Bloomberg Audio Studios, podcasts, radio news.
As we now turn for his unique view on balance of power to Larry Summers, the former US Treasury Secretary in the Clinton administration, of course, now Bloomberg Wall Street Week contributor, Mister 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 creation the construction of a building, announcement 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 safe to say this is the beginning of the politicization of the FED.
Well, I think that I don't know that i'd 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 fifty 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 politicized, and when
it is perceived as politicized, everybody expects higher inflation. And then that expected inflation as wage earners bargain, as price setters set prices, becomes a self fulfilling prophecy, and you get higher inflation. And if you want to do something about it, then when everybody's expecting higher inflation and pushing prices way up, if you don't validate that by printing money, you end up getting a recession. So it makes it
harder and worse for everybody. And that's why most countries in the world have moved to having institutions based on independent central banking. And you saw a bit of market response. It wasn't a dramatic market response last night, but it was a revealing one. You saw short term interest rates go down because people thought, gee, if it's so political, the Fed's going to cut more.
You saw long term.
Interest rates go up because people thought we're headed for more inflation. And you saw a dollar go down because even though you could earn a higher interest rate on the dollar, market judgment was that it was going to be a less valuable currency over time because of all the money that was going to be printed by a political fed. So it was a sign that we were looking more like an emerging market country.
And I think that's.
The way this is going to be read very broadly over time. If we know anything, it's that these things don't happen smoothly. It's like Hemingway said, go bankrupt first, slowly, then quickly, and if we lose our credibility, if at a certain point our credibility tips over only takes it takes decades to grow a farce, but it takes only an hour to burn one down. And credibility is a bit like that. And we're putting ours at risk. And it's made worse by the fact, by a couple of things.
It's made worse by the fact that the president's proposals for monetary policy are outside of the reasonable range of debate. You can argue as to whether we should cut rates fifty basis points or one hundred basis points. There is no one outside of those politically attentive to the President who defends the idea that we should cut interest rates to anything like the one that the President has talked about.
No one that's not a serious idea. And by the way, I just have to say, this, is it really this president who is treating saying things that don't turn out to be exactly accurate on our 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 a 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 Besstt 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. 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 Best 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 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 a tradition. Secretary Ruben 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 interistrates wouldn't be changed very much, but the markets would listen as credibility
was lost, and long term interstrates would rise. And that's why we have an established tradition of which Secretary Best 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 J 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 it's I don't think so.
I'm not so Donald Trump can cut off her paycheck.
I'm not an.
Expert on the lead 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.
Fascinating conversation we wanted to bring you with Larry Summers, the former Treasury secretary in the Clinton administration, Bloomberg Wall Street Week contributor, mister secretary, thank you as ever.