By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives
Coda: Is the Fed Independent of Influence?
In my two part series (here and here), I examined conventional views of (mostly) economists on the Fed’s supposed independence. What they focus on is the Fed’s independence from our elected representatives and as well on operational independence of the Treasury. The reason why they believe this is important is because the Fed is supposed to protect us—we can identify us as “money users”—from the danger that the “government” (Congress and Treasury), our “money issuers”, might conspire to degrade our currency by having the Fed “print money” to finance a profligate government. These “Weimar Worriers” are just certain that if a cabal of central bank, treasury and congress had their way, we’d be off and running to hyperinflation. Hence, thank god that our central bank is independent! Any meddling by Congress (or the Treasury) in the affairs of monetary policy making would be the final death knell for our Dollar.
I have argued in the series that the Fed is a “creature of the Congress”. In that sense, we should not see it as “independent” of Congress, which can use its law-making power (as well as other powers) to tell the Fed what to do. As Bernanke (and many others at the Fed have said) the Fed will do what Congress tells it to do. The Congress can, and has, changed the laws that the Fed operates under—as I pointed out in the previous posts. There never has been the kind of independence supposed by economists.
However, the Fed was set up to be free of the usual day-to-day political pressures, with lots of safe-guards put in place. For example, the lengthy terms that do not coincide with those of our President and other elected representatives ensure that appointed Fed officials are not “campaigning” at the same time that we are holding elections. (Indeed, commentary focused on the apparent “running” of Janet Yellen for Chair of the Fed—unusual behavior that looked more “political” than usual.) And with rare exceptions (Hello Ron Paul! Hi Bernie Sanders!) we do not see our politicians running on a platform promising to take over monetary policy-making.
The Congress and the Administration—in normal times—keep a “hands-off” approach with respect to telling the Fed what its “monetary policy” ought to be. Here we are defining “monetary policy” the way the Fed and most economists do: nowadays, that is the setting of the discount rate and the fed funds rate; during the Monetarist period, it was the setting of aggregate “money” targets (reserves or M1 and M2 growth targets). However, as I argued in Parts 1 and 2, in emergencies the Fed cooperates with the Administration to formulate policy. It is not a coincidence that the Fed kept rates low in WWI, WWII, and after the GFC.
If we were to define “monetary policy” much more broadly then it is clear that both the Congress and the Administration “interfere” frequently—in areas of regulation and supervision of banks, financial institutions, and financial instruments. Dodd-Frank continues in that tradition.
With regard to “operational independence” from the fiscal authorities, we have legislated constraints as well as adopted informal rules. However, upon inspection these turn out to have very little practical importance. While the Fed cannot buy Treasury debt directly, the Fed can lend reserves to banks, which then buy the Treasuries and can sell them on to the Fed without constraint. Importantly, the Fed targets the overnight interest rate, which reduces its degrees of freedom (it buys or sells Treasuries as necessary to hit the target). It is also the Treasury’s bank, and those in the Treasury as well as the Fed who are familiar with the operations deny that the Fed actually does—or would—refuse to clear the Treasury’s checks. Operational independence is a formality that doesn’t much matter.
And in the past when it was very important to ensure that fiscal policy could be smoothly run—as in WWI and WWII—the Fed acquiesced, keeping rates low on Treasury debt. There’s every reason to believe the Fed will do so again in the future should it be necessary. We also have the Fed’s unprecedented behavior since 2008, as it sought to keep rates extremely low “in the national interest”. That helped to keep interest service on the debt low in the aftermath of “Obama’s deficits”.
Some commentators have interpreted all of the above as a “whitewash” of the Fed’s relationship with private banking. Some have also tried to argue that the Fed is not really a creature of Congress—rather—the Fed is a “hybrid” with one foot in the private banking business and another in government. Both of these views are fundamentally wrong.
The Fed is a lender of last resort to the banking system; it always has been. This is an important aspect of its “public purpose”. The US tried operating a payments system in which private bank liabilities did not clear at par. That didn’t work. We tried operating a system that was subject to runs, relying only on the banks, themselves, to stop runs. When a financial crisis hit, it was all up to the Original JP Morgan to gather bankers into a room and lock the doors until they worked out a solution. That didn’t work well, either. Indeed that was the major impetus to creating the Fed in the first place (unlike the earliest central banks, which were created to provide government finance). And, yes, it was in large part the bankers’ idea to get a central bank. They convinced Congress to finally do something about the US monetary mess. Our history of financial crises stood out like a sore thumb in comparison with early-adopters of central banks. We had a financial system that was not ready for the 20th century.
