The Wall Street Journal - 16.08.2019

THE WALL STREET JOURNAL. Friday, August 16, 2019 |A

W

hat to make of the
current battle over
the politicization of
the Federal Reserve?
The past year has fea-
tured an unprecedented attack by
President Trump on Fed leaders and
their independence. Mr. Trump not
only questioned the board gover-
nors’ judgment but even contem-
plated removing the chairman for
the sin of not setting interest rates
where the president wants them. In
reaction, four past Fed chairmen re-
cently co-wrote an op-ed on these
pages to remind the country that
short-term political pressures can
undermine the proper long-term ob-
jectives of monetary policy.

Yet it’s ironic to witness former
Fed chairmen lamenting the central
bank’s politicization. Over the past
few decades the Fed has become in-
creasingly politicized in large part
because of the actions of its leaders,
including the op-ed’s four authors. It
is worth reflecting on how an insti-
tution like the Fed becomes politi-
cized, and what can be done today to
promote Fed independence.
Milton Friedman, Allan Meltzer
and many other observers of Fed
history recognized that indepen-

The Fed was politicized

long before Donald Trump

got to the White House or

even started tweeting.

Central Bankers in Glass Houses

dence is more than a matter of legal

and institutional structure; it de-

pends on how the Fed behaves. Un-

der the Fed’s current structure and

rules, there are many levers that

politicians can, and do, employ to in-

fluence monetary policy. True inde-

pendence comes from making it

harder for politicians to pull those

levers.

Recognizing this, Friedman and

Meltzer advocated transparent, sys-

tematic rules as the best antidote to

political attacks. When a president or

lawmaker asked a Fed chairman why

he decided not to lower interest

rates, the answer most likely to de-

fuse a populist attack would run

something like this: “Our actions re-

flect the transparent monetary-policy

framework that we have established

to implement our legislative man-

date, and that framework is derived

from our understanding of how the

economy functions. The framework

and the thinking behind it are all

publicly disclosed. We occasionally

alter our framework as our under-

standing evolves, but we don’t em-

ploy ad hoc judgments based on our

personal discretion to set interest

rates. We follow the discipline of

what our economic framework says

should guide interest-rate policy.”

No official has ever given such an

answer, because no such policy

framework, or disclosure of it, has

ever existed.

Meltzer often testified before Con-

gress to point out that establishing

this kind of systematic policy frame-

work would also enable Congress to

exercise its legally established role as

the Fed’s overseer. With a framework

in place, lawmakers could hold the

central bank to account for its fail-

ures. Without such a framework to

focus congressional questioning, Fed

leaders can provide evasive, long-

winded answers to legitimate chal-

lenges of their actions.

It is particularly strange and dis-

ingenuous for the former Fed chair-

men to extol the virtues of congres-

sional oversight as the discipline

that underlies the Fed’s legitimacy

when they have done little over their

careers to make oversight more ef-

fective. In particular, Paul Volcker

and Alan Greenspan elevated obfus-

cation to an art form in their con-

gressional testimonies. (People used

to joke that Mr. Greenspan once said

to a congressman: “If you under-

stood me, then I misspoke.” It was

funny for a reason.)

The lack of a systematic mone-

tary-policy framework has not been

the only thing to encourage the Fed’s

politicization. Ben Bernanke and

Janet Yellen took the Fed into new

fiscal-policy territory by buying

mortgage-backed securities and

thereby providing a subsidy for

mortgage interest rates. When mone-

tary policy strays into the fiscal

realm, the Fed inevitably becomes a

target of both legitimate criticisms

and attempts to get it to subsidize

other things.

Messrs. Greenspan and Bernanke

also presided over major expansions

of the Fed’s regulatory and supervi-

sory authority, embodied in the

Gramm-Leach-Bliley Act of 1999 and

in the Dodd-Frank Act of 2010.

These laws made the Fed more pow-

erful, but those new powers also

made the central bank a party to

new political bargains.

