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Dudley Do-Wrong

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

There is one useful lesson that has come out of this long and hellish summer. (Yes, it is still summer here in Georgia, and it has been as hot as Hades for weeks.) I have learned that I have not lost the ability to be shocked, and at my advanced age, that is indeed a surprise. When I think back to the shocking events of my lengthening life — the Cuban Missile Crisis, the assassination of John Kennedy, the magnitude of bad karma in the year 1968, the horror of 9/11, not to mention all the market crashes in my 37-year investing life — one would assume that my reaction to today’s successive shocks would be an overwhelming "meh."

Not so. I was reminded that I was still alive and subject to the element of extreme surprise when I scanned the headlines on Aug. 27 and found that William Dudley — THAT William Dudley, the former President of the New York Fed — had written an editorial piece for Bloomberg that basically posited the idea that the Fed should not "bail out an administration that keeps making bad choices on trade policy..." He went on to say that, "There's even an argument that the election itself falls within the Fed's purview…If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020."

You read that right. I had to read it three times to convince myself that he was actually saying what I thought he was saying — that the Federal Reserve should add an additional mandate to its existing two (which are price stability and maximum employment, by way of a reminder) and that that new mandate should be to help determine the outcome of a presidential election. While his message does not quite rise to a "Seven Days in May" scenario — he did not encourage the Fed to raise an army and storm the White House — it was nevertheless an idea that I never expected to see a former Fed official (especially one who was the Fed's second most important FOMC member) put out into a public forum.

I wonder if Mr. Dudley had anticipated the blowback that followed, which pretty much amounted to a Force 10 gale. Jon Ferro, sidekick to Tom Keene on "Bloomberg Surveillance," weighed in on that morning's show with some trenchant commentary (in a British accent, which made it sound even more impressive) saying that Dudley had "done the Fed no favors" with his commentary and that he believed that Dudley's motivations were political and that he was jockeying for a position should a new administration be put in place next year. Even Larry Summers — no friend of Donald Trump, to be sure — said that Bill Dudley had been "disloyal" to the central bank with his commentary and that he had made a "profound mistake." And so it went, to varying degrees, across the political spectrum and the ranks of economic punditry.

What could Bill Dudley possibly have been thinking? I discount the political jockeying angle — what president would want a Fed chairman who had been so manifestly reckless in his public remarks? Instead, I think that there is something akin to the Stockholm syndrome that sets in among the political and financial elite in this country that makes some of them want to distance themselves from the institutions that they have served for so long.

Exhibit A in my theory — which I shall call the "Upper East Side Syndrome" — is Mr. Sanford Weill, who so famously said in 2012 in a CNBC interview that the U.S. should "have banks do something that's not going to risk the taxpayer dollars, that's not too big to fail." The irony of his words cannot be overstated, given that he was the one who almost single-handedly put together the company — Citigroup Inc. — that de facto broke Glass-Steagall and led to today's deposit share dominance of the nation's largest banks. I suspect that Mr. Dudley — who headed the New York Fed from 2009 to 2018, which was a largely a period of tepid economic growth and over-reliance on quantitative easing and low rates — has not been a fan of Jerome Powell's attempts to get back to "normal" and at the same time to tread lightly through the Trumpian political swamp.

As I was trolling the web to get some views on this subject, I came upon a Sept. 6 piece on The Hill website provocatively titled "Why William Dudley's advice may destroy the Fed." In reading it, I got a reminder of one of American history's sorriest episodes of the clash between Presidents and banks — Andrew Jackson's war on the Second Bank of the United States and its president, Nicholas Biddle — and what happened in the aftermath of that epic battle.

I was struck by the similarities between then (early 1800s) and now, and the fact that there has always been acute tension between populist presidents like Trump and Jackson — both wealthy, both lovers of tariffs, both suspicious of immigration and "non-Americans," both disdainful of elites even though they were of the elite. I was also reminded that Nicholas Biddle had not been an entirely innocent party in the Bank War, using inflammatory rhetoric against Jackson and entirely failing to be cognizant of the "common man" fervor of the times.

The Jackson-Biddle war, as we know, did not end well — Jackson refused to renew the bank's charter in 1832 and it expired in 1836, leading to the ascension of regional banks in the South and West (with their relaxed lending standards), the Specie Circular of 1836 (gold and silver only in payment for western lands), the Deposit and Distribution Act of 1836 (which placed money in "pet banks," mostly located in the western regions) and just a general movement of funds away from the money centers on the elitist East Coast. Those pesky East Coast bankers predictably responded by contracting their lending activities — and voilà, the Panic of 1837 and a depression that lasted until 1842.

While I don't believe that Dudley's remarks are going to lead to a banking panic, I'd make a large bet that they fed right into Trump's tendency to believe that there is an active Washington conspiracy against him, and his belief that the Fed is trying to steer the economy into a slowdown that will undermine his chances for reelection in 2020. The Fed also apparently felt worried enough about that possibility to issue a statement through a spokesperson: "The Federal Reserve's policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment...Political considerations play absolutely no role."

Thus the "bonehead Fed" tweet of a few days ago and the ongoing harangue for zero rates, no matter how destructive that rate environment would likely turn out to be. Dudley apparently got so much criticism (even from his pals) that he apparently had a change of heart and "clarified" his views on Sept. 4 in a piece posted on msn.com:

"What the Fed does or doesn't do can influence electoral outcomes, which in turn can have consequences for the economy and for monetary policy. But the Fed should never be motivated by political considerations or deliberately set monetary policy with the goal of influencing an election..." Mr. Dudley should have heeded the advice of Benjamin Disraeli to "never complain, never explain" instead of doubling down and looking totally foolish now.

I hope that this is one of the last gasps of Trump Derangement Syndrome among the economic literati, and that they will all learn to be a bit wiser and a bit more strategic in their criticism. In the meantime, the Fed needs to institute its own version of the Hippocratic Oath ("First, do no harm") among its present and former governors: First, think twice — and then just shut up.