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Trump Picks Another Swamp Creature for Fed

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Pres. Donald Trump has nominated another swamp creature to sit on the Federal Reserve board of governors.

Marvin Goodfriend does not come from the ranks of politicians. He’s an academic – an economics professor at Carnegie Mellon University. But he’s perfectly suited for the role of central planner. He fits right in with the other central bankers running what investment guru Jim Grant once called “the Ph.D. standard” monetary system, as opposed to the gold standard.

Goodfriend already has ties to the Federal Reserve. formerly serving as director of research at the Richmond Fed

The mainstream media has presented Goodfriend as a challenge to the status quo – a yin to Jerome Powell’s yang. Here’s how CNBC described him.

If President Donald Trump’s nomination of Jerome Powell to lead the Federal Reserve was a way of preserving the status quo, his selection of Marvin Goodfriend for another vacancy is a way of challenging it.”

Now, you might read that and say, “Oh good. Now we’re getting somewhere.”

Not so fast.

Goodfriend isn’t a fan of the conventional radical policy of quantitative easing. He’s actually a proponent of an even more radical policy – negative interest rates. And that means he’s also an advocate for the “war on cash.”

As Bloomberg notes:

Goodfriend thought the impact of QE was questionable, at best. Instead, he made a case for an even more unorthodox idea: negative interest rates. He conceded, however, that a sustained policy of negative rates might require abolishing paper currency, a step that would likely prove unpopular.”

As Tho Bishop at the Mises Institute pointed out, Goodfriend made a case for negative interest rates back in 2016, calling the zero bound an “encumbrance” that needs to be removed just like the gold standard was.

The zero interest bound is an encumbrance on monetary policy to be removed, much as the gold standard and the fixed foreign exchange rate encumbrances were removed, to free the price level from the destabilizing influence of a relative price over which monetary policy has little control—in this case, so movements in the intertemporal terms of trade can be reflected fully in interest rate policy to stabilize employment and inflation over the business cycle.”

Negative rates effectively place a tax on savings. When rates fall below zero, it literally costs you money to keep your cash in the bank. That leaves you with a few choices. You can spend it, or you can just stuff it under your mattress (or hide it in your microwave as some Swedes have reportedly done in that country), or you can just suck it up and pay the bank to hold cash for you.

Goodfriend isn’t alone in his advocacy for negative rates. Harvard professor Kenneth Rogoff is all for them. He recently published a paper making the case for pushing rates below the zero bound. He wants policymakers to develop market infrastructure for the widespread adoption of negative rates during the next inevitable downturn.

During recessions, central bankers drop interest rates to “stimulate” demand. As Rogoff points out, the Fed has cut borrowing costs an average of 5.5 points during nine recessions since the mid-1950s. Currently, rates around the world are generally below 2% Some are still in negative territory. What is a central banker to do?

There is still strong psychological resistance to negative rates, but Rogoff says they can be extremely effective in today’s economic environment.

It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’s time. The growth of electronic payment systems and the increasing marginalization of cash in legal transactions creates a much smoother path to negative-rate policy today than even two decades ago.”

Enter the “war on cash.”

Bishop dug up some past statements that show Goodfriend is all for that as well.

Since negative interest rates usually coincide with greater use of cash (and personal vaults), Goodfriend went so far as to suggest the Fed should consider devaluing the value of printed bank notes. A $10 bill would buy less than a $10 debit card transaction, opening up a new front in the ongoing war on cash.”

Last spring, the International Monetary Fund (IMF) published a working paper offering governments suggestions on how to move toward a cashless society, even in the face of strong public opposition. Cash warriors always use the fight against drug dealers and terrorists as the excuse for limiting the availability of cash in society. But here we see the real reason for the “war on cash.” If we have to pay to keep money in the bank, and there is no currency available to stick under the mattress, we’re more likely to just spend dollars rather than lose money by keeping them in the bank. This allows central planners to manipulate us into funding their Keynesian schemes.

Last summer, Bishop warned putting Goodfriend on the Fed could be bad news for everyday Americans.

Given his radical views on monetary policy, it’s not hyperbole to suggest that Goodfriend’s nomination would represent a genuine danger to the economic wellbeing of every American citizen – or at least those outside of the financial services industry.”

So, to say this Trump pick challenges the status quo is a bit of a stretch. He’s certainly a different kind of swamp creature than Powell. But at his core, Goodfriend is just every other central banker. He’s a central planner who thinks he’s smart enough to run the US economy. This kind of thinking is dangerous, no matter which tools he prefers to apply to the task.

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