Thoughts From The Divide: Scapegoats and Fall Guys
The term “scapegoat” comes from a ritual described in Leviticus, where a goat was symbolically burdened with the sins of the people and sent into the wilderness, supposedly taking with it the community’s collective guilt. It’s handy that people have an antipathy toward goats: “scapekittens” or “scapepuppies” just wouldn’t work as well. Over time, the term evolved to describe individuals or groups unfairly blamed for problems they didn’t cause.
A “fall guy”, by contrast, is someone who takes the blame knowingly or is set up to absorb consequences for others, usually as part of a calculated strategy. In both cases, the objective is to deflect responsibility, but the fall guy is more instrumental in the narrative.
This distinction can be important on occasion. Consider Tom Hayes, who was convicted of Libor manipulation and whose conviction was recently overturned. We had the pleasure of meeting Mr. Hayes when he pitched us on various short-end trades in 2009, none of them obviously illegal. Was Mr. Hayes a scapegoat or a fall guy? We would argue scapegoat, because, while he was present at the scene of the crime, his conviction was not precalculated as a way of exonerating the guilty. Either way, the cynical might think those convicted were used to absorb blame and public anger, while the systemic issues remained unaddressed, and banks and bankers were bailed out. The destruction wrought on public balance sheets was such that someone had to be guilty of wrongdoing, and heaven forbid that it might be a major political donor. Izabella Kaminska made some well-observed points on why the 2008 crisis is far from over.
The case of Ghislaine Maxwell is just as topical and interesting. Trump has managed to alienate his base by going back on promises to reveal elite wrongdoing associated with Epstein. It turns out that the claim there was no “client list” is simply not credible, and one might partially blame Ghislaine’s conviction for that. Was Ghislaine a scapegoat? Her family thinks so, and we are told she is preparing to file a writ of habeas corpus. Could a deal be made? Well, Trump is a master of “The Art of the Deal”. Right now, negotiations appear to be in the show-and-tell phase.
Of course, for finance geeks like us, the best current example of scapegoats and fall guys is the relationship between Powell and Trump. We have discussed this question often in TFTD, partly because it’s funny, but mostly because it’s central to any sensible macro analysis. To understand the likely direction of markets, we need to understand both the Fed and the WH’s reaction function. Trump wants lower rates, and/or Powell to take the blame for any adverse economic outcomes, and Trump is willing to use aggressive NFL tactics to get there. Indeed, there may be other objectives if you were to take the Heritage Foundation’s Project 2025 policy document seriously. Paul Winfree’s “Federal Reserve” section seems to advocate reducing the Fed’s scope of operations. We are not alone in thinking Fed independence is in the cross hairs, and our friends who speak to Fed officials tell us that they take the threat seriously.
One might imagine relations between Powell and Trump might be strained by circumstances. Judge for yourself (cringe warning). It’s not often we get to combine monetary policy with “The Office”-style comedy. But there is a serious takeaway for monetary policy. Trump and co are trying to back the Fed into a September cut. Getting markets to fully price that cut makes it harder for Powell to fail to deliver. A “dovish hold” in the coming FOMC would set us up for the September cut Trump wants.
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