The doings of the central bank sound esoteric. But Trump might be making some of his most important moves here.

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President Donald Trump took the unheard-of step of preventing a respected, successful Federal Reserve chair from serving a second term. He wanted his own man — emphasis on man — and another erase-Obama’s-presidency trophy, and named Jerome “Jay” Powell to replace Janet Yellen.

Powell’s confirmation hearing before the Senate Banking Committee this week produced few surprises. He generally seemed to support Yellen’s path of gradual interest-rate increases as the economy keeps growing, and no concern about inflation (which is very low). He did say a few telling things, such as the desire to give a “fresh look” at bank regulations (“There’s certainly a lot of regulatory burden.”) and a cryptic statement that no banks are too big to fail anymore.

But Powell is only the start of Trump’s opportunity to change the Fed. He’ll get to name new governors as terms of sitting ones expire. On Wednesday, he nominated Marvin Goodfriend, a professor at Carnegie Mellon University, a critic of the Fed’s response to the financial panic. Goodfriend has also supported closer congressional control of the central bank — an “impeccable conservative” in the words of House Financial Services Committee Chairman Jeb Hensarling, R.-Texas. If confirmed, he would be on the board until 2030.

This is not inside baseball. The Federal Reserve plays a critical role in the economy and lives of average citizens, and its impact extends well beyond setting the baseline for interest rates. It has a dual mandate under the law to keep inflation low while ensuring maximum employment. Through such means as asset purchases and other tools, it decides how tight or loose credit will be and the size of the money supply. This is “monetary policy.” The other wing of government’s economic role is fiscal policy, the spending and tax policies approved by Congress.

The Fed is a regulator, too, overseeing commercial banks. And it compiles and disseminates valuable objective data about the economy. The Fed is nominally independent, although the Fed chair must testify before Congress and the president nominates him and the members of the Board of Governors.

It’s not a new idea. Alexander Hamilton modeled the Bank of the United States on the Bank of England, and from 1791 to 1811, it was important in stabilizing the finances and banking of the new nation. But Jefferson and Madison opposed it on constitutional grounds and the first central bank’s charter lapsed. A second one was killed off by Andrew Jackson, whom Trump prominently admires. And for most of the 19th century and into the 20th century, laissez faire attitudes and minimal state regulations led to a succession of financial panics.

In the Panic of 1907, it was left to the wealthy financier J.P. Morgan to save the economy. This focused the attention of even those who weren’t in the Progressive Movement, and the Fed was established in 1913.

Back to now: Trump’s early Fed moves are somewhat subtle for him, but they risk moving away from the bipartisan consensus on the central bank. And they’re happening along with efforts to dismantle banking regulations and destroy the independent Consumer Financial Protection Bureau.

This laissez faire won’t be like the 19th century, but a return to regulatory capture — what led to the 2008 walk-to-the-brink. Or worse: A strand of the Republican Party (and some Democrats) are deeply skeptical of an independent Fed and support much tighter political control of monetary policy.

We won’t know the consequences until trouble strikes.

The Greenspan Fed was lax in regulation and credit leading up to the 2000s bubble. But once crisis struck, the Bernanke-led Fed responded superbly. Most important: It acted as the “lender of last resort” at a time when commercial and investment banks didn’t trust each other enough to even carry out the overnight money moves essential to keep the economy going.

This central job of a central bank was hard-won knowledge from the 19th century — and the botched Fed response to the 1929 crash. It requires a pragmatism and suppleness of intellect that ideologues don’t possess. The 1929 disaster and the central bank’s mishandling were done by “impeccable conservatives.”

Even Hamilton admitted the Constitution doesn’t explicitly address central banking. But as written and ratified, it didn’t anticipate the United States as a continental empire and global superpower in a highly complex world. It did enshrine slavery. The genius of the framers included giving the document room to adapt.

The Fed isn’t perfect. But just as Churchill supposedly said that “democracy is the worst form of government, except for all the others,”an independent, pragmatic Federal Reserve is better than any other.


Today’s Econ Haiku:

Is it a tax bill?

Or a right-wing goodie bag?

The bill will come due