Opinion: Trump Fails His Own Unintended Financial Stress Test

The Daily Herald (Everett, WA)

By Catherine Rampell December 27, 2018 

The Keystone Cops are officially in charge of our economy.

Markets have been plunging, with the S&P 500 down 20 percent from its September peak. A lot of factors have driven the correction, including President Trump's trade wars, his government shutdown and a surprise court ruling declaring Obamacare unconstitutional.

Trump needs a villain, though, and that villain can't be Trump. Why, according to the president, markets love Trump!

So instead, he declared the villain to be Federal Reserve Chairman Jerome Powell, a man Trump personally chose for the job a year ago.

As Trump and his surrogates love to remind us, most major economic measures — unemployment, gross domestic product, consumer spending — still look strong. Under such circumstances, it's unsurprising that Powell has continued the gradual interest rate increases begun three years ago under his predecessor, Janet Yellen.

Nonetheless, Trump has said the Fed should stop its rate hikes because the economy is apparently too fragile to withstand them. Instead of abiding by tradition and never talking about monetary policy, the president has gone public with his fury with the Fed.

Then, over the weekend, things got exponentially worse: News broke that Trump was thinking about firing Powell.

Whether Trump has the legal authority to do so remains ambiguous. Unambiguous, though, is how economically cataclysmic even such an attempt would be.

There are good reasons we want central banks to remain politically independent. As Argentina, Venezuela, Turkey and other hyperinflationary economies have shown us, putting the cash printing press in the hands of politicians is a recipe for disaster.

Politicians always have an incentive to crank out a little more money today, which juices growth in the short term but jeopardizes price stability in the long run.

Over the decades, the Federal Reserve has cultivated a hard-won, well-deserved reputation for political independence, and with it, a credible commitment to stable prices. The entire worldwide financial system depends on that independence.

With one fell swoop, Trump could destroy it, and set off a global panic.

None of that has stopped some of Trump's economic advisers, such as Heritage Foundation fellow Stephen Moore, from encouraging Trump to fire Powell, plus everyone else at the Fed, too. That's ultimately what would be necessary for Trump to get the looser money he wants: He appointed four of five sitting Fed board governors, and last week they all voted unanimously for a rate hike.

Fortunately, some Trump officials know how disastrous such developments could be. Unfortunately, those officials also appear to be incompetent.

First, Treasury Secretary Steven Mnuchin tweeted a quote purportedly from Trump himself, declaring that "I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so."

Call me crazy, but Trump seems to know his way around Twitter. If that's really what he believes, he certainly has the means to deliver the message himself. The fact that he didn't was less than reassuring. (In fact, Trump continued cyber-bullying the Fed on Monday, further spooking markets.)

Then Mnuchin decided to make things worse.

On Sunday, he released a seemingly panicked statement urging the public not to panic. From his Mexican golf vacation, Mnuchin had called heads of our biggest banks and then told the world that these banks had enough liquidity to continue lending. He also announced an emergency Christmas Eve convening of the "Plunge Protection Team," which includes heads of the Fed, Securities and Exchange Commission and the Commodity Futures Trading Commission.

I cannot sufficiently stress how amateurish it was for Mnuchin to make this announcement.

If markets were worried about anything, it was Trump's scheme to fire Powell, not bank liquidity; until Mnuchin suggested they should be worried about bank liquidity. The whole episode was like going to your doctor for a heart attack and being told not to worry because he knows how to treat brain cancer.

Maybe Mnuchin was trying to put on an ill-devised show of strength for his boss. Maybe he wanted to assure Wall Street that he had Trump under control, and needed a cover story for the calls. Maybe he was trying to draw from the playbook written during the 2008 financial crisis, not realizing that the conditions, the players and the threats are all quite different this time.

Other, more seasoned members of the Plunge Protection Team — including Powell — almost certainly would have warned Mnuchin that releasing such a statement would backfire. The fact that the statement came out at all suggests he either ignored or didn't seek their input, either of which is alarming.

In any case, if you've been wondering how this administration would handle a real financial crisis, we just had a dry run.

Two, sort of.

Neither went well.

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