I had been planning to write about the Google remedy decision, since Judge Amit Mehta said he’d release his decision in August and it’s the last Friday of the month. But it’s not out yet. So I wrote this essay instead. Enjoy.

Over the past few months, Donald Trump has been trying to seize control of America’s central bank, the Federal Reserve. He has been complaining for months that the existing leadership of the Fed, which is led by a former private equity baron named Jay Powell, is keeping interest rates too high and stifling economic growth. He is seeking to take over the Fed, and direct it to reduce borrowing costs.

Trump’s campaign culminated on Monday, when he sought to fire a Biden appointed Fed Governor named Lisa Cook, who serves on the board of the interest-rate setting committee of the bank. In a hearing today a judge deliberated over whether this move is legal. If it is, then Trump has taken a big step to enlarging the power of the Presidency, and potentially getting direct control over the American payments system.

The conflict is part of a broader ideological battle over the nature of Presidential power. Since his inauguration, Trump has fired commissioners of “independent agencies” across government, from the Federal Trade Commission to the National Labor Relations Board, often with no Congressionally authorized law allowing him to do so. And yet, these firings have mostly been upheld in the courts, because of a conservative Constitutional theory that the elected President should be able to directly control executive branch agencies. There’s a significant outcry from process liberals that this power grab is authoritarian, but on the other hand, when the President can’t directly run the government, then elections are less meaningful.

And yet, there’s something unusual that happened when this dispute came to the Federal Reserve.

While most regulators exist to oversee corporate behavior and limit the power of the superrich, the Federal Reserve is an actual banking institution, and its multi-trillion dollar balance sheet and authority subsidizes Wall Street every single day. So Supreme Court Justice Sam Alito, when writing about the nature of Presidential power, said that the Fed isn’t like the rest of those grubby regulators. The Fed, he wrote, “should be regarded as a special arrangement sanctioned by history,” as it is a “unique institution with a unique historical background.” The Fed is special, because reasons.

Given the Supreme Court’s hint that he cannot fire Federal Reserve officials over policy disagreements, he has taken a different path to seizing control. He is seeking to fire Cook “for cause,” a vaguely defined term that usually means overt corruption or malfeasance on the part of a public official. So this week, one of Trump’s officials, Bill Pulte, claimed Cook had committed mortgage fraud, though that’s far from clear. Trump then fired her. Cook is fighting this firing in court, as it’s obvious Trump just wants control of the Fed and is using an allegation as pretext.

Economists and liberal elites have been gnashing their teeth over this episode, claiming that the sky will fall if an elected leader gains control of monetary policy. “We are all Lisa Cook,” wrote Paul Krugman. Here’s economist Justin Wolfers, noting that the markets were beginning to crash after Trump fired Cook.

If you didn’t hear of the stock market crash, that’s not a surprise, as the markets quickly reversed themselves. The vaunted attack on “Federal Reserve independence” had come. Economists flipped out, but Wall Street… shrugged.

Why? What’s going on? In this piece, I’ll try to explain the real dispute.

One claim from defenders of the Federal Reserve’s independence is that the ability of the central bank to make decisions without interference from political leaders has always been a part of its Congressional mandate. Their goal is to convince you that American economic success over the past 100+ years is in part a result of this political structure. And yet, that claim is untrue. Indeed, much of this discourse is organized on an entirely falsified version of financial history. So to understand the nature of this dispute, we have to run through how the Fed became organized as the weird institution it is today.

The Fed, like all of our political institutions, was formed as a compromise between different factions in American politics. The Federal Reserve Act, its founding statute, was passed in late 1913, the result of many years of debates among agrarian populists, regional bankers, and Wall Street financiers over the nature of money. Late 19th century battles over the gold standard, the financial crisis in 1907, the Pujo hearings into the “Money Trust” in 1912-1913, and the emergence of the U.S. as a global superpower all colored its structure. It was also part of a series of institutional innovations, which included the formation of the Federal Trade Commission, and the structuring of corporate America itself by J.P. Morgan, who was also running our monetary system.

