End the Fed

Email Print
FacebookTwitterShare

 

 
 

u201CWe probably
know more about tribes in the Amazon jungle than we do about the
real nature of power in the United States. Neither political science,
nor history, nor economics do very well on this.u201D
~ Tom
Ferguson

Something new
is happening around the contours of monetary policy. It's becoming
part of our popular political landscape. We saw this a few weeks
ago, when Sarah Palin injected
into the 2012 presidential race the idea of fundamentally reorganizing
the Federal Reserve's mandate. Republican Mike Pence, Senator Richard
Shelby, and a host of other Republicans have jumped on this concept,
and there will soon be legislation introduced to make this happen.

Beyond Republican
politicians, the public is beginning to rethink our monetary order.
A YouTube
video on quantitative easing
has over 3 million views. The video
slams the Fed for missing the dotcom bubble, the subprime crisis,
for being fundamentally undemocratic and unaccountable, and for
being engaged in collusive dealings with Goldman Sachs. Financial
blogs and CNBC discuss the Fed, and its associated characters, with
deep insight and passion. And Bernanke drew 30 no votes in his confirmation
hearing in 2009, the most ever for such a position, just four years
after drawing almost none. The market nearly crashed on the possibility
that Bernanke's nomination would fail before the White House stepped
up aggressive lobbying efforts. On the left, the last few years
saw a remarkable grassroots coalition of economists and activists
to bring transparency to the central bank, joining a long-sought
libertarian crusade. I was a staffer for Rep. Alan Grayson, who
was working with that coalition to require an independent audit
of the Federal Reserve. Tomorrow, because of provisions put into
Dodd-Frank by Senator Bernie Sanders and Congressmen Grayson and
Ron Paul, the Federal Reserve will release details of its 2007-2010
emergency loans to the web.

This network
of politicians, advocates, and bloggers will go to town on whatever
revelations come out of that. (Although the Fed obnoxiously put
its Maiden Lane disclosures in a non-copy or printable PDF format,
so we'll see how easy they make it to get this info.) The defenders
of technocracy are out in force as well. Paul Krugman is defending
the institution, if not every decision. The Democratic partisan
class is going after right-wing Fed critics, while more liberal
independents are pointing to the Fed in the 1940s and the Reconstruction
Finance Corporation as a very different monetary model. Not since
the populist movement of the 1890s has there been this much discussion
of monetary structures among the public, and so much dissent about
how money is created and circulated throughout the economy. It's
happening for a reason. The public is now paying attention to finance.
We ran a focus group in Orlando last year, and one of the surprising
conclusions was that nearly every independent voter knew who Ben
Bernanke was. People don't like the structure of our financial oligarchy,
and they are talking about it. Even the deficit hysteria and the
Fannie/Freddie GSE fights are a function of this monetary debate.

It is good
that this debate is happening. It means that we will be able to
examine the real power structure of the American order, rather than
the minor food fights allowable in our current political system.
This will bring deep disagreements, profound ones, but also remarkable
possibility. Modern American industrial policy is to push capital
into housing, move manufacturing abroad, build a massive defense
establishment, and maintain an oligarchic financial sector. This
system isn't a structural inevitability. People built it, and people
are unbuilding it. People with names, motivations, and reputations.
People like us, and like Sarah Palin.

In 1989, Bill
Greider published a remarkable book called The
Secrets of the Temple: How the Federal Reserve Runs the Country

in which he described how Fed officials were the real decision makers
in the American political order. Shielded by the argument of u2018political
independence', most politicians wouldn't and still won't dare interfere
with the workings of our economic structure, even though the Constitution
clearly mandates that the monetary system is the province of Congress.
The dramatic and overt coordination of this u2018independent' central
bank with the executive branch and the banking sector, and its flouting
of Congressional and public scrutiny, have removed its institutional
legitimacy.