There were big debates about how to design our system. The bankers wanted something like the Bank of England—private owned then (but later nationalized). Many in Congress wanted the US central bank to be housed in the Treasury—not a bad idea, in my view. In any event, Congress created the Fed and set it up with the “checks and balances” approach to governance that I described in Part 1 (following Bernie Shull’s great paper). That didn’t work, and overtime, Congress has asserted greater control.
Yes, private banks are nominal “owners” of regional banks. Really it is more of a “membership fee” since their “stock” in the Fed is nothing like normal equity shares. They join up and then get a return based on Fed profits. Profits above 6% go to the Treasury. Policy, however, is set by Congress. The power resides with Board of Governors, with narrowly defined monetary policy established at FOMC meetings.
And, yes, the Fed operates clearing for private banks. It lends when they’ve got liquidity problems. It approves mergers. It watches out for the banking system. And sometimes it acts like the Original JP Morgan when it brings bankers into a room, locks the door, and bangs their heads together until they hammer out a solution—as it did during the LTCM crisis.
But that doesn’t make the Fed a “hybrid”: it gets its mandate from Congress. Yes, the Fed “caters to” private banks in the sense that it is supposed to stop runs, and to lend to troubled banks. But Congress passes the laws that tell the Fed what to do, and can change them if it doesn’t like what the Fed did.
Some argue that the Fed is captured by Wall Street. Heck, I’ve argued that for years! So is the Treasury. So is the entire darned Administration of Obama, and that of Bush, Jr, and that of Clinton. We’ve got the best Government that Wall Street’s money could buy. I agree. That was not the issue I was discussing in the two part series. If the critics are trying to argue that is what they mean by the Fed being “independent” then they can also argue the Treasury is independent of government, as is the Obama Administration, as is the Supreme Court of the United States. They all work for Goldman Sachs and JP Morgan and and Citi and Bank of America and AIG, and so on. Or, in Timmy Geithner’s case, for Warburg Pincus. (Literally.) Fine.
They’ve got the Supreme Court claiming that corporations are people, too.
The first order of business when a new President is elected is to choose which Wall Street firm gets to run Treasury (usually it is Goldman Sachs, which also gets to run many of the treasuries in Europe and around the world). Our conspiracy theorists love to talk about the cabal of bankers running the Fed, but they completely ignore the Rubins, Summerians, Paulsons and Geithners at Treasury where there is a completely open and unashamed Wall Street cabal running the entire show.
If you want to call the Fed “hybrid” public and private, so is the Treasury. Indeed, so is Government Sachs, since it not only runs a bank but also holds many of the top positions in the US government. And in the governments of a number of other countries, too.
Fine and dandy, but that wasn’t the topic.
Finally, the question was raised: do I think that we ought to have an independent central bank? I can see an argument for some Fed independence from pork barrel politics. The Fed is a bank, and all banks have a magic porridge pot. One can imagine that pot-bellied politicians with cigars would love to have the Fed lending to their pork barrel projects. It is bad enough that Congress is pitching the pork—which actually requires budgeting and voting and Presidential signatures. What if a handful of “wise men” on the FOMC in Washington could shovel the pork? Hey, Chairman, I need some financing for a series of Trump Towers in my district!
Now, that is not really what the political independence debate is all about. There is the belief that what I described as the normal monetary policy (setting interest rates) is extremely important and needs to be free from political posturing. The fear is that politicos want low interest rates to prod economic growth so that they can go back to their districts and claim the credit, meanwhile inflation soars and we’ve got to buy wheelbarrows to truck worthless dollars to the grocery store. In my view that is all nonsense. Politicos do not have a pro-hyperinflationary constituency.
The true danger is always, has always been, will always be, in the opposite direction. Politicos hate inflation and do not mind unemployment. The unemployed do not contribute to campaigns and don’t vote much (except in Chicago where Mayor Daley pays them to do so and tells them who to vote for).
