President Donald Trump wants the FED to lower the interest rates. The FED’s board is made up of governours who have the authority to either raise or lower the interest rates. The governours are nominated by presidents, and consequently, the parties that rally behind them. It so happens that democrats have more governours than the republicans. Since the FED does not want o lower the interest rates, President Donald Trump resorted to exerting pressure on one of the governours who are of democratic persuasion. Obviously on the advice of the members of his closest circle the president decided to dismiss one of the governours – Lisa Cook, who was appointed to this FED position by President Joe Biden. To be able to dismiss a governour, the president needs to have a valid reason – a cause as it is legally referred to. The president’s lawyers maintain there is cause enough, the lawyers from the opposition contradict. As usual, when it comes to legal matters, much depends on interpretation.
Now we do not want to delve into the case concerning Federal Reserve Governor Lisa Cook as such. What appears to be of greater importance is the mechanism of wielding power in the United States in particular and, generally, anywhere in the world.
A country’s leader – who may go by the name of president, prime minister, monarch, secretary general – has a job of managing and guiding the country. To do this job successfully, he needs to have a vision, a plan, and… wiggle room. We are not going to decide whether the interest rates ought to be higher or lower. What we are concerned with is whether you can be a successful leader of a country without having sufficient influence on the country’s finances. In the general election people choose their leader. Theoretically at least, they choose their leader on the basis of the promises that a candidate for office makes. Now the candidate running for office may of course be mendacious – having no intention of delivering on his promises – but let us assume that we are dealing with well-meaning candidates. Once elected to a high office, the successful politician needs to have real power or else he will not be able to deliver on what he promised, irrespectively of his good intentions.
On the flip side we have a mechanism enshrined in law – a constitution – statues that safeguards the proper balance of power, the famous checks and balances. We have such mechanisms because we fear to entrust full power to an individual or a group of individuals who might – as not infrequently happens – turn out to be socio- and psychopaths. But, the same checks and balances on the other hand hamper a well-meaning leader from discharging his duties in terms of fulfilling the promises that he made.
The refusal of the FED to lower the interest rates might be dictated by a couple of factors. One, the FED governours might be right from the economic or financial point of view. So far, so good. Two, those FED governours who are from the opposing party might simply want to act in spite of the president’s wishes, just out of malice. That’s bad enough. Three, the FED governours might want to please others than the president or the be ulk of the citizens of their country. That’s pretty bad. Who do the FED managers want to please? The FED’s shareholders. If for whatever reason the shareholders want the rates to be high or low, the FED will act accordingly. Sure enough, for public consumption the governours will frame their financial policy in terms of aiding the country’s economy rather than pleasing their shareholders. In any of the three cases the FED finds itself on a collision course with the President of the United States.
The question arises why the country’s leader cannot decide on financial matters? The answer is: because it is the law of the land to have a central bank that is independent or semi-independent of the country’s authorities. Indeed, the FED was established in 1913 and at that time it was agreed that the country’s financial policy would be placed in the hands of the financial entity which is for all intents and purposes not strictly a government agency but a private enterprise. One of the arguments was that if it were the presidents who could decide about the interest rates and the amount of money in circulation, they would soon trigger huge inflation and consequently bring the United States to rack and ruin.
Indeed, that might be so, the argument is somehow valid. Still, the same arrangement appears somewhat weird. It looks like a ship’s captain cannot give orders to the ship’s helmsman and decide about the course of the voyage. The passengers have entrusted their lives to the ship’s captain, not to the ship’s helmsman (by the way, governour derives from Latin gubernator, which means helmsman); consequently, if the ship runs aground or remains adrift, it is the captain who is held accountable. But the ship may run aground or be left adrift not because the captain was not competent enough, but because the ship’s helmsman refused to take the captain’s orders. Now the ship’s helmsman may be right in refusing to carry out the captain’s orders, but then in case of accident it ought to be the helmsman who should be held responsible rather than the captain. It may equally be so – as mentioned above – that the ship’s helmsman may act out of malice or may take orders from some of the influential passengers (shareholders). That’s a nice fix, isn’t it?
The problem of such or similar checks and balances is not limited to the United States. If leaders are restricted in their action, how can they be expected to deliver on their promises? If leaders cannot deliver on their promises because they are restricted, what sense then is there for having elections?