At the time of its formation, conservatives wanted a system wholly run by private New York banks, while populists sought to move power over money to the West and South. President Woodrow Wilson ended up making the decision, and he listened to William Jennings Bryan and Louis Brandeis, who both pushed against centralized private New York control of credit. In 1913, Congress passed the Federal Reserve Act, which decentralized control over money by chartering 12 separate Federal Reserve banks, along with a board overseeing them in D.C. But the original Fed didn’t look like what we have now, an institution in D.C. that sets monetary policy. The board in D.C. was more like a judicial body, and the 12 regional reserve banks were supposed to facilitate the flow of local credit through their discount windows and check-clearing functions. The idea that a central bank would “control interest rates” wasn’t part of the mandate, and bank supervision was a significant part of the job.

The Fed was also conjoined with the executive branch, in fact the Fed was actually part of the Treasury Department. In the House draft, the Secretary of Agriculture was on the Fed board. That provision was removed, but when the final version passed, the Treasury Secretary was the automatic Chair, and the Comptroller of the Currency was also a member of the board. Even the question of what the board in D.C. would do was up for grabs, and until the 1930s, most of the power over monetary policy rested in the hands of the New York Reserve Bank, led by powerful personality Benjamin Strong, who pioneered regulating interest rates by buying and selling bonds.

The Fed today looks very different than it did in 1913, it is a fully public central bank run out of Washington, D.C.. What happened? Well, the crash of 1929 and the collapse of the banking system, fostered dramatic institutional reforms. During the Great Depression, Congress passed the Banking Act, which restructured the Fed. This law removed the Treasury Secretary and Comptroller from the board, and vested monetary policy authority in D.C. While the President didn’t have the legal authority to fire board members, that didn’t matter. From 1935-1951, Fed Chair Marriner Eccles conducted bank regulation and monetary policy according to the wishes of the President. FDR and Truman directly set interest rates, and Eccles saw his job as managing the banking system’s response to it.

Through the Depression, World War II, and the Korean War, the Fed had a low interest policy, and except for a brief period, inflation remained under control. In 1951, the Federal Reserve board negotiate a deal with the Treasury Department, known as the “Fed-Treasury Accord,” granting the Fed some discretion in how it set interest rate policy, particularly short-term rates. The Fed-Treasury Accord is lauded by people at the Fed, who both pretend that “independence” has always existed and celebrate the deal that helped seed it. Still, from the 1950s to the 1970s, the President, Congress, and the Fed worked together, sometimes acrimoniously, to regulate the money supply and banking. The people on the board of the Fed were usually business people, bankers, and farmers. The Democratic Party put in its platform that it was a party of low interest rates, and everyone got that monetary policy was political in nature.

In the late 1970s, during the neoliberal turn, modern day Fed independence was born. New Fed Chair Paul Volcker, backed by Jimmy Carter, was appointed to manage an inflationary era. While beloved today as the man who conquered inflation, his real goal was to maintain the global supremacy of the dollar and to begin the financialization of the American system. Volcker started off his term by bailing out the Hunt brothers, who were trying to corner the silver market, while crushing the middle class and trying to destroy unions. He and his successors, notably Alan Greenspan, essentially suggested to Congress that if it wanted to end inflation, it needed to allow the Fed to have total discretion over the banking system, without any interference at all from anyone except macro-economic experts and Wall Street. The “Too Big to Fail” era was here; in 1984, regulators bailed out a bank named Continental Illinois, which was an explicit moment when bankers realized size conveyed safety.

Despite his finance-friendly outlook, Volcker was not corrupt, and did believe in regulation. During the Reagan era, he was essentially ousted from the Fed, because he wasn’t sufficiently friendly to junk bond-fueled takeovers. To replace Volcker, Reagan appointed a libertarian named Alan Greenspan, a former consultant for corrupt savings and loan Silverado Savings. Under Greenspan, the Fed’s regulatory powers were gutted, and it increasingly focused on ensuring that financial asset values would go up. The “Greenspan put” was an expression coined by Wall Street in the 1980s, indicating that the Fed would never allow the market to go down too much. During this time period, from the 1980s onward, the Fed board became increasingly dominated by macro-economists, not practically minded people. Bank regulation, which had been a core mission of the Fed, was for losers.

Bill Clinton retained Alan Greenspan, and doubled down on the Reagan framework, emphasizing expertise, his bevy of Rhodes Scholars, and men like Larry Summers. By the 1990s and 2000s, the only opponents of Federal Reserve dominance were considered cranks, like Ron Paul or Dennis Kucinich. In 1999, Time Magazine put the “Three Marketeers” on its cover - Alan Greenspan, Larry Summers, and Robert Rubin - calling them the “Committee to Save the World,” after they engineered yet another bailout of Wall Street, via an obscure hedge fund called Long-Term Capital Management.