As Stephen Haber and I document

in our book “Fragile By Design”

(2014), the Fed’s authority over ap-

proving bank mergers and supervis-

ing compliance with the Community

Reinvestment Act led it to oversee a

highly political and economically de-

structive rent-sharing arrangement

between merging megabanks and

activist organizations. That in turn

encouraged risky behavior in hous-

ing finance in the years leading up

to the 2008 crisis.

So the problem of politicization

isn’t all about Mr. Trump. In fact,

the president’s highly visible and

bumptious attacks likely will have

little effect. In contrast, the politi-

cization wrought by Fed leaders’

actions produces major adverse

consequences. Arthur Burns’s kow-

towing to President Nixon behind

closed doors decades ago was one

example. Today Fed leaders have

created a different set of problems,

but the result is the same: The Fed

is anything but independent.

The best ways to insulate the Fed

from political attacks are for Con-

gress to remove the most politiciz-

ing regulatory and supervisory pow-

ers from the Fed (as the U.S.

Treasury had proposed right before

the 2008 crisis), and for Fed leaders

to eschew fiscal interventions and

formulate and disclose a clear strat-

egy that constrains ad hoc discre-

tion. I’m not holding my breath on

any of these, but meanwhile perhaps

Fed leaders can spare us the self-

righteous platitudes.

Mr. Calomiris is a professor of fi-

nance at Columbia Business School

and a member of the Shadow Open

Market Committee.

By Charles W. Calomiris

JON HARGEST/GETTY IMAGES; JOSHUA ROBERTS/BLOOMBERG NEWS

Milton Friedman and Allan Meltzer

OPINION

What Hong Kong’s Protesters Know About Business

One of the odder
tics in discussions
of Hong Kong’s 10-
week political
trauma is the no-
tion that the pro-
tests rocking the
territory are bad
for business.
Something nearer
the opposite is
true: These pro-
tests are one last chance to preserve
the city’s economic reputation, at
enormous cost—and risk—to Hong
Kongers, who understand exactly
what’s at stake.
There is confusion about what this
mass popular mobilization means for
the economy because the protests
are disruptive by design. This week’s
airport shutdown called attention to
a longer-running decline in travel to
Hong Kong in recent weeks. Meetings
have been canceled, conferences
postponed.
How can this be good for a tiny
territory whose main business is do-
ing other’s people’s business—serv-
ing as a hub and conduit for trade
and finance across a region? And this
isn’t the only blow to Hong Kong’s

reputation. No firm relishes putting

its employees in danger simply by

asking them to commute to and from

work; no one enjoys sending frequent

security updates to staff. Growing

numbers of companies have to do

both in their Hong Kong offices.

This is leading to murmurs about

whether Hong Kong remains a viable

place to do business. Some leaders in

the expat business community warn

of “significant” damage to the terri-

tory’s reputation from the upheaval.

Another common theme is that when

it comes to business attitudes, the

protests are as bad as the Chinese in-

trusions into Hong Kong’s legal sys-

tem that triggered them.

But let’s be clear about the real

dangers to Hong Kong’s economy, be-

cause Hong Kongers sure are. It isn’t

anything so passing as a protest.

What’s bad for business in Hong

Kong is a form of regulatory capture

born not so much of outright corrup-

tion as of political inadequacy. One of

the territory’s most important roles

is to serve as a porthole between the

mainland Chinese economy and

global capital markets. Yet Hong

Kong’s regulators face notorious dif-

ficulties imposing the rule of their

law on mainland companies listed on

the territory’s stock exchange. The

danger to Hong Kong’s reputation for

consistent, business-friendly rules

has grown more acute as Chinese

President Xi Jinping has tightened

his political grip on the state-owned

companies listed in Hong Kong.

What’s bad for Hong Kong’s repu-

tation is the perception that it’s a

preferred parking place for the

wealth of Chinese apparatchiks who

have no obvious reason to be

wealthy. That includes real estate in

the territory worth tens of millions

of dollars, allegedly owned at one

time or another by relatives or asso-

ciates of senior Chinese officials, and

lucrative business deals between

Hong Kong companies and relatives

of other senior officials from the

mainland.

