Chapter 1: What is the main topic discussed in this episode?
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As we now turn for his unique view on balance of power to Larry Summers, the former U.S. Treasury Secretary in the Clinton administration, of course now Bloomberg Wall Street Week contributor. Mr. Secretary, welcome back to Bloomberg TV and radio. Will we look back on this day as the day that Fed independence died?
It's too early to know. And, you know, we've seen a lot that has been threatening to Fed independence, an unprecedented degree of rhetorical attack publicly from the president on the Fed.
involvement of the president in criticism of the Fed over a relatively minor matter, the construction of a building, announcements by the president of various kinds with respect to the composition of the Federal Reserve. So I don't think there's any question that we're facing the most severe challenge to Fed independence in the last two generations.
And I don't think it's safe to say this is the beginning of the politicization of the Fed.
Well, I think that... I don't know that I want to call it the beginning. There have been various things that have happened in the past, but I would say it's the gravest, most extensive politicization of the Fed in more than 50 years.
And what we know from experience around the world and from our own historical experience, for example, with Richard Nixon and the then chairman of the Fed, Arthur Burns, is that when monetary policy is politicized and when it is perceived as politicized, everybody expects higher inflation. And then that higher expected inflation as wage earners bargain, as price setters set prices, becomes
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Chapter 2: What is the significance of Fed independence?
No one. That's not a serious idea. And by the way, I just have to say this. Is it really this president? tweeting, saying things that don't turn out to be exactly accurate on a real estate-related loan application as being the end of the world?
That is a sin of which the president has stood accused on many, many occasions, has been found guilty by courts, has engaged in settlements, has paid fines. And so if somehow misleading statements on loan applications are disqualifying, I think that that's a brush that should paint very, very broadly.
Secretary, the current Treasury Secretary Scott Besson said today in the President's Cabinet meeting, the Fed's independence comes from a political arrangement between itself and the American public. Having the public's trust, he said, is the only thing that gives it credibility. Lisa Cook is going to fight this. The lawsuit is coming today.
How important will it be for her to win this lawsuit on a precedent-setting level to maintain that credibility?
Look, I don't think we have yet had access to all the facts. I don't think the president has access to all the facts.
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Chapter 3: How has political rhetoric affected the Federal Reserve?
And that's why jumping to any conclusion without any sort of process, without any sort of fact finding, was, I think, completely inappropriate. So I don't feel in a position to judge the results of lawsuits. But I can judge the process. And I have to say, I don't understand quite what Secretary Besant was saying.
The view that previous administrations have had is that the independence of the Fed is in part reflected in statute, that it reports to the Congress that it is not part of the executive branch, what the Supreme Court reports. recognized when it distinguished the Fed from other agencies with respect to the president's ability to hire and fire.
So in part, it's rooted in law, and in part, it's rooted in tradition. Secretary Rubin and I, I remember very well, told President Clinton that it was our advice to him that engaging in public debate with the Fed was a fool's game because the Fed wouldn't listen. And so short term interest rates wouldn't be changed very much. But the markets would listen as credibility was lost.
and long-term interest rates would rise. And that's why we have an established tradition, which Secretary Besant has endorsed very recently, of administrations not engaging on the question of monetary policy and how interest rates should be set and at what level they should be set.
But we have an administration that is disregarding the superstructure of norms that has really been what has made our democracy and our economy so strong for decades. This is of a piece with sending the FBI to former officials' homes. with threatening people with criminal prosecutions. And I think over time it runs very, very substantial risks for our national economy.
Secretary, I'm out of time. I just want to know, to the extent that you understand it, can Jay Powell keep Lisa Cook employed as long as he thinks it's correct? Is he the one who controls her paycheck?
I don't think so. I'm not.
So Donald Trump can cut off her paycheck.
I'm not an expert on the legalisms, but remember that whereas the Deputy Secretary of State reports to the Secretary of State, the governors of the Federal Reserve are not subservient to the chairman and don't report to the chairman. So I think this is something that will be worked out in court.
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Chapter 4: What challenges does the Fed face regarding its independence?
I'm Carol Masser. And I'm Tim Stanevex. Subscribe today wherever you get your podcasts.