Dick Bove: Trump carries mantle for Andrew Jackson in fight against the Fed

President Donald Trump speaks in front of a portrait of former U.S. President Andrew Jackson in the Oval Office.  
Kevin Lamarque | Reuters
President Donald Trump speaks in front of a portrait of former U.S. President Andrew Jackson in the Oval Office.  

In September, it is expected that the Federal Reserve will raise the Federal Funds rate one more time. Many believe that the agency will raise rates again in December and possibly two to three times in 2019 until the rate is in the area of 3 percent.

These actions will be directly contrary to the stated wishes of President Donald Trump and hints made public by his chief economic advisor. The rate increases will also ignore the fears of some district Federal Reserve Bank Presidents like James Bullard in St. Louis and Neel Kashkari in Minneapolis. The issue here is whether the Fed will be inverting the yield curve creating a recession.

Therefore, the elements are in place for another epic battle concerning control of the Federal Reserve. In the beginning, this conflict may stay at the surface level but it is quite possible that it will delve more deeply into core issues related to the institution's real function and purpose. That battle was begun under President Andrew Jackson and continues to the present.

Fighting forces within the Fed

In her fascinating book entitled "Fed Up," ex-Fed insider Danielle DiMartino Booth relates that "she was shocked to discover just how much tunnel vision, arrogance, liberal dogmas, and abuse of power drove the policies of the Fed." The book goes on to argue that "… a cabal of unelected academics … made decisions without the slightest understanding of the real world; just a slavish devotion to their theoretical models." She is referring to the years following 2008.

My personal experience with the Fed is certainly not close to that of Booth, but it was not contrary to her findings. For a number of years now, I have noted that the monetary thrusts being made by the Fed were being defeated by the regulatory thrusts made by the organization.

On the two occasions when I went to Washington to ask why this was happening, the answer I received was two-fold: The regulators make their decisions in order to resolve the problems in the banking system and the monetary authorities make their decisions related to the broader needs of the economy. I received no confirmation that these two groups within the Fed coordinated their actions to develop a consensus as to what would be best for the economy.

The net result is that the monetarists authorized three quantitative easings from 2008 to 2012, while the regulatory authorities kept raising the capital requirements of the banks. The net result was lower interest rates, which raised the value of financial assets, but there were no increases in bank loans that could have stimulated economic growth. The FDIC tells us from the first quarter of 2008 to the first quarter of 2014 loan growth in the United States was negative 0.5 percent – not per year but for the total six years.

Jacksonian revolt

Taking a deeper dive, consider these two figures: From the second quarter of 2008 to the second quarter of 2018 bank loans grew by 2 percent per year; the S&P 500 grew by 7.2 percent annually, excluding dividends.

These numbers are at the heart of the Jacksonian revolt against the Second Bank of the United States. Their argument was that the Northeasterners were controlling money supply for their own benefit starving the west and south from receiving funds and, therefore, from growth.

When the creation of the Federal Reserve was being debated, the same argument was used and Jackson's name was constantly evoked. Only by then the argument focused on Wall Street. The considerable opposition to the creation of the Fed was led by notables like William Jennings Bryan, who argued that Wall Street would control the funds in the United States, starving the west and the south and rewarding the Northeasterners on Wall Street.

If either Jackson or Bryan had seen the two stats above related to loans and the stock market they would probably been apoplectic. They would clearly argue "I told you so."

Hamilton, Jefferson

Fast forward to today, the two Fed Bank Presidents who are raising concern about an inverted yield curve and recession are by no coincidence from the very areas that Jackson and Bryan considered to be the west and the south. The President's core supporters are in the west and the south – not on Wall Street or New York or Massachusetts.

President Trump's fear is that further increases in interest rates could slow economic growth presumably in the west and the south. He may have a good case to make. Year-over-year growth in the money supply at 3.9 percent is the trending back to the Volcker years. Actually, in the past three months, money supply growth (M2 NSA) has been zero.

Thus, the battle concerning the nature of the United States financial system, which actually started with Alexander Hamilton (need central banking) and Thomas Jefferson (banks are inherently evil) could easily start again. The data suggests that the Fed may need fixing.