With every passing day, the Fed is slowly losing the game, a point made earlier today by SocGen's Albert Edwards who wrotes that "Citizens Will Soon Turn Their Rage Towards Central Bankers."
And it is not just skeptical pundits, and former (and in some cases current) Fed presidents admitting central banks are increasingly powerless to boost the global economy and control inflation (or the Phillips curve) even if they still have sway over capital markets. What is far more insidious to the Fed's waning credibility is when former economists affiliated with the Fed start repeating mantras that until recently were only a prominent feature in the so-called fringe media.
This is what happened last April, when former central bank staffer and Dartmouth College economics professor Andrew Levin, special adviser to then Fed Chairman Ben Bernanke between 2010 to 2012, made the whocking announcement that "A lot of people would be stunned to know” the extent to which the Federal Reserve is privately owned. The Fed “should be a fully public institution just like every other central bank” he added during a call seeking to make the Fed more transparent and accountable to the public.
Why was that stunning? Because it has long been a bone of contention if only among the fringe media, that at its core the Fed is merely a private institution, beholden only to its de facto owners: not the people of the U.S. but to a small cabal of banks. Worse, the actual org chart of who owns what is not disclosed, even as the vast majority of the U.S. population remains deluded that the Fed is a publicly owned institution.
At its core, the question goes to Fed independence: something which the Federal Reserve has long claimed to be, yet an assumption which increasingly more are starting to question even in polite, establishment society.
Fast forward to today, when in yet another striking remark, former Fed governor and the person cited among the most likely replacement for Janet Yellen said overnight that "the Fed isn’t as independent or permanent as many think."
“There has been this idea that the Fed has its own power” said Kevin Warsh, a Fed governor from 2006 to 2011, quoted by the WSJ. “It doesn’t.”
Discussing the core topic of Fed independence, Warsh reminded his audience that the central bank was created by Congress: “We are accountable to Congress, and importantly, the only place where we have any deserved and granted independence is in the conduct of monetary policy.” but then added that the idea somehow that if the Congress says ‘We think you guys should consider X, or you should reform yourself in this way,’ well my view is we shouldn’t fall into a defensive crouch and say ‘How dare you challenge our independence!’ We are subject to the people’s will.”
Warsh, a Republican and currently a fellow at Stanford University (although perhaps not for much longer if the rumors that he is being groomed to replace Yellen are correct), said the Fed rightly aims to keep politics out of monetary policy, although as recent events in Europe have shown - for example when the ECB forced Sylvio Berlusconi out in 2011 when the former Italian PM threatened to pull Italy out of the Euro, or when the ECB forced Greek banks to halt withdrawals during the 2015 Greek bailout - the more appropriate case is that central banks should keep out of politics.
To be sure, Warsh has often been critical of the Fed, calling for broad changes such as how Fed board members communicate with each other as well as the public. One month ago, he challenged the Fed's dominance over the capital markets saying "We should allow asset prices to be an independent source of economic insight and discipline" and slammed Fed group think:
Leading Fed officials are confidently predicting a benign external environment for the next several years: steady growth, stable inflation, and financial assets trading at fair values. Policymakers have all but proclaimed their monetary mission accomplished, their employment and inflation targets largely achieved. The dot forecasts from members of the FOMC are nearly on top of each other.
The last time I recall such uniformity of opinion—among central bankers, academics, and market pros-- was just over 10 years ago.
During the Wednesday event which was moderated by Dallas Fed president (and yet another former Goldman employee) Robert Kaplan, Warsh - perhaps building the case for his nomination - continued to take jabs at the Fed. Kaplan said that while he disagrees with some of Warsh’s comments and criticism, he also thought such disagreement and debate was helpful in strengthening the Fed, according to the WSJ.
But most critically, Warsh also hinted that the Fed's days could be numbered, and the central bank is at risk of eventually being dismantled if it doesn’t make needed changes from within.
“The idea that we [the Fed] are a permanent fixture in the economy is mistaken,” Mr. Warsh said. “The reason we need to reform ourselves is because we believe in an independent central bank subject to the oversight of Congress and the selection of the president.”
Perhaps, but more importantly because as Albert Edwards noted this morning, sooner or later "citizens will soon turn their rage towards Central Bankers."
Finally, he reminded the audience that "the Fed is the nation’s third experiment with a central bank, and the reason it’s our third is because the first two didn’t go so well.”
Now if only America had another Andrew Jackson...