What’s bad for Hong Kong’s econ-

omy is the extent to which Beijing’s

preferred method of control to date

has been to vest political authority

in a relatively small set of profes-

sional guilds. Half the members of

the territory’s legislature are ap-

pointed by “functional constituen-

cies,” comprised of special-interest

groups or trade associations for pro-

fessions such as law, architecture

and insurance—a method devised to

thwart pro-democracy voters. This

has fed a creeping corporatism at

the expense of Hong Kong’s reputa-

tion for economic freedom.

Despite these lapses, Hong Kong

has more than earned its place at the

top of league tables of the world’s

freest economies. That freedom is

sometimes controversial among

Hong Kongers, some of whom might

prefer a more interventionist social-

welfare state funded by higher taxes

or tighter regulations of this or that

domestic concern. Hong Kongers,

however, also understand the impor-

tance of relative freedom and rule of

law as counterbalances to the indig-

nities Beijing inflicts on them.

This is why so many Hong

Kongers see the danger posed by the

extradition bill that started this fra-

cas. That proposal, intended to make

it easier to ship individuals from

Hong Kong into the maw of China’s

opaque Communist Party “justice

system,” would gut the rule of law

that underpins the territory’s pros-

perity. It would accelerate the barely

tolerable, crawling mainland-ization

of the territory’s economy into a

gallop.

Who could reasonably think acqui-

escence to this would protect Hong

Kong’s hard-won reputation as a

business hub?

Hong Kong’s protests could yet

turn tragic if Mr. Xi sends in China’s

tanks despite all the warnings that

doing so would hurt both his own

global standing and China’s economy.

But even if they don’t ultimately suc-

ceed, Hong Kongers have reminded

the world of two important facts.

One is that freedom still tugs at

the hearts of millions of ordinary

people. The other is that despite the

convictions of bien-pensant business

leaders, China-infatuated authors

and populist-fearing politicians,

sometimes the crowd really does

know better what’s in its own eco-

nomic interest.

The real economic dangers

come from Beijing and the

damage it deals to the city’s

rule of law and reputation.

POLITICAL
ECONOMICS
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Sternberg

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It’s No Felony to Violate the Law of Contradiction

‘T

he test of a first-rate intel-
ligence,” wrote F. Scott
Fitzgerald, “is the ability to
hold two opposed ideas in mind at
the same time and still retain the
ability to function.” Few are the con-
temporary politicians able to pass
that test. Among the paucity who
might, cable-TV journalists of our
day do their best to divest them of
this exemplary quality by pointing
up the egregiousness of their con-
tradictions. So, too, do politicians in
debate against rivals enjoy catching
out an opponent in what they feel is
a disqualifying contradiction.
Those cable-television journalists
who specialize in interviewing poli-
ticians—Rachel, Tucker, Don, Laura,
Wolf, Sean, the three Chrises (Wal-
lace, Matthews, Cuomo)—like few
things better than to show up politi-
cians not of their own general views
by finding contradictions between
their past and current statements,

voting patterns, behavior.In 1998,

Senator, you said unequivocally that

you were for the death penalty for

parakeets. (Let’s put that quote up

on the screen.) Yet just last week

you authored a bill that would re-

move all parakeets from death row.

How do you explain that?

In the moral scheme of cable tele-

vision, contradictions are taken to

be the first sign of slippery behav-

ior, a devious mind, bad character.

For a cable journalist, catching a

politician in an apparent a contra-

diction feels penetrating; it is his su-

preme gotcha moment.

With a 40-odd-year political ca-

reer behind him, Joe Biden is more

prone than most to have his feet put

to the contradiction fire. Without in

the least admiring Mr. Biden, one

nonetheless feels for him when some

television journalist or political op-

ponent recalls that he said a eulogy

for the strongly segregationist Sen.

Strom Thurmond, or voted for the

Hyde Amendment on abortion, or

thought crime on balance not a good

thing and putting criminals in

prison not necessarily a bad one.

The problem for Mr. Biden is

that so many of his past positions

no longer pass muster against con-

temporary political views, forcing

him to race breathlessly to erase

old opinions, while in the act also

creating fresh contradictions. Poor

dude can’t win. Donald Trump, hav-

ing been in political life for barely

four years, is better situated in this

regard. Besides, such is his certi-

tude in all matters that it is less

than clear he could recognize a

contradiction.