When Wall Street decides it wants hyperinflation, I’ll worry because it will hire all the politicians needed to get it. Until then, this is all a red herring. We do not need this kind of political independence because there’s zero chance the Fed and the Treasury and the Congress will team up to hyperinflate.
Me? I’d eliminate that kind of independence. Congress should mandate that the overnight rate ought to be set at 0 or 25 or maybe 50 basis points and left there forever. (Oooh, I know that will drive our hyperinflationary Weimar Worriers crazy.)
I think there is some argument for making some kinds of monetary policy—more broadly defined—behind closed doors and with independence. Deciding whether a troubled bank is troubled because it is insolvent or because it is illiquid is the kind of “monetary policy” decision that needs to be free of Congressional pressure. (If it is illiquid, lend; if it is insolvent, turn it over to the FDIC for resolution.) We saw what happened when the Keating Five Senators tried to protect Lincoln Savings and Loan from being resolved (luckily on the other end of that stick was my colleague Bill Black, who is like a bulldog when it comes to fighting corrupt senators, bankers, and regulators). Politicians always need money and banks and thrifts have the magic porridge pot, so elected representatives will always try to interfere with regulators and supervisors that go after a bank in “their” district. We have to insulate the Fed and the FDIC from that kind of interference.
But what the Fed did during the GFC bail-out of Wall Street stunk. It was disgusting. Congress should not, cannot, let that happen again. That is what my project is all about. We do not want the Fed to have that kind of political independence. My project team broke the story of the Fed’s $29 TRILLION in loan originations to save the blood-sucking vampire squids of Wall Street.[1] This wasn’t a liquidity problem. It was an insolvency problem, with the major banks massively insolvent because their top management had turned them into what Bill Black calls “control frauds”. The Fed should not have the political independence to try to save fraudulent and insolvent financial institutions. Maybe we should have bailed them out (I think not)—like we bailed out the auto industry. But that should be done by Congress, not by unelected officials at the Fed.
(To be clear, we have 4500 honest banks. We have a half dozen huge banks that are run as control frauds. Our financial system’s main problems can be found among those SDIs—systemically dangerous institutions. We will not get back our economy or our government until we close them.)
We need a central bank. It needs to serve the public purpose. It needs to be held accountable. We need to improve governance of the Fed. And we need to increase transparency. The Fed is a creature of Congress. It is up to Congress to improve democratic accountability, governance, and transparency of the Fed.
[1] See two annual reports of research conducted with the support of Ford Foundation Grant no. 1110-‐0184, administered by the University of Missouri–Kansas City. See: L. Randall Wray, 2012. “Improving Governance of the Government Safety Net in Financial Crises,” Research Project Report, April 9. http://www.levyinstitute.org/pubs/rpr_04_12_wray.pdf; and L. Randall Wray, 2013. “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”, Research Project Report, April http://www.levyinstitute.org/publications/?docid=1739.
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Thanks Randy, that should silence the critics that you didn’t address the Fed’s cozy relationship with Wall Street and its disastrous handling of the GFC. As you point out:
The Fed is a creature of Congress. It is up to Congress to improve democratic accountability, governance, and transparency of the Fed.
Never happen, sadly
It should, but it won’t. Any stick to beat a dog, apparently.
I have a dream, another novel really, about how a genuine reformist President succeeds in getting the seat, not a Dem or Rep candidate…
Is this really possible given how the electoral system was set up?
How can a candidate, genuinely wanting to make good change for the public interest, get into Congress and help to reform the mess that you are in?
Are you tied forever into the two party system as here in Oz, people with reformist agendas not from Labor or the Coalition, can succeed in getting a seat in Parliament and use their power to make change for their electorates?
Interested in ANY realistic comments which address the above.
Please Google Wikipedia as to what it takes to pass a Constitutional amendment in the US and then see when we passed the last one.
After Citizens United, this will never happen. Never.
The closest we have to a reformer is Alan Grayson. He’s the most leftist Congresscritter there is. Independently wealthy and only a junior Representative, who was targeted by his own party in his first re-election (the DCCC, the fundraising arm of the Democratic party, refused to give him a dime, which is unheard of (the Republicans also targeted him, used him as a scary clown to raise lots of funds from out of district donor. Grayson’s is “Hail Mary” campaign measures were a reflection of his funding situation). See here as to how the Democratic Party has set out to centralize funding and hence increase control of members:
http://www.nakedcapitalism.com/2011/10/tom-ferguson-congress-is-a-coin-operated-stalemate-machine.html
Mind you, not 100% effective, since Grayson did manage to get back, albeit in another Florida district. But this gives you a picture.