Like most American
institutions, the Fed has shrouded itself in myth, with self-serving
officials discussing the immaculate design of the central bank as
untouchable, secretive, an autocratic and technocratic adult in
the world of democratic children. But the Fed, and specifically
the people who run it, are responsible for declining wages, for
de-industrialization, for bubbles, and for the systemic corruption
of American capital markets. Take this passage from Greider's masterpiece,
on the inflation battles of the early 1980s.

u201CWhen
White House officials congratulated themselves on how swiftly inflation
was declining, Volcker pulled out his card on union wages and warned
them not to be too optimistic. Until labor got the message and surrendered
on its wage demands, the underlying rate of inflation would continue
to push prices upward – and collide with the stringent reality
imposed by the Fed's money policy.u201D

Here was the
Federal Reserve Chair, a Democrat, carrying around union wage stats
in his pocket so he would know whether he was driving worker pay
down fast enough. If you want to understand the poverty of the financial
reform debate, that Volcker was u2018the hero' of the reform side should
illustrate it.

On a basic
level, the Federal Reserve has two jobs. One is to maintain price
stability, and the other is to maintain maximum employment. This
u2018dual mandate' comes from debates in the 1970s about full employment,
and was part of the Humphrey
Hawkins legislation
that President Carter watered down from
its original liberal origins. While the Fed ostensibly has to care
about full employment, Carter made sure this would be more of a
guideline, and it is quite obvious to anyone who pays attention
to FOMC minutes that most Fed officials don't take it seriously.
Nevertheless, the Fed has a bunch of tools to accomplish these goals.
It regulates the money supply through its balance sheet and a variety
of market interventions, it maintains the payments and clearing
system, and it regulates banks. It also has a number of consumer
protection responsibilities, and has emergency lending authority
that was radically expanded by Wall
Street super-lawyer Rodgin Cohen in 1991 through a very subtle secretive
maneuver.

Structurally,
the Fed is a two-part system, with a Board of Governors in DC and
Reserve Banks that sit in 12 separate regions of the country that
represented roughly equivalent sectors of the economy in 1913. The
Board of Governors has 7 members, each of whom can have one 14-year
term, and a Chairman who has a four-year term. These members are
appointed by the President and confirmed by the Senate. Monetary
policy is set through the Federal Open Market Committee, which has
members from both the board and the Reserve banks. If you ever want
to see how the country is actually run, read the transcripts of
FOMC meetings, which are released
on a five-year lag
(they used to be shredded as a matter of
course). It is stunning to read how Reserve bank presidents basically
talk to WalMart and high-end headhunter firms to find out how their
regional economy is doing, and then set monetary policy. It's also
crazy that we still do not know what the FOMC was saying from 2005
onward, during the height of the mortgage boom and bust. All of
this is secret, and very much open to subpoena for some enterprising
politician. (It is one of my great disappointments that neither
the Democratic House or Senate tried to get these transcripts, given
that we
know
that Alan Greenspan was muffling dissent on the housing
bubble in 2004, the last released transcript.)

The Reserve
Banks are quasi-public and quasi-private entities owned by member
banks. The New York Fed, for instance, pays dividends to JP Morgan,
and has a .org web address. The Reserve banks are governed by Boards
of Directors that are drawn mostly from the banking sectors of their
regions, as well as large companies and the occasional union leader
or university president. The Fed also has a large research staff
and funds most macro-economic monetary policy research. It
is uncommon to find u2018credible' economists in monetary policy

who have no financial ties to the Federal Reserve banks. The Fed
is actually one point
of contention between the right-wing billionaire Koch family and
the Ron Paul libertarians
; the Kochs are supportive of Federal
Reserve-tied scholars, and Paul's people are not (the Palin Tea
Party had no involvement in the Audit the Fed fight, the Ron Paul
Tea Party was the driving force on the right for that legislation).

