Today, Explained - “Awwww, Shucky Ducky!”

Episode Date: May 7, 2019

President Trump has tried and failed to install two controversial candidates onto the Federal Reserve’s Board of Governors. Vox’s Matthew Yglesias argues that while failing the president might also be succeeding. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Before we get into another big bad episode of Today Explained, support for the show today comes from Quip electric toothbrushes. They now have a kid's Quip. The Quip starts at just $25 and you can find out more at getquip.com slash explained where your first pack of refills is free. G-E-T-Q-U-I-P dot com slash explained. There's a paradox in the federal government. The Fed is boring and everybody sounds bored by it. But the economy is interesting and everybody cares about the stock market, the job market.

But the Fed is the single most important actor in all of that. Matthew Iglesias hosts the Weeds podcast from Vox. It's like the Supreme Court for the economy. Lots of people, like you're not lawyers, but you understand that Supreme Court confirmations are really important because that's the apex of the legal system. The Federal Reserve sits atop American economic policymaking. And so if you care about jobs and wages and anything, you should care. And the thing we should care about is all the drama at the Fed lately? A lot of drama.

Donald Trump has, for over a year now, decided to violate the tradition that the president should not be interfering with the conduct of monetary policy. President Trump, just minutes ago, sounding off on the Federal Reserve. I think the Fed is making a mistake. They're so tight. I think the Fed has gone crazy. He's become very vocal about his desire for low interest rates, but he's not communicating with phone calls. He's doing tweets. He's talking at press conferences. I mean, he's being Donald Trump about it. The president threw out another tweet concerning the Fed. He says, and I'm quoting here, the only problem our economy has is the Fed.

The Fed is like a powerful golfer who can't score because he doesn't have a touch. He can't putt. In parallel to that, he is trying to fill some vacancies on the Federal Reserve Board, and he has gone about it in a very strange way and most recently floated a couple of people. Stephen Moore. You know, I consider myself a growth hawk. Sort of right-wing economist, think tank guy, television pundit, and Herman Cain. Ah, shuck and duck it! The godfather's pizza guy for federal board slots. And the combination of the fact that these guys were not really traditionally well qualified

with the fact that Trump has been breaking the sort of standards of conduct with regard to the president's involvement in this issue made it very controversial. Both nominations went down. This has been a real area where Trump has struggled despite the level of support he normally gets from congressional Republicans to get his way. Well, let's dig into the board of Governors and these two guys a bit more. Is nominating someone to the Board of Governors of the Federal Reserve like nominating a Supreme Court justice, just to stick with your analogy? I mean, it sort of is. These nominations have not become nearly as politicized as Supreme Court nominations, in part because the chairman of the Federal Reserve has been understood to really, really steer the board in a way that isn't as true

on the Supreme Court. And it does make a real difference, right? If you put a few more people on who had a really strong point of view, that would tend to shift the balance of the discussion, probably shift the outcomes on policy. So it's important. So Herman Cain was one of them. I'm ready for the gotcha questions. And they are already starting to come.

And when they ask me who's the president of you, Becky, Becky, Becky, Becky, Stan, Stan, I'm going to say, you know, I don't know. Do you know? Tell me a bit about how Trump justified that nomination. Sure. So Herman Cain's qualification in theory is that he used to serve on the board of directors of the Kansas City Federal Reserve branch. That might sound like it's a qualification, but basically like local business executives tend to sit on these

boards. It doesn't make them experts in monetary policy. It's a kind of community building gesture. Cain is not an economist. He's not particularly vocal on these topics. He's a proponent of the gold standard, which is one of the most archaic ideas when it comes to monetary policy one could possibly think of. He was driven out of the 2012 presidential race by some very serious sexual harassment scandals. So the whole Cain thing was pretty much a non-starter and it crashed and burned fast. Breaking news coming in.

President Trump has another tweet, a very substantial one. He says, my friend Herman Cain, a truly wonderful man, has asked me not to nominate him for a seat on the Federal Reserve Board. I will respect his wishes. Trump's other pick, Stephen Moore, was a much closer call because Moore is a guy who has been involved with a lot of prominent conservative institutions. He was a Cato Institute guy. He was a Heritage Foundation guy.

