Garvan Walshe: While Trump rants about Tylenol, his allies point a gun at the Federal reserve and world financial stability

Garvan Walshe is a former national and international security policy adviser to the Conservative Party. He runs Article7 – Intelligence for democrats.

Ronald Reagan once said that the ten scariest words in the English language were “I’m here from the government and I’m here to help.”

He was wrong.  For the financial markets at least they are these, issued by a majority of the US Supreme Court on Monday: “Whether Humphrey’s Executor v the United States should be overruled.”

With Trump is at his most unhinged — telling world leaders at the UN their countries are “going to hell”, pregnant women not to take paracetamol, sending out mixed signals about NATO’s willingness to shoot down Russian aircraft, setting up road blocks to stop the president of France driving to his own country’s embassy in New York and riffing on babies full of liquid  — few have noticed this technicality.

But those ten words contain the greatest danger to the international financial system since an analyst discovered that “collateralised debt obligations” would not  protect them from sub-prime mortgages that would not be repaid, or even that stocks had not, in the words of economist Irving Fisher in 1929 “reached a permanently high plateau.”

In between the first and second world wars, the United States took on leadership of the global financial system, and therefore responsibility for its stability. The main institution charged has been its central bank, the Federal Reserve system. Its governors are economists, and are kept insulated from political pressure. This model has been emulated for central banks across the world because countries that don’t apply it, like Turkey’s, lose credibility with the markets, leading to inflation, a fall in the value of the currency, or both. It has survived the collapse of the gold standard, through the postwar Bretton Woods system of managed exchange rates, the move to floating currencies exchangeable only in terms of each other, and even the global financial crisis of the late 2000s. 

Now, the US Supreme Court has put it at risk.

It has done so because of another apparently abstruse aspect of the US system, this time in its legal branch, something known as “unitary executive theory.” This is the idea that the executive branch of the American federal government should be considered a single legal person, and that Congress is exceeding its powers if it tries to pass laws regulating its conduct.  Humphrey’s Executor was a Great Depression era case that rejected this view. It held that Congress could pass such laws and that therefore the independent agencies could be given defined legal mandates and insulated from short term political pressure and the whim of the president.

The most important of those agencies is the Fed. Trump has made no secret of his desire to control it, browbeating Fed chair Jay Powell about interest rates, calling him “a numbskull”  and seeking to replace him with someone more pliant. He had his underlings invent charges against another Fed governor, Lisa Cook, in order to have her dismissed (she’s contesting them in court).

At least three US supreme court judges are partisans of the unitary executive. Clarence Thomas has even publicly stated his opposition to Humphrey’s Executor. We might think that odd for a judge, but it might also these days be better to see the US Supreme Court as a 9-person legislature, to which life peers are appointed, rather than a conventionally judicial body. Two more, Amy Coney Barrett and John Roberts, the Chief Justice, often side with them, even if they apply different reasoning.

This time they decided to short-circuit the normal appeal process and directly take on the case, noting in a one-paragraph decision that they would consider overruling Humphrey’s Executor, without it going through the normal appeals process. Words in Supreme Court judgements, like guns in Chekhov’s plays, aren’t meant to sit idle. The case itself has to do with a different agency, the Federal Trade Commission, but the issue is the same: can the president do what he wants with it, or do laws passed by congress limit his powers?

It’s just possible that Roberts and Comey Barrett will find reasons to apply this to the Federal Trade Commission (a consumer protection agency), and keep the Fed secure for now.  They performed this kind of casuistry in their ruling granting the President wide immunity from prosecution last year.  But they have tended to side with the other Republican-appointed judges since, even in cases that overturned decades of precedent.

What can be certain is that if Trump acquires power over the Fed, he’ll use it to avoid the interest rate rises it thinks are needed to control inflation. Controlling inflation was why Turkey’s Erdogan denounced central bankers as “the interest rate lobby;” and why a Big Mac costs around $6 in the US, but 200 lira in Istanbul.