Thank you Yves, I will check these links out.
The US hasn’t been going to well with its current two party system, seems to me it just entrenches their power. Without hope, humans don’t do too well at a psychological level…
I had an opportunity to discuss politics with some East coast Jewish folk at a recent family wedding and I was humored by the comment/question from one of them….Alan Grayson is Jewish? ( with all the attendant facial enhancements)
It was a quick end to that conversation….grin
There is an atempt to call for an Article 5 convention by having the states call for one. (wolf-pac.com) Then there is the campaign by Lawrence Lessig to raise voter awareness.
It’ll never happen because the “Fed” owns Congress and the WH, not vice versa. Witness Obama appointing the former chair of Israel’s central bank, Stanley Fischer, Bernanke’s mentor, as Vice [actual] Chair of the Fed. The capture of the USG is complete.
It’s a relief to read Wray’s conclusions. I was beginning to think this series was ghost written bubble-boy Krugman.
Oops, typo: second reference to “Fed” was missing quotation marks.
No, you have the chain wrong. The Fed does not fund campaigns. It does fund a ton of economics research. It would be accurate to say the Fed owns much of the economics profession.
The banks are huge donors and as Tom Ferguson points out, still gave a ton to Obama last election cycle. And Fischer is an AIPAC stalwart, so you get a twofer (pleasing the Israel lobby as well as the banks).
I am delighted to see that Professor Wray sees the light at the end of academic tunnel. Behind all the posturing about Fed independence, the Fed ultimately is Wall Street’s piggy bank. It permits bankster looting to continue by disguising insolvency as illiquidity. As for inflation, Wall Street lives off inflation and could not continue sucking the economy’s blood without inflation, since only inflation permits pyramided loans to be serviced and assets to be continually recapitalized and loaded up with debt.
Naturally, the inflation is obscured by dishonest indexing, and only those who keep careful personal records will know that actual inflation in the prices of goods people need is running at more than 10 p.a. for the past three years.
It permits bankster looting to continue by disguising insolvency as illiquidity. j gibbs
Well said!
As for liquidity, let the banks create their own by issuing and accepting their own common stock as money. But why share, when one can legally steal instead?
PS:
I generally like your comments and appreciate your hard hitting reinforcement. I almost feel I can retire now.
Much more to the point and satisfying than parts one and two. Almost said what I believe has developed much more over the years in that the Fed has become the tail while Wall Street’s the dog. Hopefully the democratic impulse is alive enough to tear that dog down.
Wray’s own comment on part 3 resonates well with Michael Hudson..
LRWray | January 11, 2014
I’ve come to believe that “financialization” is the natural trend of capitalism. It can be slowed, maybe even stopped, but it takes diligence. Yes, some countries still have governments and economies that are not run by the financial sector. It is difficult but maybe not impossible.
Michael Hudson in “The Bubble and Beyond”
“”Violence and corruption are essential tactics to impoverish the economy while creating more billionaires at public expense. The $13 trillion in Bush-Obama bailout giveaways after September 2008 endowed a power elite that threatens to rule the rest of the 21st century if no reforms occur along the lines advocated by classical political economy, the Progressive Era, New Deal and, most recently, Modern Monetary Therory. (MMT)
What is needed to save democracy from turning into oligarch is to recognize how predatory this financial strategy has become, and how far today’s ending has diverged from productive credit.
This makes criticism of financial malstructuring neither left nor right wing. It spans the political spectrum, because the entire economy is threatened by the austerity that results from financial dynamics operating unchecked – and ultimately bankrupts the banking sector itself.””
———-
Interestingly the Fed has been trying the get the attention of Congress for better fiscal policy..
“”The foreclosure mess, the Fed noted, hurts innocent bystanders when their neighborhoods are ruined by other people’s failure. Towns burdened by lots of empty houses lose property-tax revenue needed to sustain public services. The foreclosure process piles up “deadweight losses” in which nobody wins, not even bankers. Mortgage relief, on the other hand, in effect redistributes income and wealth from creditors to debtors. “Modifying an existing mortgage—by extending the term, reducing the interest rate, or reducing principal—can be a mechanism for distributing some of a homeowner’s loss (for example, from falling house prices or reduced income) to lenders, guarantors, investors, and, in some cases, taxpayers,” the Fed document explained. Both the lender and the borrower can gain from reducing the size of an underwater mortgage, the Fed asserted. “Because foreclosures are so costly, some loan modifications can benefit all parties concerned, even if the borrower is making reduced payments.”
Refinancing at a lower rate and reducing the principal allows a family to keep its home with the promise of regaining equity as they pay down the more affordable mortgage. The modification can also restore the loan as a profitable investment for lenders, who will gain a greater return than they would if they had let the mortgage slide into foreclosure. Writing it down acknowledges that the original debt was never going to be repaid anyway. The lender suffers an accounting “loss” on the forgiven debt, but this could be less costly in the long run when compared to foreclosures.
See Ben S. Bernanke, “The US Housing Market: Current Conditions and Policy Considerations,” White Paper, Federal Reserve Board, January 4, 2012. William C. Dudley, “Housing and the Economic Recovery,” Remarks at the New Jersey Bankers Association Economic Forum, Iselin, NJ, January 6, 2012.
Sarah Bloom Raskin, “Putting the Low Road Behind Us,” Speech at the 2011 Midwinter Housing Finance Conference, Park City, UT, February 11, 2011.””
http://www.levyinstitute.org/publications/?docid=1739
Wonderful post, tying up the loose ends of parts 1 and 2. I am reminded of a scene in the Hunger Games when Beetee’s character notes that if the law was made by man then surely man can unmake it as well. The $50,000 question is do the people have the will to undo the damage?
For now at least, the Fed is out in the public domain preaching the gospel of the status quo, downplaying the real inflation in the economy. That’s pretty disturbing when they don’t even understand what money is. “Money does not measure prices or values; it is the common denominator for their expression. In short, prices are expressed in money, they are not measured by it.”
http://globaleconomicanalysis.blogspot.com/2014/01/money-as-communication-purposely.html
This was a great post by Prof. Wray. I love it when the bottom line of any argument is just straight talk. Taleb was on the BBC last nite arguing black swans and anti-fragility. He ironically only managed to convey the message that he didn’t begin to understand the implications of his own prescriptions. But Wray certainly brought it all home today. Something occurred to me about the Fed v. the ECB. Both institutions are not allowed to buy bonds directly from governments. In the EU this is because the union of governments is a quasi-sovereign union and so the national debt is not the mandate of the ECB. But it can loan to private banks who then buy their own national debt. That money then goes into paying the operating expenses of those countries I assume. Here the Fed cannot directly buy treasuries, but can give private SDI banks all the money they need to buy treasuries which it then buys from them at a modest profit to the banks. Why? Here there is no conflict over the sovereignty of the debt – our treasuries are not competing with any other treasuries and the musical chairs played by the Fed and the SDIs is unnecessary. On top of which the money the Fed (aka taxpayer) gives the banksters goes into speculative investments because to create an adequate supply of jobs would cause inflation. This really isn’t working. This is a Taleb-style over rationalization of money. This is a perpetual black swan. The Fed needs to be answerable to the people, not the banksters. In a world of enormous problems all begging for solutions which are dependent on financing, there is no excuse for this avoidance.
But heaven forbid that we should actually have a white swan swoop down on us and demand an adequate definition of the presently meaningless word “inflation.”
Inflation really only means how close the looted masses are to being dangerously discontent with their lot. It’s an important indicator to the PTB who have vague memories of 1793 in France.
What needs to happen most ,IMO, Is there has to be non-stop pressure with an open discussion as to how “small” this countries “leadership circles” actually are.
The “fed” is not captured, and it is not capturing….anything. It is a tool of the “establishment”. Yes that somewhat hyperbolic boogey man. But the leadership, in every “complex”…i.e. :military industrial complex, academic industrial complex, national security industrial complex, healthcare/insurance/pharmaceutical industrial complex, media/information industrial complex,agricultural industrial complex, prison industrial complex and of course, the financial services/money creation industrial complex(fire sector)… is a self-serving ticket to “the good life” for those inside.
Never mind,”conspiracy”, which would only apply when one of these groups engage in something illegal..(like many in the financial services industry do)…but our problem is deeper.
The founders of this republic, chose a republic over a democracy, because they figured an educated group who had the time and money to devote themselves to leadership of state issues, were better suited than the ignorant masses.
Our problem is that this has led to “groupthink”. These hammers see only nails… our system has run amok for so long, no one knows what to do. Now the train is leaving the track, and no one wants to see, but they can’t stop watching.
The issue of money is one that the “tool”; that money represents shouldn’t “cost” us the debt associated with its use.Let our now maturing nation have the gravitas to finally fix the system. 112th congress, HR 2990, The need act, was just such a bill that we all need to familiarize ourselves with. This is a real time, right there,you can read it for yourself; bill… that can be re-introduced anytime.
And my question of what needs to happen ,has to include “why do we have to sell debt to ourselves, for the right to use “money” that was created out of thin air. It is a fiat money system we have.But if the Treasury/US government was a monetary sovereign,Then why do we need to create the money we use to keep track of things , as a debt, to be paid back .with intrest.?
If the fed is hopelessly corrupt, which it is.. then it needs to be replaced. And like any other structure, when the rot is too bad for restoration, sometimes the eaiest way to go about it is to tear the whole thing down, and rebuild. And if you like most of the features, you can rebuild them, and fix what you didn’t like.
I always dislike discussions of economics and political sciences, when the levers of power and the structures are discussed in terms where they are assumed to be operating in some sort of vacuum. Like the personalities of the people and their personal connections don’t influence the outcome of every decision.I say the whims of those holding office are so great, that the levers barely matter. Everyone knows how to “fudge” things, they are good at..To assume these professional political class folks aren’t doing it all the time is naïve.
While I don’t want to overstate the importance of peoples connections and networks, they must be included in our thinking.As the professor pointed out, everything is infiltrated by economic intrests, with names. families, companies, investments, trusts for peoples offspings to various companies, etc. I am just going to put it out there….
this is one side of what the mindless masses are up against.
100 years of networking.
http://www.stopthenorthamericanunion.com/CFRMembers.html
These groups that are funded and filled by the “wannabe’s” of these old family foundations, corporate behemoths,and industrial combines… are the grand dads to the newbies like the Koch bros and their lewis powell/chamber of commerce memo inspired . the likes of the heritage foundation/mercatus center/cato institute,americans for prosperity,americans for progress, and the family research council/federalist society,etc… .(and as a note, people can’t be fooled into thinking these groups have any other ideology other than money and power and control. While I think the membership of groups like the council on foreign relations and the like are indicative of something, look at who was releasing this sort of info since the sixties,the john birch society.Now, we have the tea party, a Koch funded “astro-turf movement, with all of its implicit giveaways to people who own chemical industries, want no labor laws,enviromental regulations,wage increases, legal liabilities for major manufacturers of anything,etc.The new “Koch circle of friends”, like the family research council and all the “religious” regulars, and “states rights” parrots out there… are the third generation of a family , in which the second generation of Koch, was a founding member of the john birch society, which warned then and still calls Obama a socialist,and every democrat a communist….and were afraid of a communist takeover of America(supposedly), .This family fortune was created by the first Koch, who went to the soviet union in the thirties and built an oil industry/infrastructure for stalin..They obviously don’t believe in anything. But being good fascists.Where the message, is for control.only, not information.
These groups have waged a concerted propaganda campaign for over a hundred years.(obviously the new ones weren’t involved in the beginning, but they have taken the torch and are running strong)
any progressive ideas about money,law,politics,energy,banking,enviromental stewardship,etc… must remember who is going to be for the status quo. Then, in a critical way, delve into what would really be best, and not leave to the “experts”, the incredibly important act of forming opinions about issues.
again, a fourth estate would be good here… but that too, has been gamed… and as a result, “garbage in, garbage out”
Thanks Rob 100+ Your considered comments about what is deeply wrong in the USA – the greed and total disregard for human life of the old moneyed families that run your country (and many others) have sowed a seed for my next novel. I think NC readers are going to like it a lot.
L. RANDALL WRAY said: In my two part series (here and here), I examined conventional views of (mostly) economists on the Fed’s supposed independence. What they focus on is the Fed’s independence from our elected representatives and as well on operational independence of the Treasury.
from MEXICO: The Fed’s“independence from our elected representatives” is the least of our worries. Far more important is the Fed’s independence from Wall Street.