In classical logic a contradiction

consists of a logical incompatibility

of two statements, so that when

taken together they yield two con-

clusions that form the usually oppo-

site inversions of each other. In

plainer words, a contradiction is a

combination of statements that are,

or seem, incompatible with each

other, often with one directly op-

posed to the other. A touché point, a

disqualifier, sometimes an argument

closer, it is always pleasing to call

out to an opponent, “But hey, wait,

isn’t that a contradiction?”

Most of the contradictions cable-

TV interviewers and rivaling politi-

cians enjoy pointing out in those

with whom they disagree have

their origins a good while in the

past. Often these have to do with

lapses into political incorrectness

avant la lettre. That political cor-

rectness has no statute of limita-

tions plays nicely into the hands of

people who specialize in pointing

out contradictions.

“A foolish consistency is the hob-

goblin of little minds, adored by lit-

tle statesmen and philosophers and

divines,” wrote Ralph Waldo Emer-

son. A thorough consistency over a

long life may even be the mark of a

dull mind. Thought after all changes,

evolves, at least in lively minds. One

wants to have been consistently

kind, honest, honorable, but to have

been consistently right and politi-

cally correct probably isn’t in the

cards, not for politicians nor for the

rest of us. If the law of contradic-

tions were enforced, the jails would

overflow.

Apart from purely polemical pur-

poses, then, searching a politician’s

record for contradictions isn’t al-

ways a useful activity. More than

that: If no contradictions are to be

found, perhaps that politician ought

to be viewed with suspicion. What,

after all, is he hiding?

What Fitzgerald meant by the

ability of the intelligent person to

“hold two opposed ideas in mind at

the same time and still retain the

ability to function” is that life itself

is filled with contradictions, and the

monorail thinker, forcing himself to

travel on one line only, has little

chance to grasp its rich complexity.

To understand that good and evil

can sometimes appear nearly indi-

visible, love and hatred occupy the

same mind, grandeur and squalor

often commingle, to understand this

and so many of the other contradic-

tions that life throws up is, as

Fitzgerald had it, “the test of a first-

rate intelligence.”

Those able to pass that test,

those genuinely capable of complex

thought, in our and in every other

day, are in short supply. Maybe it

isn’t such a good idea to attempt

to disqualify them for what seem

contradictions.

Mr. Epstein is author, most re-

cently, of “Charm: The Elusive En-

chantment.”

By Joseph Epstein

TV hosts and rivals love to

catch candidates’ flip-flops,

but an intelligent mind

should change sometimes.

From an Aug. 14 “fact check” by

PolitiFact.org:

Sen. Kamala Harris, D-Calif.,

tweeted, “Michael Brown’s murder

forever changed Ferguson and Amer-

ica.”...Sen. Elizabeth Warren, D-

Mass., tweeted, “5 years ago Michael

Brown was murdered by a white po-

lice officer in Ferguson, Mis-

souri.”...Afterthese tweets came

out, PolitiFact heard from numerous

readers who asked us to check

whether Harris and Warren were

correct in calling Brown’s death a

“murder.”

There is no question that [Officer

Darren] Wilson killed Brown....In

discussing the case with legal ex-

perts, however, we found broad con-

sensus that “murder” was the wrong

word to use—a legal point likely fa-

miliar to Harris, a longtime prosecu-

tor,andWarren,alawprofessor....

That said, experts who have stud-

ied police-related deaths and race

relations said that focusing too

much on the linguistics in controver-

sial cases comes with its own set of

problems.

“I don’t know if the legalistic dis-

tinction intensifies the anger, but it

does feel like an attempt to shift the

debate from a discussion about the

killing of black and brown people by

police,” said Jean Brown, who

teaches journalism at Texas Chris-

tian University.... Because the sig-

nificance of Harris’ and Warrens’

[sic] use of the word is open to some

dispute, we won’t be rating their

tweets on the Truth-O-Meter.

Notable &Quotable: ‘Murder’