Independence was the term characterizing this era of monetary statecraft. But what it means is three separate concepts. First, there was the idea of some sort of regulatory distance from the White House, where the President can appoint members, but must allow them to work without direct control. That notion of “independence” applies to a bunch of agencies, and is a New Deal-era holdover. Then there’s the “independence” granted only to the Fed itself, which is more a norm suggesting that the Fed should enact policymaking around debt and credit without much input from elected officials. That was a direct break from the New Deal, which saw direct control of rates by FDR There’s also a third unstated meaning to independence - the Fed keeps the stock market up, or the “Greenspan Put.”

But the 2008 financial crisis blew up the Greenspan era, challenging the officials in charge of the Fed in a number of different ways. It was a crisis the Fed should have seen and prevented. The Fed was, after all, the institution that had regulatory authority over mortgages, which it never used. But its leaders were blinded by their obsession with the macro; Ben Bernanke gave a speech titled “The Great Moderation” as the crisis was brewing, in 2004. The blindness was a result of their obsession with macro-economic forces, and ignoring the actual banks and institutions in the real economy. Banks, even big ones, were still micro, left to the losers in the bank supervision department.

And yet, somehow, during the crisis, these banks had affected the real economy. In response, the Fed did what it had done since the Volcker era; it bailed out Wall Street. In this case, it did so by expanding its balance sheet by several trillion dollars, buying bad assets from banks and supplying cash in return. By 2022, its balance sheet had reached $9 trillion. The Fed now regularly loses huge amounts of money due to losses on its portfolio, and those losses are essentially the accounting for a subsidy to Wall Street.

The crisis generated a legitimacy problem for the Fed, since its wizards and oracles had failed, and yet the public had no way to vote them out. But rather than engage in real reform and introspection, like most establishment institutions, the professional managerial economists doubled down. Federal Reserve Independence, rather than a temporary historical phenomenon that should be eliminated as a failed experiment, became sacred, to the point that Joe Biden’s White House had a policy that no administration official could even comment on interest rates.

And that brings us to Lisa Cook, the woman at the center of this story. Cook is the first black women to be put on the Federal Reserve board. I knew Cook vaguely before she was nominated and her scholarship on Jim Crow and its effects on patents and newspaper formation is great. So I was excited to see what she’d do. Here’s what I noted in 2022 upon her nomination:

Alas. On the Fed board, she voted to approve the Capital One-Discover merger, to remove restrictions on Wells Fargo over its fake accounts scandal, to give special benefits to Goldman Sachs, and in favor of recent deregulation without even issuing a statement indicating any red lines. Most importantly, she voted to relax the buffer that the biggest banks must keep in reserve in case they run into trouble. I’m not sure she’s ever dissented on anything. In other words, she’s an orthodox economist who went along with a deeply rotten Fed culture. Trump is badly mistreating her, and she should not be fired for cause. But she’s not a heroic public servant.

That still leaves the question unanswered about why Wall Street didn’t react to the end of Fed independence. The rationale for a market drop is that the Fed is run by technocrats with a long-term view. But the President would simply be a short-sighted politician, and that would lead to a lack of credibility in U.S. markets There’s some evidence of higher rates on long-term bonds since Trump started his campaign to take control of the Fed but nothing remotely akin to what was predicted.

And I think that’s because all parts of this debate are clothed in flabby misleading language. The real meaning of Federal Reserve independence, to Wall Street, is that the Fed supports the stock market. And look at this tweet from Treasury Secretary Scott Bessent. Why would anyone on Wall Street worry if he’s running monetary policy instead of Powell?

In other words, what matters is not some nerdy legal conflict among the branches of government, but whether the Fed will continue manifesting the number go up strategy, in which all policy is oriented to ensure that financial asset values keep increasing. When people talk about how the U.S. is the global reserve currency, or that it dominates the world’s financial order, number go up is what they mean. This chart, the value of the stock market against the value of the economy, shows how financial assets now dominate America, and have since the Fed turned ‘independent.’

Historically, as Adam Tooze notes in an excellent essay, it’s been the economists and professional managerial class running the Fed. Volcker, Greenspan, Bernanke, Yellen, Powell, they paid attention to technocrats and charts, and kept the markets up using the language of expertise. But now, Trump wants control of the Fed, so he can move the markets up, but he’ll use the language of a blowhard real estate booster. But the net effect is the same; Wall Street’s version of Federal Reserve independence is intact. If a populist President took over the Fed and sought to make credit accessible to normal people while crimping financiers, the markets would react differently.

