DOJ Subpoena Against Fed Chair Threatens Independence Via Criminal Charges

Key Quotes

"this is an attempt by this administration to uh force out its perceived political opponents from the government and so this is quite unprecedented we haven't seen anything really quite like this even in this administration over the past year you know something analogous would be you know criminal investigation of chuck schumer or hakeem jeffries or you know a supreme court justice jay powell is a senior government official and um the administration's made quite clear uh that it would like him to carry out his duties differently from how he is doing it and now they are basically threatening to throw him in jail if he doesn't step down or comply and so this is a very very significant escalation that is different in kind even from what we saw over the summer where the administration was sort of pursuing potential removal actions against um various members of the board including powell this is a criminal investigation which i think i think is different in kind and and should be understood to be a very different set of issues that go that go well beyond the fed itself"

Lev Menand, a professor at Columbia Law School, argues that the current situation is an unprecedented attempt by the administration to remove political opponents from government. Menand distinguishes this criminal investigation from previous actions, stating it escalates the conflict beyond the typical tensions between the central bank and the presidency. He emphasizes that this goes beyond the Federal Reserve itself and represents a significant shift in the nature of the conflict.

"the idea of criminal charges or the perception which many people share right now that criminal charges because you don't like essentially because someone doesn't like the job you're doing obviously gets to an even deeper issue of governance that would apply in any governmental system anywhere"

Joe Weisenthal highlights that the concept of criminal charges being used due to policy disagreements transcends the specific context of the Federal Reserve. Weisenthal suggests that this approach touches upon fundamental issues of governance applicable to any governmental structure. This indicates a concern that such tactics could undermine broader principles of how governments should operate.

"the law does not permit the agencies to to pay for this in any way and so the officials are on their own the legal staff at the board of governors cannot represent powell in uh proceeding being brought against him by the justice department they can't represent him in a removal action by the president and so these matters require you to hire your own counsel and there are organizations that um arrange for lawyers to represent people in these positions pro bono or will pay the legal fees but it definitely has an impact on who can you know serve in the government this is part of why the stakes of this are quite high this sort of thing scares people away from government service and and leads to resignations"

Lev Menand explains that government officials facing legal challenges, such as Jerome Powell, must personally bear the costs of their defense. Menand points out that agency legal staff cannot represent individuals in such proceedings, necessitating private counsel. This financial burden, Menand argues, discourages qualified individuals from serving in government and raises the stakes of these legal battles.

"i think that as long as the board continues to in fact be controlled by non trump appointees you're not going to see a lot of market pricing reaction but if and when we could reach a sort of tipping point where there's a sort of rapid and dramatic negative reaction i don't know that we will reach that you know it felt like we might have been approaching one over the summer leading up to the cook um firing and then there was a real step back from that by the administration but i think we're still several seats on the board away from the market seriously considering and pricing in a central bank that engages in sort of an inflation tax based policy or monetary financing or something like that"

Lev Menand suggests that the market's reaction to concerns about central bank independence is contingent on the composition of the Federal Reserve's board. Menand believes that significant market pricing changes will only occur if the board is controlled by Trump appointees and a "tipping point" is reached. He notes that the market has not yet fully priced in the possibility of a central bank engaging in policies like inflation taxes or monetary financing.

"monetary policy is bank regulation and vice versa that the money supply in the 21st century is created by investor on banks j p morgan bank of america they're the ones actually issuing the money in circulation that people are using and it's their expansion of the money supply or contraction that is affecting the when it comes to all of the macroeconomic variables what the federal reserve is doing when it conducts monetary policy is changing the incentives and constraints on the collective balance sheet of the banking system to expand and contract"

Lev Menand posits that monetary policy and bank regulation are intrinsically linked. Menand explains that commercial banks, like JPMorgan Chase and Bank of America, are the primary creators of the money supply. He argues that the Federal Reserve's monetary policy actions influence the incentives and constraints on these banks' balance sheets, thereby affecting the expansion and contraction of money in circulation.