An economist is sounding the alarm about President Donald Trump's use of the government to attack Federal Reserve Chairman Jerome Powell.
University of Michigan economics and public policy professor Justin Wolfers told MS NOW's Ana Cabrera that using the Justice Department to issue criminal charges against Powell is "the stuff of tin-pot dictators. This is the stuff that never ends well."
Justice reporter Ken Dilanian noted that the Justice Department's biggest challenge will be proving that Powell lied to Congress with corrupt intent. So far, based on the videos of Powell's testimony, he said, "It remains to be seen whether they have any evidence of that in this case."
The financial markets fell on Monday as a result, Dilanian also mentioned. The same observation was made Monday by a CNN analyst who said that it's an indication Trump is losing the political fight with Powell.
Cabrera told Wolfers that "money class" and markets prefer stability, and asked if this undermines it. Wolfers said that those are already responding to the news "very, very, badly."
"This is unprecedented and let's cut through the legal jargon here: This is the president threatening the Fed Chair with jail. He was doing it quietly. He didn't announce it. It's that the Fed Chair came out and brought it out in public. Now, is this the first time a Fed Chair has been threatened with jail for upsetting the president? In U.S. history, it's absolutely the first time. In global history, absolutely not. We've seen these tactics before in Argentina, Russia, Turkey, Venezuela and Zimbabwe. This is the stuff of tin-pot dictators. This is the stuff that tends to precede higher inflation. This is the sort of story that never ends well."
Wolfers expects Wall Street to react badly early on but "not dramatically." He attributes it to what he calls "the Trump two-step." It's when no one knows whether Trump is serious about his actions. If he's serious, the markets will react in a massive way. The second part of the two-step is the TACO, which stands for "Trump always chickens out."
Cabrera went on to recall a previous conversation with Wolfers in which Wolfers explained why central bank independence is critical to keeping an economy stable.
"So the core question is, do you want monetary policy run in the best interest of the American people or in the ideosyncratic political interests of the president. We could answer that as a question in economic theory, but we know what happens when a populist strongman takes over monetary policy," Wolfers continued.
He recalled seeing it unfold in Turkey when President Recep Tayyip Erdoğan had the same kind of "belief" that Trump does. When Erdoğan lowered interest rates to what Trump wants, they had inflation.
"It's a terrible, terrible outcome. It's a bad path to walk down that's not going to lead to anything, neither for the American people or for President Trump's agenda. The whole thing is pointlessly destructive."