Ok, so Wall Street is happy. But are there other consequences if the Federal Reserve’s “independence” disappears and Trump really does take it over? The dispute over who does monetary policy and bank supervision is overwrought, Trump has actually gotten the interest rate choices right more than Powell has. But the Fed is far more than just an interest rate selection machine, it has lots of other powers. There are legitimate fears that the President might use the Fed’s management of the payment systems to target political enemies. The Fed can buy an unlimited amount of assets, foreign currencies, or grant master accounts which come with an implied backstop to political allies. Without an active Congress to check Trump, I can see some really bad stuff happening. And yet, that’s no different than in many other areas. That’s also not something we’d want to fix, because Trump, for all that I don’t like him, did win the election, and that has to come with the ability to wield power. Still, we do need to start asking the question. What kinds of rights or recourse do people have against misuse of central banking authority?

Unfortunately, the response from Trump opponents has been disappointing. Mostly the Democrats have cried that the Fed’s independence is too important to toss away, and they have largely scoffed at thinking about what it would mean to actually have a central bank responsive to public demands. As is similar to attacks on many establishment institutions, Trump’s attack on the Fed is not generating popular outrage because the Fed has lost its legitimacy. I’ve written a lot about the failures at the Fed, but here’s why.

Fed Chair Paul Volcker used to carry around a card of union wage rates, as a reminder that his goal in achieving low inflation was to break union power. The Federal Reserve is responsible in part or fully for the legalization of derivatives, the explosion of subprime lending during the 2000s, the great financial crisis, a trillion dollar transfer of wealth to big banks as interest rates increased, the institutionalization of crypto-currencies, the merger explosion of the early 2020s, and the failed regulation of Silicon Valley Bank, among other problems. It’s also a highly political institution, pushing free trade and defending large banks; in the 1990s, Fed officials secretly bailed out Mexico so as to protect Citibank and pass NAFTA.

There’s more. After the crisis Congress required the Fed to place compensation limits on bank executives. Jay Powell simply refused. The Fed fostered a giant corporate merger wave in 2021, intentionally sabotaged its own payments network, FedNow, because it might be cheaper and better than the system run by large banks, and didn’t block a single merger application of the over 3500 it received from 2006-2021. This choice, as I noted years ago, “includes Silicon Valley Bank in 2021 buying Boston Private Bank and Trust, which the Fed board unanimously justified by noting that SVB would not ‘pose significant risk to the financial system in the event of financial distress.’” Speaking of which, the Federal Reserve’s chief legal officer, Mark Van Der Weide, helped author the legislation that removed regulations on Silicon Valley Bank, and the Fed, and Jay Powell, lobbied for it.

There’s just an endless amount of bad behavior from the technocrats, so the opponents of Trump, asserting that we must protect the “independence of the Fed,” are really missing the point. And I fear that their goal, after Trump leaves office, will be to “restore the independence of the Fed.”

Right now, the Fed isn’t being run well, and it hasn’t been run well for decades. It also suffers from a severe democracy deficit; when Joe Biden was being pilloried for inflation, he didn’t think it was his job to fix it, because of Federal Reserve independence. That’s very bad. And Trump, regardless of what happens with Cook, will end up appointing a majority of Fed board members by the end of his term, which means that the next President will be stuck with Trump appointees who could sabotage his or her agenda. Is that reasonable? I don’t think so.

A better approach would be to just accept that the Fed is a political institution, and that it should be controlled by the elected executive branch with checks from Congress. Policy shouldn’t be the province of economists, but politicians chosen by the public. I used to think Congress could directly run monetary policy, but I no longer think that’s practical. Instead, I could see stripping the Fed of a lot of its power, combined with putting cabinet members, like the heads of the FTC, Secretaries of Commerce, Transportation, Energy, and so forth, on the board.

At any rate, the debate needs to be about how to use the Federal Reserve to make our society more fair, not fighting over whether the annoying dork brigade or real estate boosters get to control moving the stock market up.

Thanks for reading! Your tips make this newsletter what it is, so please send me tips on weird monopolies, stories I’ve missed, or other thoughts. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation, and democracy. Consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller