301. A Monetary and Fiscal History of the United States (2)
2 (13m 37s):
Absolutely. I mean, it has scientific aspects. Cause in each case you wanna know what are the side effects, you know, if you're helping the poor, what, what maybe negative side effects that has if you're helping the rich, maybe what negative side effects that has. So there are technical scientific aspects to it, but at bedrock they come and especially in the political arena, say in the Congress where this is decided politics is ruling the rost.
1 (14m 7s):
Right? But why can't, why can't we have both? Why can't we have lots of rich people and we help the poor, you know, have a tight social safety net? Why can't we look to countries, you know, like Northern European countries like Germany who, you know, have a a, a very robust economy the most in, in the entire eu, and yet they still have a pretty good social safety net and they take care of their poor. Why can't we do that?
2 (14m 31s):
Very good. Well, that's a really good question that's being argued about for decades and decades. I think the simple answer, a very simple answer to something that really probably would take six weeks to answer well, is that the American political spectrum relative to Western Europe is shifted to the right. We have left leaning and we have right leaning. But if you're left leaning in Europe, you're generally quite a bit to the left of left leaning in America. And, and adversely for right leaning, the whole political spectrum is just shifted. So that things that, let's just think about welfare payments to underprivileged people that get supported enthusiastically and easily by the electorate in Sweden or Germany don't make it in the United States.
2 (15m 31s):
The, the the right look, we might as well name him, right? We only have two parties, the Republican party. The Republican party is usually opposing these things. And if they're in the majority or because of the ridiculous filibuster, have enough of a minority, we don't get them here.
1 (15m 53s):
But why wouldn't say right leaning, maybe Chicago School of Economics or Austrian School of Economics, economists in Europe come to America and say, Look, you can have both Republicans, you can take care of the poor and be good people. You're the, you're the party of, you know, morality in the Bible and says to, you know, Jesus says to take care of poor people. That's what you should do. And you don't have to give up anything. You can still have a robust economy.
2 (16m 17s):
We don't need to bring poor Europeans to say things like that. I've been saying things like that for decades. Paul Crewman has been saying things like that for decades. And you go down the list of other left, left of center, Janet yelling before she became secretary of the, before she became chairman of the Fed, then you gotta stay outta politics was saying things like that many of us have.
1 (16m 45s):
Right. All right, let me be a stand in for, for the average listener doesn't know that much about any of these topics. You know, your book is called A Monetary and Fiscal History of the United States, 1961 to 2021, A takeoff on Milton and Rose Friedman's book and Monetary History. What's the difference between monetary and fiscal? Let's start right there.
2 (17m 8s):
Okay, so monetary has to do largely with interest rates. The money supply, credit lending, things that the Federal Reserve in our country in general, the central bank of the country, in our country, that means the Federal Reserve either has control over, so the short term interest rate or a lot of influence over. So the money supply and credit and things like that. Fiscal policy refers to things that are outside the scope of the Federal Reserve, but are controlled by what I'll just call shorthand the political government.
2 (17m 49s):
So that includes the president, is it his or her? I guess they've all been his so far. One day it'll be her, his administration, the Congress and the apparatus that works for the Congress. They decide, they develop ideas for some of which go forward, some of which don't. And decide on fiscal policy, which pertains to taxes, transfer payments like unemployment and welfare and social security and all of that stuff. And government purchases of goods and services like how many soldiers will we have, how many judges will we have?
2 (18m 31s):
How many FBI agents will we have? How many IRS agents will we have? Which is now a, a subject of controversy. The Federal Reserve has nothing to do with any of those things. That's all in the hands of, as I just said, the political, the dual, maybe I should have said the dually elected political government. Mm
1 (18m 55s):
Yeah, no Putin here. And is there, is there a pretty strong wall separating those two that they really not breached? Yeah. Okay.
2 (19m 6s):
That what you just said would be a slight exaggeration, Michael, when they are breached, it creates a lot of controversy and sometimes a fewer, so they are occasionally breached. So let me give you a few examples. One very prominent one, this story is told in many places, including my book that you just held up, is Richard Nixon, an Author Burns. So Author Burns was the Fed chair put in by Richard Nixon and heavily influenced by Richard Nixon. And most people will tell you we got pretty terrible monetary policy as a result of the political, you know, that meant, I'm tempted to say political control of monetary policy.
2 (19m 54s):
That's a slight exaggeration. Burns had to deal with other people, but heavy political influence on monetary policy. Another example of breaching in the other direction, though not quite as strongly came when Alan Greenspan in 2001 basically endorsed the Bush tax cuts. And that got a lot of Democrats mad and got a lot of economists concerned about the Fed poaching over the line and therefore inviting the fiscal authorities to come back and poach in the other direction and make terrible monetary policy.
