Go With Taylor, President Trump

Go With Taylor, President Trump
Profile photo of Taylor Lewis

federal_reserveAs the kids say, boy, he ‘bout to do it!

President Trump has indicated he’ll soon make his pick for a new Federal Reserve chairperson to replace current Chair Janet Yellen. Early reports suggest Jerome Powell, a member of the Fed’s Board of Governors, is favorited. Trump is also considering Stanford University economist John Taylor and, the safest of options, keeping Yellen in place.

Powell is the top choice of Treasury Secretary Steven Mnuchin, an automatic red flag for anyone suspicious of the money party pit known as Wall Street. Should Powell get the job, you’ll be sure to hear $1,000 bottles of champagne popping in Goldman Sachs high-rises from miles away.

Yellen is more of the same. A monetizer to the hilt, her tenure at the Fed, despite recent interest rate hikes, has been a continuation of her predecessor’s prime-pumping policies. Yellen’s orthodox approach and experience make her, paradoxically, the most conservative choice.

John Taylor is the most interesting candidacy of the three. A contributor to conservative publications, Taylor is best known for the “Taylor rule,” a formula that helps the Fed determine the optimal money supply. The formula itself is econometric gobbledygook, but can be best summed up as: The Fed should raise interest rates by a half percentage point when inflation or general output increases by one percentage point.

As a theoretical concept, the Taylor rule keeps the economy humming along without becoming overheated, staunching the flow of credit when productivity is on the rise. By automatically tightening credit, the formula acts as an automatic cooling valve that tempers the market’s more mercurial forces.

In practice, however, the Taylor rule is ignored. As economist Gary North says, when it comes to modern monetary policy, “there are no rules.” The money supply is dictated by the whims of the PhD-ed pooh-bahs. There is no master formula, just conceit.

That said, Taylor himself isn’t all bad. He’s no Marc Faber or Jim Grant. But plenty of conservatives sing his praises. Trump was impressed with him. Even if his eponymous rule is rarely practiced, it signals that Taylor is less prone to juicing the economy with cheap credit every time Adderall-addled traders have a meltdown.

For an economy still detoxing from the steroid surge of cheap money that was injected into its veins following the financial crisis, withdraw is badly needed. But markets are ornery. Take away their bottle, and they start to cry. All those stock market highs Trump brags about will pale in comparison to the correction that would follow should the Fed abruptly turn off the monetary spigot.

If there’s one thing Trump gets, it’s optics. And that’s why he’s backpedaling, leaving open the possibility of reappointing Yellen. When Fox Business host Lou Dobbs encouraged Trump to keep the current Chair, Trump called Yellen “very impressive” and remarked “I like her a lot.”

Trump’s no goldbug. His entire outlook is predicated on where he made his fortune–the real-estate industry. Nothing sends property values into the stratosphere like low interest rates. Back in April, Trump told the Wall Street Journal, “I do like a low-interest-rate policy, I must be honest with you.”

That’s surely honest, but most unfortunate. Low interest rates are widely regarded as the prime culprit behind the housing bubble of the mid-2000s, which, like a clown entertaining children with balloon animals, was inflated to cheers and applause, only to burst in everyone’s face.

So what did the Fed do in response to collapsing home prices, the fall of Lehman Brothers, and the fire-sale panic that shot through the stock market in autumn 2008? Like a dog to its vomit, the central bank did the only thing it could: Papered over its mistakes with fresh fiat currency. And the ride never stopped. From September 2008 to July 2017, the Fed’s balance sheet increased from just under $1 trillion to $4.5 trillion.

By gorging on government bonds and mortgage-backed securities, the Fed made the banking system flush with cash. But it was the equivalent of a band-aid on a laceration. The disease went uncured. The idea that dictating interest rates from on high went without question.

We’re overdue for a correction, and, given the scale of credit expansion, you can bet it’ll be a doozy. The Fed has worked itself into a corner without a painless exit. Modern monetary policy always reminds me of Winnie-the-Pooh and Piglet tracing their own footprints in the snow, seeking out the elusive Woozle. The circuitous path ends up a total wash, much like getting the economy high on easy credit. The cheap liquidity must eventually be pulled back. As it recedes, so do the economic gains conferred.

In my younger, more bullish libertarian years, I’d idealistically demand Trump put former Texas congressman Ron Paul in charge of the Fed, for the sole purpose of shuttering its doors.

(Ah, the youthful dreams of yore, when the world could be ransacked without consequence.)

With age comes ideological moderation. I’ve become resigned to the fact that central banks are like nuclear weapons: Until other countries given them up, ours are here to stay. So it is with fiat currency.

The mistakes of the past can’t be avoided without a change in philosophy. Trump wants a soft money peddler to keep the good times rolling. The latest reporting has Powell as the pick. Trump should resist, calling one of his patented policy audibles. Taylor is the best choice to continue unwinding the Fed’s balance sheet without sparking a panic. There’s no guarantee he’ll succeed, but maybe—and it’s a big maybe—he’ll avoid a calamity.


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