The Most Boring Scandal in History is Coming (Capital Wave)It is clearer to me each day that people don't understand the difference between evil and incompetence...
Dear Fellow Travelers: I’m probably 65% still from jet lag. So, staying up all night has given me time to catch up on the news. This week, Treasury Secretary Scott Bessent shot a huge arrow across the bow of Washington’s most powerful institution. He says we need to examine the entire Federal Reserve institution to determine if it has been fulfilling its job. Appearing on CNBC, Bessent compared the Fed to the FAA, asking why we're not doing a full review after "this many mistakes." Oh boy… Someone with real power and access wants the Fed review that Senator Rand Paul has been yelling about for years. Bessent also took a shot at all those Fed PhDs, saying he doesn't know "what they do" over there while they're "fear mongering over tariffs" and refusing to cut rates. Even the Treasury Secretary thinks the Fed is a bunch of out-of-touch academics. But before we celebrate the coming exposure of Fed secrets… I want to be honest with you. Such an audit will likely be another boring moment in U.S. financial theater. Here’s why… The Great Revelation That Won’t BeSo, what will we find in a Fed audit or review of its operations? Well, I want you to imagine that after months of political posturing, some government accountant (who didn’t sign up for this) drops an 800-page report on Capitol Hill. The libertarians crack their knuckles. Everyone is ready to expose the century's greatest conspiracy. And then we start reading… Page 1… The Federal Reserve purchased Treasury securities in line with its stated monetary policy objectives. There’s gotta be something here, right? Page 47: The meeting minutes reveal discussions on dual mandate considerations. Now, the readers start getting nervous… Page 156: Emergency lending facilities operated within established legal frameworks. Where’s that smoking gun? Powell once said "um" fourteen times during a single meeting, and he was incorrect that inflation was transitory. There’s no scandal. Just boring ass monetary policy jargon for 800 pages… I’ll read it… and I’ll be interested. I’m just not expecting any real results here… Fantasy vs. RealityThe anti-Fed crowd believes they're going to uncover secret bailouts for cronies. They believe they’ll uncover secret wealth transfers to elites and favoritism in foreign banks. Or that the Fed is quietly driving inequality for the purposes of some grand takeover of America… (all while ignoring that the Fed has been writing about the impact of their policies on the rich and the poor… they know what their policies do…) And we already know about most crisis lending. It's documented. The "conspiracy" can’t be that the Fed bought bonds to lower interest rates. That’s part of their job. Yes, they provided dollar liquidity to foreign banks during crises, because when the global system implodes, it takes us down too. I don’t say this because I like the Fed. I say it because I’ve studied this stuff… And I don’t think that this is an Evil Empire operating out of the Eccle’s Building. I think it’s an incompetent creation… BIG difference. The Truth StinksThe Fed's real problems are unlikely to be criminal conspiracies. They're far more mundane and somehow more terrifying. The Federal Reserve isn't evil. It's imperfect. Sometimes embarrassingly so. These aren't financial masterminds. They're academics who often make mistakes while trying to manage a complex system with imperfect tools. And since they don’t want to be blamed for the outcomes of their policies, they regularly mislead. They're technocrats who believe deeply in their models. Sometimes they ignore reality when it doesn't fit their equations. They suffer from groupthink. They get defensive when criticized. But criminal masterminds? Please. These are people who spend their days debating whether "transitory" inflation means six months or eighteen months. What We'd Actually FindA Fed audit would reveal thousands of pages of meeting transcripts showing overeducated people making educated guesses about an unpredictable economy. Which, in the end, is a common failure to understand human behavior. We’d be treated to long, internal debates about policy trade-offs. We’d read risk assessments that turned out wrong. The most damning evidence would be when Fed officials privately express concerns about policies they have publicly defended. Or we end up confirming their uncertainty about outcomes they projected with confidence. In other words, human beings are trying to engage in centralized planning… Which doesn’t work for a reason. It can’t model human behavior or the complexity of hundreds of millions of people making billions of decisions per day. Which is somehow more unsettling than actual corruption. Corruption you can fight. But what do you do when fallible humans run monetary policy with economics degrees, trying but just stinking at their jobs? That's not a scandal you can fix with handcuffs. The Post-Audit RealityWhen this audit occurs, and it likely will, be ready for another boring scandal. Headlines will scream "Fed Secrets Exposed!" But the reality will be 800 pages of accounting entries and meeting transcripts. All of it will likely tell us what I’ve been saying… The Fed does exactly what it says it does, just not very well. Conspiracy theorists will move the goalposts. Fed critics will pivot and start screaming about the impacts of policy instead of corruption (which is largely my message. The policies are nuts, focus there.). They’ll revisit insider trading activities (but miss the fact that corporate insiders now understand policy pivots and have made small fortunes from Fed policies too…) And Powell (or whoever follows) will continue to give awkward press conferences. Meanwhile, the money printer will keep going BRRRRRR… And not because of some shadowy cabal… But because the Keynesian economic system requires constant debt expansion… as many economists believe the money printer to be the least worst option left. Funny thing… Bessent is now the real driver of liquidity (and BRRR) in the system… Why This MattersBessent is right about one thing… We should ask whether the Fed has succeeded in its mission. But it’s not because they’re likely a conspiracy shop. It’s very hard to have 21,000 people working at a place like the Fed and no one talks to the press about illegalities. So, it’s probably not what a lot of people believe. It’s probably just going to reveal that Ben Bernanke, Janet Yellen, and Jerome Powell made a lot of mistakes and questionable calls. The 2008 crisis? They missed it completely. "Transitory" inflation in 2021? Wrong for over a year. Current standoff over rate cuts? Classic Fed stubbornness and failure to see beyond their academic fishbowl... Those aren't crimes. They're policy mistakes. Big difference. A Fed review wouldn't likely expose corruption. However, it would hopefully spark a conversation about whether our monetary policy framework is effective. Do we need the dual mandate? Should the Fed buy mortgage bonds? Is 2% inflation the right target? [Editor’s Note: NO!!!!] Those are serious questions deserving serious answers. Not conspiracy theories. But maybe that's exactly the conversation we need. Only 7% of Americans are aware of the Fed's true role. Maybe they should let me do the 60 Minutes story I’ve wanted to do… Now… let’s get to the market update… Join us…... Continue reading this post for free in the Substack app
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