German View

Donald Trump Has a Point

Fed Chair Janet Yellen has been one of the many targets of Donald Trump's ire. Source: AP
  • Why it matters

    Why it matters

    Conservatives in Germany and the United States are questioning the policies and even the independence of central banks like the Federal Reserve and the European Central Bank.

  • Facts


    • The Federal Reserve and the European Central Bank have kept interest rates at record lows ever since the 2008 financial crisis.
    • U.S. Republicans and some German politicians have slammed the two central banks for keeping rates too low for too long, creating new risks for the financial system.
    • Germany’s ordoliberal economic tradition has some followers in the United States. A move to force the Fed to follow specific monetary rules stems from that tradition.
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If Donald Trump were to take the White House on Tuesday, there’s one person who already knows they won’t have a job much longer: Federal Reserve Chair Janet Yellen.

The Republican candidate and former reality show host has said he will “fire” Ms. Yellen the first chance he gets. He’s accused the U.S. central bank of acting politically – of being in league with President Barack Obama and helping him artificially prop up the world’s largest economy.

Mr. Trump’s personal, frontal assault on the head of an independent central bank was one of the many unprecedented moments in this unusual election campaign. And yet, it’s one of the few issues where Mr. Trump’s Republicans might actually get some understanding from Germany.

Some German politicians have been no less scathing in their attacks on the European Central Bank, which sets interest rates for the entire 19-nation euro zone that includes Germany.

Germany’s own finance minister, Wolfgang Schäuble, has led the charge. Earlier this year in Frankfurt, he slammed the ECB’s president, Mario Draghi, and said the central banker should be “proud” of his role in the rise of Germany’s far-right Alternative for Germany, or AfD, party.

The personal attacks on both sides of the Atlantic may be unprecedented, but the anger is real, and unlikely to go away after Tuesday’s election.

“Criticizing the Fed, particularly from a presidential candidate, is even more of a no-go in the United States than is ECB-criticizing by national politicians in the euro zone.”

Carsten Brzeski, ING-Diba

Comments like Mr. Schäuble’s suggest that monetary policy could be a key topic in Germany’s own federal elections next year as well.

When it comes to monetary policy, both sides believe central banks like the Federal Reserve and European Central Bank are headed in a wrong and dangerous direction. Their policies need to change, and fast.

“Criticizing the Fed, particularly from a presidential candidate, is even more of a no-go in the United States than is ECB-criticizing by national politicians in the euro zone. The similarity clearly is that both Trump and high-ranking German politicians have actually opened the box,” Carsten Brzeski, Frankfurt-based chief economist of ING-Diba, told Handelsblatt Global.

“The irony indeed is that both sides do have a point,” Mr. Brzeski added. “The U.S. economy could probably do with higher interest rates … and the ECB’s low interest rate policy does have adverse effects on banks and savers.”

In fact, the anger is much more broad-based in Germany than it is even in the United States. Politicians, economists and bankers from both sides of the political spectrum in Europe’s largest economy have criticized the ECB’s low-interest rate policy for undermining the savings of households and creating risks in the financial system.

ECB President Mario Draghi Speaks At Berlin Lecture
German Finance Minister Wolfgang Schäuble (right) has been only slightly less scathing about Mario Draghi than Donald Trump has been about Ms. Yellen. Source: Getty Images

Like Republicans in the United States, Germany has been mostly fighting a losing battle. The Federal Reserve’s more dovish members have prevailed in keeping rates low in the United States, and the German Bundesbank has in most cases also lost out to the more dovish tendencies of other euro zone countries, led by Mr. Draghi himself, a former Italian central banker.

To be sure, if the German public had a chance to vote in Tuesday’s election, they’d still overwhelmingly pick his Democratic rival Hillary Clinton. And among German economists, a recent poll by the Munich-based Ifo Institute found that a whopping 99 percent would vote Democratic.

Much of the latter is due to Mr. Trump’s wider economic policies and his unpredictability. There are fears in Berlin and elsewhere that he could spark not only a recession in the United States, but fresh turmoil in a fragile European Union.