1 (20m 40s):
Right. So people
2 (20m 41s):
Don't realize this, by the way, Michael, let me just add one thing. Yeah,
1 (20m 44s):
Yeah.
2 (20m 45s):
The Federal Reserve has no standing in the Constitution at all. It's not in the con it's not mentioned in the Constitution and the US Congress, if they could pass a bill and get the President to sign it, these are big ifs could abolish the Fed tomorrow or control the Fed tomorrow. It has that right. There's no constitutional protection. That's not true in all countries. Some other countries, the Central bank has constitutional protection, but not in ours.
1 (21m 16s):
Right. So let's talk about that for a minute cuz you know, one of my areas of specialty is conspiracy theories subject in my next book, and I wrote about a lot of people think the Fed, you know, they put the fed up there like just below the Illuminati. You know, there's these guys in a, in a dark room somewhere with their cigars and they're making decisions. They, they weren't elected, you know, they're pointed for life or whatever. I mean, how much control do we really have? It feels like somebody in there has more power and we don't know what they're doing.
2 (21m 45s):
I understand that feeling, but it ought to be dissipating. So if you went back decades, the Federal Reserve cloaked itself in mystery. It does have, first of all, let's start, it does have power. As I was saying before, the Federal Reserve can set interest rates. It doesn't have to ask the president of the chairs of the relevant committees in Congress or anybody else. So it's got real power and interest rates matter to people's lives. If you went back several decades, the Fed quite deliberately cloaked itself in mystery. It had the attitude, we don't say anything and if we say it, we say it critically.
2 (22m 28s):
So you have no idea what we just said. There's a famous incident of, of Allen Greenspan testifying to some committee of Congress who probably the banking committee and a senator after a ation of one of these Greenspan ations of twisted pros and dangling partisans. And what did the man say? Which was deliberate by the way. But the senator said, Well, I understand what you mean, Mr. Chairman And Greensman looked him in the eye and said, If you understood what I said, I must have misspoken That that was the attitude of the Federal Reserve back then.
2 (23m 9s):
It's not the attitude now. I mean, I invite anybody who's got some spare time to tune into one of Jay Powell's press conferences that he holds after each meeting of the federal open market committee, when they make an interest rate decision, he speaks plain English. He takes questions from the press and it's just an example of how much more open the federal. And he's not trying to obfuscate, he's trying to be understood. And it's just an example of how much the Fed, and by the way, other central banks have also changed in this dimension over the decades.
1 (23m 51s):
Well, and Greenspan was famously a devil devotee of of Iron Rand and, and objective at least in the early days. And you can see photos of him in the, you know, the collective as they ironically called themselves. And you know, and it it, if I recall his memoir came out just before the oh eight meltdown. Right. And basically he was saying, you see my policies work the whole time and you know, the whole kind of free market. And then, you know, like the next month when the ink ink was not even dry and his memoir, the meltdown happens. Yeah. So that would be an example perhaps of too much poli politicization of the Fed.
2 (24m 27s):
That was an exa, I don't, there wasn't so much politicization as Greenspan was chosen by the way, by Ronald Reagan. But then he was reappointed by Bill Clinton, the other party, and then there was George HW Bush in between those to ke reappointing him. He was a rightwinger. He was, as you said, a devotee of rand by the way. I think you were sort of half suggesting wondering was that just a part of his misspent youth? No, he was a believer right to the end as, as far as I know, and people with that kind of political philosophical view don't believe very much in government regulation.
2 (25m 22s):
They point to the harms that government regulation can do. And there are harms. I mean there's, I don't think there's ever been a perfect regulation and they put more weight, We're coming back now to your asking about politics in these people of that I'll put more weight on the unintended harm that you can get from regulation. And Greenspan was very much in that category. Oh, when I was serving as his vice chairman in the mid nineties, we had disagreements. A few of them were on monetary policy, but mostly they weren't, they were mostly on regulatory issues where, you know, I bet left and he bat right.
2 (26m 11s):
And neither one of us was a switch hitter and we, we had different views and he carried that view right through, this is where you started this line, right through to the financial crisis. The Fed was asleep at the wheel in terms of regulation while that was going on. They weren't alone. The i c was asleep of the wheel. The securities and Exchange Committee Commission was asleep of the wheel and so on. All the bank regulatory agencies, most of whose heads had been appointed by George Bush II Greens span going all the way back to Reagan. But most of the others were Bush Jr.
