The Fed and Accountability

I heard an interview with Larry Kudlow recently on ‘professionals’ at the Fed. By professionals (my word not Larry’s) he means academics without experience running a bank or institution who use modeling to make decisions. Something gets lost when economists move from higher education to federal offices and eventually hold titles, director of this and coordinator of that. Stack enough decades together and patterns of behavior on finance repeat themselves over and over until the thinking defines the institution. The Fed is in such a state.  

During the seventies and eighties federal institutions drew its experts (primarily) from community bankers, farmers and small business owners. The idea being that real world experience in a field was critical to making tough decisions on a larger scale. The people responsible for the economic health of the nation have a clear understanding of market principles and the consequences of tweaking the currency. For sure, the Federal Reserve has always been responsible to clean up dumb political decisions made by administrations hoping to goose the economy. 

Private sector bankers typically have rational ideas on lending versus a government employee who hasn’t met a payroll or bothered with ledgers. Not that public sector workers can’t be trained or understand how global finance works, but according to Kudlow, they lack the economic philosophy. 

Economists from similar schools and similar philosophies will come to similar conclusions when making decisions. This shouldn’t surprise anyone. Talk to salesmen at a convention and their opinions and attitudes on money and work will be familiar to each other and the profession. Ask teachers who they like for president in any election year and the response will likely be the Democrat. Surgeons vote alike and join the same clubs; their thinking on issues is familiar across states as is their salaries. The free market allows for like-minded people and groups to employ and be employed by each other. In the public sector (especially federal) this creates problems because bureaucrats are un-elected but have an increasingly outsized role in how Americans buy and sell.  

 Kudlow wasn’t bemoaning the institution of the Fed as much as arguing for a more accountable Fed. Government offices that draw heavily from one school of thought eventually stop listening to other schools, and thoughts. When everyone thinks the same way the mechanism for pulling back on bad ideas isn’t there. A rethink is needed when accountability is lacking.

The Central Intelligence Agency drew almost exclusively from the WASPy Ivy league schools right after World War II. Part of it just seemed logical, pick college kids with parents who attended the same clubs, went to same churches. The agency got bigger and through political will was forced to change its loose way of operating and accounting. Some high profile failures like the Bay of Pigs forced Congress put a lid on some of their crazier schemes. The CIA recruits from all over the US now.

Larry Kudlow didn’t make any suggestions about how to turn the Federal Reserve around but interestingly he is on the Donald Trump team of advisers. If Trump does win I think the country will see some positive moves toward a more accountable system of lending. The president’s authority over the Fed chairman is limited and presidents don’t like to interfere too much lest they get blamed for a messy problem. Kudlow is a known supply-sider advising a borderline protectionist candidate (Trump) on economic indicators. It is an odd pairing but one that can work if Trump does get the nomination next week. 

First comes accountability then comes philosophy.