He's written for National Review. He's written for the Weekly Standard. And what all of that masked is that his reputation in Washington, including on the right, was actually really bad. And he's regarded as sort of a clown. So it created an awkward situation for conservatives who didn't really want to talk about the fact that this guy is a charlatan. So conveniently or inconveniently, depending on your perspective, he just also turns out to have said an incredible quantity of misogynistic stuff over the years. Like he said, it was outrageous that women are allowed to referee

NCAA basketball games. He said, I do believe one of the biggest problems with the American economy today is what has happened with male wages over the last 25 to 30 years. When you have male wages declining like that, they become less important in terms of the breadwinner in the family. And that can lead to family instability. He also had $300,000 in unpaid alimony and child support payments. So that wound up being a lot of vetting problems that sort of provide an adequate excuse for Republican senators to come out against him. Now, the president tweeting this, Steve Moore, a great pro-growth economist and a truly fine person, has decided to withdraw from the Fed process. And it was scuttled, I don't want to say for bad reasons, but it's interesting that it wasn't scuttled for the fundamental reason, right? When his name was floated, a lot of those of us who cover these issues were like, oh, no, this is really bad.

Like this guy doesn't know what he's talking about. And he really doesn't. And he's been very ideologically inconsistent. All while Barack Obama was president, all he would talk about is we need higher interest rates, we need to go on the gold standard, the Fed is going to destroy the economy with ruinous inflation. But then Trump is president. He wanted the opposite of what Moore used to call for. And so Moore was like, yeah, Trump's right. We need huge rate cuts. We're at risk of deflation. It's like your greatest fear at the Fed is that you'll put somebody in

who doesn't really know what he's talking about and is a completely unprincipled partisan hack. And that's more on monetary policy. And it's frankly more on economics over the years. So he attracted a lot of criticism. But what ultimately sunk him with Republicans is this other stuff, right? That sort of sexist jokes and personal misconduct. If Trump actually has a dog in this fight, if he actually believes firmly that interest rates

should be low and that that would be great for the economy, why would he pick someone like Moore who doesn't seem to have real strong beliefs? Trump's mentality is like not to look at people's policy convictions. He wants loyalists on the Federal Reserve who will not do the right thing for the economy, but the right thing for Trump's reelection. So what does that mean for him? Is he going to have to find a new set of loyalists to try and appoint here? Well, or he might come around to the idea of trying to find qualified people who'll do a good job. You think?

You never know. It's hard to know what's really happening with all of this because it's difficult to know what feedback Trump is getting from Senate Republicans. Very few of them wanted to criticize Trump for sending these guys up there. But a lot of them would say in broad terms, oh, I don't think they're confirmable. You know, he should probably rethink this. And so a question is, is Mitch McConnell and his staff, like people who know what they're talking about, are they delivering to the White House some better advice on how to get this done? Or are they kind of all flailing out there?

After the break, Matthew explains what exactly the Federal Reserve does. Like, I know we all have a sense, but after this you'll really, really understand why the Fed is so gosh darn important. Malachi. Yes. You work here at Vox. I do. You recently came up on a quip. Yes, I did.

And I never got to ask you, how do you like it? I like it. It's a clutch toothbrush. I used it when I went to Vegas. You went to Vegas like last week for your 25th birthday? I went to Vegas last week, 25th birthday. How did the quip do in Vegas? It's clutch. It comes in your little plastic case. Yeah. And it can stick it on your surface, the back part. And I

was like, wow, this is amazing. This is the toothbrush that I always wanted. Well, even better news, Mac, there's now a kid's quip. Do you have a little one at home? I don't. Oh, I don't. Well, you could get one now for when you do have a little one. Nice. Have you thought about that? Getting a little toothbrush or a little one or both in the future. Exactly. Yeah. In the future. Yeah. I would love to have a two or three little rascals running around with their own quips, with their own quips. When that moment comes, getquip.com slash explain is the website. The quip starts at just $25 and your first pack of refills is free. Sean, I will have to take you up on that offer. Absolutely. G-E-T-Q-U-I-P.com slash explained. Ballin'.

Thanks, Mac. Thank you, Sean. All right. Stay frosty. Matthew, at the top of the show, you said if you care about the economy, you should probably care about the Fed. Why? Yeah. So the Fed does a lot of things, but the most important thing it does is they move interest rates up and down.

Yeah. But the most important thing it does is they move interest rates up and down, kind of like a rudder, to try to increase the volume of spending through the economy or to slow it down. So they print money and keep interest rates low. That keeps it easy for businesses and individuals to borrow money and to spend and to invest. It sparks hiring. And it's all really good. And so you ask yourself, well, why don't they just do that all the time, right? Constantly print money, constantly keep rates low. And the answer is, well, you could get inflation if you go too far in that regard.