This structure
is the result of a political compromise in its inception, a holdover
from the Wall Street-populist fights of the 1890s, the financial
panic of 1907, as well as legislative shifts over 90 years. It is
a deeply corrupt and indefensible system rife with conflicts of
interest. The Reserve banks conduct a good amount of the regulatory
work in our banking system. Their boards are staffed with bank leaders,
and the presidents of the Reserve banks are actually hired by these
bankers. Reserve banks even pay dividends
to their bank members (attention Congresscritters who want to find
a pay-for!). This u2018I'm a dessert topping and a floor cleaner' identity
allows Reserve banks – particularly the NY Fed – to intimidate
courts and aide its allies on Wall Street. Additionally, the Reserve
banks aren't subject to the same government policies regarding Federal
wages, so they can pay higher wages and give lucrative and prestigious
consulting contracts to economists. In one hearing in the 1960s,
a Reserve Bank was busted for buying thousands of ping-pong balls.
That lack of accountability, while silly, was and is still the norm.

The ambiguous
identity is the reason the Fed was able to bureaucratically box
out the FDIC as a center of intellectual gravitas. It also leads
to overt corruption. Jamie Dimon, for instance, was on the board
of the New York Fed when JPMorgan was negotiating with the New York
Fed to buy Bear Stearns. Pete Peterson is a former New York Fed
President, and hired Tim Geithner to be the New York Fed, who he
is now presumably pushing to cut entitlements. Steven Friedman was
on the NY Fed board, buying Goldman stock at the same time.

The list of
failures goes on and on. But fundamentally, it is not corruption
that is at the heart of the problem for this Fed system, it is a
lack of democratic accountability. The Fed failed to stop the S&L
crisis, the dotcom boom and bust, and the mortgage boom and bust,
and shoveled money to AIG with an overtly disdainful approach to
the public. Despite the best efforts of Fed allies, the center cannot
hold. During Dodd-Frank, Chris Dodd and Barney Frank tried their
best to protect the Federal Reserve, lavishing praise on Bernanke,
and ultimately blocking the move to make the New York Fed president
an appointed position. They did nothing about the egregious 14-year
term, the banks appointing their own regulators, the dividends that
go directly from the Reserve banks to private banks, the lack of
ethics restrictions and pay scale restrictions, or the corruption
of the macro-economics profession at the heart of the Federal Reserve's
research imperatives. Frank did not legislate out of malice. Indeed,
he often expressed respect for democratic input into the legislative
process, insisting, for instance, that the conference committee
be televised. But ideologically, Frank took a Reagan-era liberal
view that the goal of the banking system was to provide housing
for the poor while protecting consumers' rights. The rest of the
capital markets structure was, as he put it in one caucus meeting,
u201Crich people fighting other rich people.u201D

The new intellectual
order dismisses this attitude as small bore. Institutionally, the
environment has changed for the Fed and its traditional allies.
Whereas at the beginning of the financial panic in 2007-2008, the
Fed was a sole provider of expertise and credibility on finance
to the political class, by 2010, the new financial blogosphere destroyed
the Fed's mythic stature. It is common for staffers to get more
and better information from blogs, and for hearings to be driven
by the conversation online, than from the Congressional liaison
group at the Fed. Read this remarkable Q&A between Ben Bernanke
and Senator Bunning during Bernanke's confirmation hearing, which
was a
series of questions inserted into the record, questions largely
drawn from bloggers.
The public has changed its appetite as
well. This YouTube clip of Elizabeth Coleman, the Inspector General
of the Fed, was my boss's most successful hearing appearance, and
possibly the most consequential hearing put on YouTube, ever:

Over 3 million
people have now seen this official say that she wasn't tracking
where trillions of dollars have gone. I prepped Rep. Grayson for
that hearing, and I used materials from the blogs to do it. Many
members watched this hearing on YouTube and signed on to the bill
to audit the Fed as a result. And so tomorrow, we are going to get
a peek at the Fed's emergency lending activities from 2007-2010
because of this legislative activity. Even before that, though,
the Fed has become far more open and responsive to requests for
information. We've already seen, via Maiden Lane disclosures, that
the Fed has been lending money to random companies, like the Red
Roof Inn, and buying up lots of toxic crap. We're going to see a
whole lot more. The conversation is no longer in the hands of the
bankers.

