Steven Rattner is Wrong on Judy Shelton, Gold, and the Federal Reserve

The New York Times recently published an op-ed by Steven Rattner on Dr. Judy Shelton's nomination to the Federal Reserve Board of Governors. Rattner is sharply critical of Shelton, starting with his headline: "God Help Us if Judy Shelton Joins the Fed."

Steve Rattner

Rattner's anodyne byline describes him as the "counselor to the Treasury secretary in the Obama administration." I am not one to disqualify people simply because they served at the behest of a political appointee, but this is cause for further investigation. (Lest there be any misunderstanding, I am just as skeptical when reading editorials from Republican political appointees and their subordinates.)

I am also not keen on using Wikipedia as a source. However, this snippet from Rattner's biography is important to keep in mind as we consider his criticisms: "In the mid-1990s, he began to work actively on behalf of Democratic candidates, beginning with President Bill Clinton."

Moving on to Rattner's piece (which I would encourage you to read for fairness's sake), here are my principal counterpoints:

• Rattner's contention: Shelton has questioned the need for a central bank, and this is "heretical." My counterpoint: Shelton does not want the federal government to stop issuing currency. However, she sees little use for an entity that arbitrarily manipulates the currency supply, credit, and -- supposedly -- economic conditions. Shelton wants the supply of dollars to be constrained not by the whims of Ph.D. economists, but by the government's gold reserves. Under such a policy, the Treasury Department would issue currency instead of a central bank -- as was the case until 1913.

• Rattner's contention: The gold standard is "a long-abandoned approach that would be akin to a Supreme Court justice embracing the Code of Hammurabi." My counterpoint: The U.S. gold standard ended with the cancelation of international gold convertibility in 1971 -- 49 short years ago -- and average Americans could redeem their dollars for gold until 1933. The Code of Hammurabi was promulgated in 1754 BC, making the comparison misguided at best. Further, if gold-based currency is "long-abandoned" because it ceased to exist in 1971, so is the 1971 song "Imagine."

• Rattner's contention: "[Shelton's] view that interest rates should be 'rules based' would have prevented the central bank’s emergency cuts." My counterpoint: Policies should be based on the rule, not the exception, and emergencies most certainly constitute an exception. Nonetheless, Shelton alone would have little impact on the policies of the Open Market Committee, of which she would be just one member. She would have to convince other governors and Fed presidents in order to carry any real weight.

• Rattner's contention: "[Shelton's] past opposition to the Fed buying bonds to help stimulate the economy — as it did successfully during the 2008 financial crisis — would have prevented the central bank from standing up many of the rescue programs that are now helping to keep the economy afloat." My counterpoint: The Fed's purchases of Treasury bonds artificially suppressed their yields, sponsored government profligacy, and encouraged more than ten years of speculative investment, as James Grant has demonstrated ad nauseam. Government interference in matters economic and otherwise leads to unintended consequences.

• Rattner's contention: "[Shelton's] notion that the Fed must consult with Congress, rather than act independently as is considered the best practice among developed countries, would have introduced damaging delays, politics and, likely, policy misfires as ill-equipped members of Congress tried to grapple with the intricacies of monetary policy." My counterpoint: As I explain in my editorial on Shelton, the Fed's misfires have been numerous in the coronavirus crisis and throughout history. And, as I note in a previous blog post, Congress has the power to regulate money. It is their prerogative to take back those powers from the Fed, and our automatic orientation should not be toward rule by "experts."

• Rattner's contention: The gold standard was "a significant culprit in deepening the Great Depression and abandoned decades ago by every country in the world (including the United States in 1973). By rigidly fixing prices to a single commodity, a gold standard exaggerates economic swings, on balance for the worse." My counterpoint: There are many rebuttals to the argument that the gold standard is uneconomic, but the clearest and most empirical is as follows: It was under the gold standard that America saw rapid economic growth. Since 1971, when the U.S. canceled international gold convertibility, annual GDP growth has never passed 7.25%. Some would argue that the gold standard worsened the Great Depression, but Fed policy catalyzed much of the suffering.

• Rattner's contention: "Between 1880 and 1933, the United States experienced at least five full-fledged banking crises; in the past 87 years, we’ve had two." My counterpoint: I concede that the Fed "smooths over" economic crises by supporting uneconomic enterprises, but this supports long-term economic stagnation of the post-1971 sort. Recessions are periods of liquidation where capital is shifted toward businesses that are more effective at satisfying consumer wants (an important finding of the Austrian school). Further, as I mention previously, the Fed's post-2008 purchases of Treasury bonds have fueled speculative investment.

• Rattner's contention: "Until [Shelton's] confirmation hearing, she backed getting rid of federal deposit insurance, a key protection for individual savers. Her long opposition to low-interest rates notwithstanding, last year she flip-flopped to Mr. Trump’s view that low rates are, in fact, a great idea." My counterpoint: FDIC protection sustains banks that have a bare-bones ratio of reserves to outstanding loans, allowing them to profit at the taxpayer expense. "Big banks" are a creature of the federal government just as much as they are a bastion of the private sector. As for the accusation that Shelton flip-flopped, is she the first person to reposition unpopular viewpoints in order to secure a nomination/confirmation? If the answer is no, and the others have been confirmed, this argument is invalid.

Rattner's strongest point reaffirms mine: "To be sure, one iconoclastic and outspoken member of a seven-person board (who are part of a 12-member committee that sets interest rates) may not change the Fed’s decisions." Shelton only has power if she is able to motivate her colleagues toward her point of view, and any policy victory she enjoys will be a testament to her power of persuasion.

Then, Rattner enters the realm of contingencies: "But if [President Donald] Trump wins re-election, he will have the chance to nominate a new chair of the Fed when Jerome Powell’s term expires in 2022." If Shelton will be such a horrible and incompetent addition to the Fed, her governorship should reduce her chances of a Fed-chair appointment. Rattner's point is self-defeating.

Rattner concludes with the following: "God help us if the next chair is Ms. Shelton or anyone else with her views. Senate Republicans must recognize this danger and show some backbone." Conversely, God help us if the next chair is someone who allows for the continued decimation of the dollar's purchasing power and another 49 years of a zombie economy.

We are a dynamic country and we need a Fed that feels the same way.