Why the Fed Needs a Total Shake-Up

Scott Bessent wrote an article at the weekend, and he calls for… We know there’s a big fuss going on about the Fed’s independence, and people are writing it up as a real market confidence problem if the integrity of the Fed is undermined by Trump’s interference – Trump putting people on the Fed board who are going to drop interest rates when they shouldn’t be dropped.

It’s seen as a threat to the integrity of the US financial system. At the weekend, Scott Bessent, who I have to say is no fool, wrote an article calling for an honest, independent, nonpartisan review of the entire institution of the Federal Reserve, including monetary policy, regulation, communications, staffing, and research. He paints it as a bid to restore the Fed’s independence.

And you think, hang on – that’s another Trump-esque lie that he thinks the Fed should be independent. He talked about scaling back the distortions they cause in the US economy through bond purchases made outside of true crisis conditions.

He also talked about misusing public funds for everything from a renovation of their own headquarters to their police force, and enriching the rich at the expense of the poor.

Really? Well, I hate to tell you, but I think he’s right. We’re worrying about the Fed’s independence – but let me just point out a few things to you. The Fed are not flawless.

There’s even a movie about it, called Inside Job. Watch that and you’ll see the culpability of the Fed over the past few decades, particularly the last two. After the tech boom, they kept interest rates too low for too long. Even Greenspan himself admitted, “We were too accommodative for too long.”

What happened then was they built a housing bubble. Do you remember the stories about people with no money owning five houses? In the US you could borrow money, and if the property dropped in value you could just hand the keys back, and your debt disappeared.

In Australia, you’d still have to pay your mortgage off whatever you did with the house. But in the US, if you had a house worth $100,000 and it dropped to $90,000, you just handed the keys back – the mortgage was gone. That bubble was created by interest rates being kept too low for too long by the Fed.

Mistake number one.

That led to the Global Financial Crisis because the Fed – whose job it is to govern the financial institutions – allowed investment banks to put together all these mortgages into mortgage-backed securities and CDOs and put them on their balance sheets. They were rated far too highly by the agencies, and consequently the investment banks, including Bear Stearns (which went bust) and Lehman Brothers (which went bust), were loaded with unregulated assets.

And that’s what caused the Global Financial Crisis.

Then, after the GFC, do you remember money printing? The Fed were printing money and effectively handing it to investment banks at zero interest. The idea was that the banks would lend into the economy and reflate it.

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