Economic checks & balances

It’s fall, which means the budgeting process at many banks is underway. A budget is a meaningful way for any organization to articulate its expense and revenue expectations for the coming year. A detailed budget is the competent manager’s best friend..I once worked for an organization where one of my colleagues complained about having to put together a budget every year. “If we are off by even a few dollars, we have to do a variance report at the end of the month,” he would complain. “We could save ourselves a lot of trouble if we just filled in the budget at the end of the month. We could set the budget according to the revenue that came in and the money we spent. That way, the actual numbers would match the budget and we’d never have to fill out a variance report.” If you can believe it, he was serious! He used to drive our CFO crazy.When we look at the nation’s budget, I wonder if the discussion around Fed independence is a little like that guy who wants to match the budget with the numbers at the end of the month. In both situations, someone wants to avoid accountability. At most organizations, a budget instills discipline in spending; and in the federal government, the Fed imposes a measure of discipline on the budget, which has otherwise been politicized beyond meaning. The Fed sets interest rates based on the performance of the economy, knowing that every increase in the Fed funds rate means Uncle Sam has to pay a little bit more to borrow. You could argue that no one pays any attention to the debt anymore, as it has essentially been allowed to run rampant, but President Trump must care; otherwise he wouldn’t be so concerned about the increased expense of high interest rates. But the President’s approach is a little like my buddy’s from years ago. Rather than correcting the budget, he wants to neutralize the vehicle implementing the discipline. Of course, the problem isn’t the Fed, it’s the runaway spending philosophy that drives Congress and the Administration. We live in a country of checks and balances, and I continue to believe that’s a good thing. Interest rates set according to independent market analysis is one of the few things holding elected officials accountable for the amount of money they spend. The key part of the hope I have for our economy depends on continued friction between interest rates and spending.