So the Fed, it's supposed to steer that kind of middle course between too much unemployment and too much inflation. And it's very important. I mean, we all know that for politics and for our personal lives, just the state of the labor market is extremely important. A lot of different things go into that. It's not like single-handedly that the Fed makes it happen. But they are the single most important actors in that. They are the government agency that has the primary responsibility for trying to keep the unemployment rate low without going too far into some kind of crazy inflation scenario.

So how is it structured? Is it here in D.C.? Is it all over the country? Where is the Fed? How do I touch it? Oh, it's really kind of weird. Okay, good. So there's 12 regional Federal Reserve banks scattered around the country.

There's one in San Francisco. There's one in Dallas. There's two in Missouri. Two? Yeah, there's one in St. Louis and one in Kansas City. So there's 12 banks, and then there's a seven-person board in D.C. And then monetary policy decisions are made by the seven-person board, plus the chair of the New York Fed plus sort of rotating banks out of the other 11. The point is the president's appointees should have a majority anytime he really wants them to. If all the seats are filled, they could outvote the regional bank presidents. The regional bank presidents are important though because they do some stuff related to bank regulation and local economic development,

a lot of stuff outside the scope of what we and Trump primarily care about for these purposes. Do these regional banks like have money? Do the regional banks have money? As banks should? So they sort of supervise the banking system in their local areas. So like if you ever wonder what happens with checks, like if you give them to the bank, what does the bank do with them? They ultimately wind up with the local Federal Reserve as part of the national check clearing system.

They used to play a very important role in the distribution of physical cash. That is much less important nowadays. So like at the Cleveland Fed, they have their cool historic vault and you can just tour it though because they don't need that much cash anymore. If you remember Die Hard with a Vengeance, in the basement of the New York Fed,

there's all this gold. Yeah. I guess you would say historic reasons. Like the gold standard? Yes, exactly. $140 billion. Ten times what's in kentucky fort knox it's for tourists so they do a lot of stuff that's important to the sort of plumbing of the banking system but not that interesting to a normal person the The most important thing the Fed does from an everyday life perspective is this interest rate stuff.

But they are really important for making sure that the banking system as a whole just operates on a day-to-day basis. They have a lot of professional staff who just kind of work on that away from the political hubbub. And how long has the Fed been at it? Was it back there with Alexander Hamilton and the Treasury? No. The Fed goes back to about 100 years ago, Woodrow Wilson's administration. And it's a somewhat complicated governance framework because the people who designed the Fed, they wanted it to be a government agency, but they didn't want it to be under the direct control of the president. So it has a somewhat convoluted management structure.

But the president appoints most of the key people. What are like the Fed's greatest hits throughout the course of the 100 years or so it's been in action? The Fed is best known for its mistakes. During the Great Depression, there was this wave of bank failures. And the Federal Reserve, I think in retrospect, most experts think the Federal Reserve did not do enough to keep the money supply large while these bank failures were happening. Then the other big, big Fed error came in the 70s, in which you had the war in Vietnam, you had a desire to keep

domestic programs high, then you had Richard Nixon coming in, really trying to put the Fed under his personal control. And in order to try to keep unemployment low, they'd let inflation start to get really, really high. And while it worked for a couple of years, over time, the unemployment rates started going up anyway, even though inflation was also really going up. And so by the time Jimmy Carter was president, you had what they called stagflation, in which the unemployment rate was at like 6%, 7%, 8%. And at the same time, you had a very high inflation rate. You know, so then the feds had good moments that people say, right? Under FDR, they reflated the economy.

They brought unemployment down. In the early Reagan years, when Paul Volcker ran the Fed, they created a very intense but relatively short recession to try to sort of break inflation and create the modern economic world that we have now, in which inflation has generally been low. And of course, the last time the whole country was paying attention or really conscious of the Fed was the 2008 financial crisis. Exactly. So you had the financial crisis and then a lot of Fed efforts to respond to that. And the response was interesting because I think in retrospect, we look at it and we say, OK, all this time since 2008, inflation has never been high.

Unemployment was very high for a lot of that time. But the recovery has gone on for a long time. So in retrospect, it really looks like the Fed should have done more back in 2009, 2010. It looks like the Fed was too quick to sort of raise interest rates in 2015, 2016. And that if you had had back when Obama was president, the mentality that Trump is pushing now, that we need to keep rates low, we need to grow the economy as fast as possible. But that would have been a good thing that we could have had the level of employment we're enjoying today, two, three, four, even five years earlier. How much can the Fed divorce itself from politics

when pumping the brakes or pushing the gas on the economy? Well, that's the question, right? So one concern that the people who set the institution up have is that if you're the president, you are always going to want to err on the side of a little bit more job growth now. And, you know, if there's inflation, like, let's take care of that later.