This is a tremendous
step forward. Of the many castle walls the Fed used to keep the
rabble out, secrecy and complexity were critical. The Fed couldn't
keep its dealings secret, and financial bloggers are constantly
explaining, explaining, and explaining. Those walls have fallen.
A lack of public debate was another. That too has fallen. A monopoly
of public information dissemination, via personal contacts between
bankers and outlets like the Washington Post (whose owner
in the 1930s was Hoover's Federal Reserve Chairman), has broken
down as well through internet communities. Gradually, a new generation
of politicians is gaining the confidence that the people themselves
through their elected representatives should be making critical
decisions about economic efficiency and banking. The Fed is adapting
to these changes, building up its communication staff and doing
town hall-style meetings. Bernanke is on TV all the time, a far
cry from the days when the Federal Reserve head simply refused to
even brief Congress. In some ways, the hardest part of the fight
is generating public debate, but that has been accomplished. The
structure of our monetary system is now up for grabs.

As we move
forward in this debate, it is important to understand that Sarah
Palin is coming from a tradition genuinely rooted in American economic
debates, from the era of the late 19th century, when Wall Street
came together to finance railroad mega-corporations. Her argument
is one against the mutability of money; she rejects the idea that
money is a political object, because that implies that it is collective
decision making that determines property values and ultimately the
social hierarchy. She believes in a natural and fixed social hierarchy,
which is a very conservative idea deeply held by the business class.
Palin is using the lack of legitimacy of the modern Fed, the failed
technocratic screw-ups and the elitist tendencies, to push for the
equivalent of a societal debtor's prison. She is speaking for creditors,
and many of the conservative forces within the Federal Reserve agree
with her. It is important to understand that reflexively defending
the Federal Reserve, which is what the Democratic establishment
is doing, is a foolish and anti-populist attempt to pretend that
the Fed is a legitimate decision making body. It isn't. It is powerful,
but not legitimate.

Liberals must
move beyond our consumer-driven approach and think about reform
of the credit system and of the monetary order, as Elizabeth Warren
has done through her remarkable tenure on the Congressional Oversight
Panel. The basic problem is the one that poet and economist Jane
D'Arista puts forward in her 1991 paper No
More Bank Bailouts
. (And yes, she wrote that in 1991, so it
is worth listening to her.) The link between the Federal Reserve
and the u2018real economy' is broken. When banks were the main conduit
between the financial world and economic activity, translating savings
into investment, the Fed could manipulate the economy by manipulating
the banking sector. But now that shadow banks dominate our credit
markets, and the Fed has allowed hot money to take over monetary
policy, the Fed's tools just don't work. That's why quantitative
easing
is foolish. We must dispatch with the ridiculous notion
that pushing hundreds of billions of dollars into a broken banking
system will have useful consequences.

Instead, let's
recognize that the Fed doesn't fulfill either part of its mandate,
and work toward a better and more plausible system of monetary stability.
That's not a long-term process, it's a constant process. D'Arista
argues that the Fed must connect itself to the
shadow banking system
and force
credit
to flow. This necessarily implies important changes in
how the Fed interacts with financial services firms and entities.
To give some idea of what this might look like, at least conceptually,
Timothy Canova paints the portrait of a more democratic Federal
Reserve financing
the government debt
during World War II. Cooperating with a
phalanx of institutions, such as the Reconstruction Finance Corporation,
and government boards that directed wartime rationing, the Fed was
able to bring unemployment down to 1% and dramatically equalize
economic opportunity and wealth building for the middle class. Another
possible conceptual framework, though one that wouldn't work today
for obvious reasons, is the subtreasury plan put forward in the
1890s by the Populists, which would tie the monetary supply to real
economic activity – in that era, agricultural output. I'm not
sure how to tie intrinsically worthwhile economic output to the
growth of the money supply, but it should be quite obvious that
growing money to help credit default swap traders is a deeply corrupt
way to think about how we as a society should define money.