And yet when it comes to monetary policy, the attacks from both sides of the Atlantic are remarkably similar. Both sides fear that central banks have become too powerful and unaccountable since the 2008 financial crisis. By keeping interest rates artificially low ever since, they worry central banks are making life unnecessarily difficult for savers and banks that earn money off of lending.

“The echo of the German tradition is in the desire to have monetary rules. That’s where it comes up in the U.S. most strongly”

Gerald O’Driscoll, Cato Institute, Washington

“I think that the very low interest rates have created what I call an unstable equilibrium around zero and around quantitative easing,” said Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation and a former head of the Kansas City Federal Reserve Bank.

Record low interest rates in the United States and the euro zone have made it even more important for banks to leverage their assets to generate returns, said Mr. Hoenig, who was attending Handelsblatt’s U.S. Election Camp in Washington.

It’s a view that has been echoed in Germany, including from bankers like Deutsche Bank CEO John Cryan. And it’s not just the ECB’s policies that are causing anguish. Economists here are also aiming their fire at the Federal Reserve, which they argue has been slow to raise interest rates from record low levels, despite a U.S. economy that is arguably well into a recovery.

“The U.S. central bank is acting much too timidly. The United States is nearing full employment after all, and hourly wages in October were already up 2.8 percent on the previous year – that’s the highest gain since the end of the recession,” said Jörg Krämer, chief economist of Commerzbank, Germany’s second-largest bank. “The still very loose monetary policy doesn’t match the condition of the real economy.”

That’s also having an impact on Europe. Since the euro zone’s economy is growing slower than that of the United States, the Frankfurt-based central bank has to make sure interest rates are even lower in Europe than they are in the United States.

With U.S. interest rates still near zero, the ECB has had to go negative – effectively charging banks and savers that set money aside – to prevent the value of the euro from rising too much against the dollar. It’s a dynamic that conservative critics of the Fed in the United States are also very much aware of.

“I think the world has painted itself into a corner with negative interest rates. It’s very hard to get out of that corner,” said Gerald O’Driscoll, a former vice president of the Dallas Fed as well as Citigroup and now a senior fellow at the Cato Institute in Washington.

“The ECB can’t even get rates back to zero unless the U.S. goes back into positive territory,” Mr. O’Driscoll said in an interview.

The common understanding is nothing new. There’s long been an affinity between more conservative economic circles in the United States and the German “ordoliberal” economic tradition. Former Dallas Federal Reserve President Richard Fisher, a leader of the more hawkish wing in the United States, in an interview shortly before leaving his post, described his own regional central bank as “the Bundesbank of the Federal Reserve system.”

The German tradition has filtered into Republican circles, said Cato’s Mr. O’Driscoll. He pointed to a move in the Republican-controlled Congress to force the Fed to declare the theoretical rules it is using to dictate monetary policy – a new law known as the FORM Act. It’s an example of the new kinds of checks on the Federal Reserve’s power that might become law in a Trump presidency.

“The echo of the German tradition is in the desire to have monetary rules. That’s where it comes up most strongly,” said Mr. O’Driscoll.

The similarities stop however when it comes to exactly what to do about it. Under a Trump administration, the Federal Reserve could very well face more political checks on its power, not to mention an “end the Fed” movement that has developed around former congressman and presidential candidate Ron Paul.

Such challenges to the independence of central banks’ are a no-no in Germany, despite all the stinging criticism of the ECB.

“I don’t see an attack on the ECB’s independence in Germany. Central bank independence is deeply rooted,” said ING-Diba’s Mr. Brzeski. “More controls could be one option; hoping for a German to take over at the helm of the ECB another one.”


Christopher Cermak is an editor with Handelsblatt Global. He covers finance and economics from Berlin and has covered central banks as a reporter in Washington DC. Jan Mallien of Handelsblatt in Frankfurt also contributed to this story. To contact the author:

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