Because that's what people care about. Yeah, exactly, in the short term. And so that's fine. But the problem is, is that if every month you err a little bit on the side of not really caring about inflation, you might get a lot of inflation over a period of several years. And in the long run, having a lot of inflation doesn't help anybody find jobs, right? It just creates chaos in the economy. And that's where you get to the Trump situation where Trump's motives for trying to put his cronies on the Fed is really just like he wants rapid job growth next year to help win reelection.

So that's not like the right way to think about it. That's not a sophisticated approach to monetary policy. When he was a candidate, Trump was like talking all kinds of nonsense on the other side of this. I think the Fed is being totally controlled politically. They're not raising rates. But there's still like the analytic question. And it does seem to me that it's plausible that a low interest rate policy would actually be good. But as you said, Trump isn't the first to try and really manipulate or assert control over the Fed.

What makes this moment different from Nixon or anyone else? When Nixon was president, he really put a lot of pressure on the Fed to do what he wanted. Right. And that included blackmail tactics against the Fed chairman. I mean, it was Nixon. Yeah. And that wound up ending badly for the country because of the big inflation in the 70s. So then there was a change of mind in the 80s and we had more independence.

We had more sort of crackdown on inflation. And so that led to a dynamic where by the time George W. Bush was president, Barack Obama was president, those administrations were like the last thing in the world they were going to do was talk about the Fed. And you could talk to economic policymakers under Obama about the Fed on the record, off the record, after three beers, like it didn't matter. Like they would not talk about it. Their answer was, we do not discuss monetary policy. They thought it would be inappropriate and they also thought it would be counterproductive. That if word got back that like Obama's trying to get Ben Bernanke to do X or Y, that Bernanke wouldn't do it. It would be a bad story for them. It would be totally

counterproductive. So Trump has come in and as he's done so many other fronts, he has a different approach than some other presidents have. And so he's decided he should just be very vocal about what he wants, doesn't play any subtle games. He doesn't do like complicated Nixon blackmail tactics either. Like he just says, the Fed should drop rates. I think they really slowed us down. There's no inflation. And he tweets about it. He tweets, he talks in press conferences. He called them loco at one point. Like he's not being polite. He's not being subtle. He's not following norms of independence.

He's just saying what he wants in the strongest possible language on Twitter or wherever. So how is the Fed chair, Jerome Powell, who has been made chair by Donald Trump himself reacting to this different approach. So Powell is just not saying very much. We have sort of inverted the power dynamics that existed in the Alan Greenspan era. We now have like a very quiet Fed that is not buckling to Trump's pressure, but also isn't pushing back against him. At the moment, I mean, they just haven't done anything on interest rates one way or the other in the past couple of meetings.

They're just kind of holding off. You know, the fact is, is that the economy is growing at a pretty decent rate. Inflation is fine. And normally, everybody would just sort of be happy about that. Trump makes everything into drama. Right now, things are going pretty well. So it's a little bit odd to have such a big outbreak of drama because it's not really clear what Trump and Powell disagree about exactly. And in the meantime, there might

be more drama because of these two nominations? Yeah, with these nominations dead, there's two more vacancies. If Trump puts more people up, there could be a lot more drama. He also might just not turn to it. Presidents in the past have sometimes let vacancies on the Fed board linger for quite a long time. Trump is very untraditional in terms of the level of vetting that he does for people. And under any previous administration, I would say, well, look, we're going to have to wait and see and we're going to hear about new candidates getting vetted. Trump, though, sometimes just nominates people on Twitter, takes the whole world completely by surprise. I will say that having put people up who failed, Trump has now raised the stakes around this and you're likely to get more attention paid

than you might have in the past if he had just sort of gone with some boring people in the first place. So maybe he's raised the Fed's profile a little bit. Yes. I mean, personally, I'm excited to have more talk about Fed board nominations. Trump's engagement with this issue, like his engagement with basically all issues, has not been incredibly well-informed or constructive. But I do think it's nice to see a president who recognizes the significance of this issue and is willing to sort of state that not only does the state of the economy matter a lot to people, but who is on the Fed matters a lot to the economy.

Hmm. That's refreshing. Yeah, I love it. Matthew Glacius loves the Fed. He writes about economic policy at Vox. I'm Sean Ramos for him, and now they got the kids' quipip so you can outfit the kids with them. G-E-T-Q-U-I-P dot com slash explained. The Quip starts at just $25 and your first set of refills is free at getquip.com slash explained.