Not Wall Street, Caused Financial Crisis) that showed that the Trump administration was right to call the Dodd-Frank legislation passed in the wake of the 2008 financial crisis a “massive government overreach. The crisis was not caused by greed, Wall Street risk-taking, and lack of private sector regulation, as is the dominant narrative advanced by the Democrats and the media.

Instead, the crisis was set up by well-intentioned but reckless government housing policies going back to the 1990s, and the crash was triggered by blunders of historic proportions by the Treasury Department and the Federal Reserve.  The misguided Dodd-Frank legislation that resulted has led to the weakest economic recovery since 1960, a dearth of new community banks forming, and small businesses unable to get credit.

The piece summarized an important Center report on our Forum with American Enterprise scholar Peter Wallison: How Dodd-Frank Damaged Community Banks and Hurt Small Businesses.  Correctly understanding what caused the 2008 financial crisis is key to fixing that disastrous legislation so the U.S. can enjoy stronger economic growth and a shared prosperity.

Today economists’ Brian Wesbury and Robert Stein of First Trust Advisors are out with a forceful column that make a number of important points that challenge the reigning narrative that government saved the economy.  They also explain why “the real the real reason the crisis spread so rapidly and expanded so greatly was not derivatives, but mark-to-market accounting.”  And they suggest names for the Federal Reserve:

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

What turned the economy around?

It wasn’t government that saved the economy. Quantitative Easing was started in September 2008. TARP was passed on October 3, 2008. Yet, for the next five months markets continued to implode, the economy plummeted and private money did not flow to private banks.

On March 9, 2009, with the announcement that insanely rigid mark-to-market accounting rules would be changed, the markets stopped falling, the economy turned toward growth and private investors started investing in banks. All this happened immediately when the accounting rule was changed. No longer could these crazy rules wipe out bank capital by marking down asset values despite little to no change in cash flows. Changing this rule was the key to recovery, not QE, TARP or “stress tests.”

Washington always uses crises to grow, Fed now 25% of GDP

The Fed, and supporters of government intervention, ignore all these facts. They never address them. Why? First, institutions protect themselves even if it’s at the expense of the truth. Second, human nature doesn’t like to admit mistakes. Third, Washington DC always uses crises to grow. Admitting that their policies haven’t worked would lead to a smaller government with less power.

The Fed has become massive. Its balance sheet is nearly 25% of GDP. Never before has it been this large. And yet, the economy has grown relatively slowly. Back in the 1980s and 1990s, with a much smaller Fed balance sheet, the economy grew far more rapidly.

Tim to hold Fed accountable for mistakes

So how do you drain the Fed? By not appointing anyone that is already waiting in D.C.’s revolving door of career elites. We need someone willing to challenge Fed and D.C. orthodoxy. If we had our pick to fill the chair and vice chair positions (with Stanley Fischer announcing his departure) we would be focused on the likes of John Taylor, Peter Wallison, or Bill Isaac.

They would bring new blood to the Fed and hold it to account for its mistakes. It’s time for the Fed to own up and stop defending the nonsensical story that government, and not entrepreneurs, saved the US economy. Ben Bernanke and Janet Yellen have never fracked a well or written an App. We need a government that is willing to support the private sector and stop acting as if the “swamp” itself creates wealth.

Peter Zeller is Director of Operations at Center of the American Experiment.

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