Reform also
requires what Ed Kane, a scholar at Boston College, has
tackled
, which is regulatory capture and growing a new cadre
of publicly-minded policy makers and regulators. One of the biggest
problems at the Fed is that its people simply do not work in the
public's interest, and see their goal as preserving the existing
secretive banking structure. I found this to be true in my limited
dealings with the Fed. At one point, I was trying to understand
why the Fed granted Goldman Sachs an exemption from regulatory scrutiny
as a bank holding company. The examiners and Goldman's lobbyist
were both happy to help me understand that I needn't worry. When
I mentioned that my boss was going to send a letter on the matter
(it's
here
, as well as the response from
the Fed
), both Goldman and the Fed examiner's responses were
the same. They turned hostile, and whined, u2018Can't we handle this
privately?' The Fed examiner told me that he would not be able to
give me good information if he was forced to work on a public response
on the matter.

Leaving aside
whether the Fed made a good decision on that particular regulatory
decision, this is no way to run a legitimate institution in a democratic
society. With a loss of legitimacy comes a lack of public trust
and a vulnerability to any form of critic. The Fed is now less respected
than the IRS. And so Sarah Palin has her opening, as do the conservative
hard money creditor interests. Liberals should stop their love affair
with conservative technocratic myths of monetary independence, and
cease seeing this Federal Reserve as a legitimate actor. At the
very least, we need to begin noticing that these people do in fact
run the country, and should not. We must also begin to internalize
the new forces of openness and rethink how a monetary system can
function in an internet-enabled society. This will require thinking
about Fed 2.0 from the perspective of the social web, as well as
building upon the increase in transparency being forced on governing
elites by such groups as Wikileaks.
The top-down backroom system just won't work if it relies on retaining
secrets between Bank of America and the Fed that a third party or
a court can release. The Fed can't print its way out of a public
that has lost faith in the banking system and the dollar. If we
rethink money creation properly, however, we will be able to remove
money creation from the hands of the oligarchs, and strike deeply
at the uncompetitive nature of the American political economy. I
do not know how to do this, but it is possible.

Tomorrow, we're
going to see some of what the Fed did from 2007-2010. And there
will be ample justifications for why the Fed needed to do what it
did, just as the Treasury keeps talking about how TARP made money.
But the Fed gave $13 billion to Goldman Sachs through AIG, a direct
transfer of $80 from every working American to the employees of
Goldman Sachs. We're soon going to find out who else got our money.
And this disclosure, and the accompanying political debate over
the monetary order, is the beginning of changing the way we think
about money itself.

And with that,
here's the new law and the disclosures it forces:

From
p. 754 of Dodd-Frank:

(c)
PUBLICATION OF BOARD ACTIONS. – Notwithstanding any other provision
of law, the Board of Governors shall publish on its website, not
later than December 1, 2010, with respect to all loans and other
financial assistance provided during the period beginning on December
1, 2007 and ending on the date of enactment of this Act under the
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, the Term Asset-Backed Securities Loan Facility, the Primary
Dealer Credit Facility, the Commercial Paper Funding Facility, the
Term Securities Lending Facility, the Term Auction Facility, Maiden
Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed
Securities pro- gram, foreign currency liquidity swap lines, and
any other program created as a result of section 13(3) of the Federal
Reserve Act (as
so designated by this title) – (1) the identity of each business,
individual, entity, or foreign central bank to which the Board of
Governors or a Federal reserve bank has provided such assistance;

(2)
the type of financial assistance provided to that business, individual,
entity, or foreign central bank;

(3)
the value or amount of that financial assistance; (4) the date on
which the financial assistance was provided; (5) the specific terms
of any repayment expected, including the repayment time period,
interest charges, collateral, limitations on executive compensation
or dividends, and other material terms; and

(6)
the specific rationale for each such facility or program

December
3, 2010

Matt
Stoller [send him mail] is
the former Senior Policy Advisor to Congressman Alan Grayson. Stoller
specialized in legislation on auditing the Federal Reserve and on
the problem of foreclosure fraud. Visit
his website.

Email Print
FacebookTwitterShare
  • LRC Blog

  • LRC Podcasts