L. RANDALL WRAY said: The Congress and the Administration—in normal times—keep a “hands-off” approach with respect to telling the Fed what its “monetary policy” ought to be. Here we are defining “monetary policy” the way the Fed and most economists do: nowadays, that is the setting of the discount rate and the fed funds rate….
from MEXICO: Well Hugh certainly doesn’t agree with that claim. “Greenspan traded low accommodative interests rates to Clinton for his job and an otherwise hands off attitude toward how Greenspan ran the Fed,” Hugh charges. “In the real world, we call this a political deal and it was over precisely interest rates. It is the basis of both the Greenspan and Bernanke puts. Where has Wray been the last 20 years?”
http://www.nakedcapitalism.com/2014/01/randy-wray-greatest-myth-propagated-fed-central-bank-independence-part-2.html#comment-1823245
L. RANDALL WRAY said: If we were to define “monetary policy” much more broadly then it is clear that both the Congress and the Administration “interfere” frequently—in areas of regulation and supervision of banks, financial institutions, and financial instruments. Dodd-Frank continues in that tradition.
from MEXICO: Is there any evidence that Congress or the Administration instructed the Fed to abdicate its regulatory responsibility in the lead-up to the GFC?
And what about the shadow banking system? Is there any evidence that Congress or the Administration instructed the Volcker Fed to “embrace it, if only in secret at first” as Jeffrey Snider documents in “The Fed Is Opaque Because It’s Flying Blind”? Our economy has been slowly sinking ever since. As Snider explains, voicing a similar concern to those voiced by Steve Keen and MIchael Hudson in regard to the unprecedented runup in private debt:
”The primary factor tying all these ends together is simply debt and credit production. I don’t think there is any real mystery here as to the appearance of the jobless recovery in the age of central bank management of interest rates, nor do I think it simple coincidence. In incorporating monetary policy into the wholesale system, the FOMC set the conditions for massive ‘money’ growth through non-traditional financial channels. The reason M1 was not as relevant in economic terms was that ‘money’ growth happened increasingly in places like eurodollars and repos; shadow channels.”
http://www.realclearmarkets.com/articles/2013/08/02/the_fed_is_opaque_because_its_flying_blind_100522.html
L. RANDALL WRAY said: We also have the Fed’s unprecedented behavior since 2008, as it sought to keep rates extremely low “in the national interest”. That helped to keep interest service on the debt low in the aftermath of “Obama’s deficits”.
Well it sure to hell wasn’t “in the national interest” of my 90 year-old mother, who saw the income on her life’s savings — income which she depended to live on — plummet to almost nothing.
To be continued…….
FROM MEXICO said: [t]o be continued…….
MARCUS TULLIUS CICERO said: Brevity is a great charm of eloquence.
You don’t need thousands of words to make a point. Try self-editing once in a while, you might be more persuasive. As a disinterersted observer of your comments and attempted decapitations (other than mild annoyance at having to scroll past your long-winded and redundant posts), I can tell you that, by the simple fact you are continuing to write, you will not be.
Here, I’ll give you an example. Your above post is 3,363 words (give or take, not counting whatever’s coming in “[t]o be continued…”).
In it you say “[t]he Fed’s ‘independence from our elected representatives’ is the least of our worries. Far more important is the Fed’s independence from Wall Street.”
This post is apparently intended to discredit the above writing of Dr. Wray, in which he says: “Some argue that the Fed is captured by Wall Street. Heck, I’ve argued that for years! So is the Treasury.”
Your point is not well-taken in that, as you can see from Dr. Wray’s comment, he believes that the Fed is “captured” by Wall Street and has emphatically “argued that for years” (necessarily implying that he sees it as a problem, and one he has advocated for fixing for a long time). Your comment is not a counter-point to Dr. Wray’s comments.
See, in 126 words (or so) I’ve identified a flaw in your rhetoric that renders your post unpersuasive. I’m sure you won’t agree, but I’m also sure many will. The point is engaging in argumentum ad nauseum is not necessary or effective.
If Professor Wray sees that the Fed (and Treasury) are owned by Wall Street, why doesn’t he face reality and realize that monetary reform may be the only way to make the monetary system responsive to the needs of the people? Why do (some) MMTers think that The Chicago Plan is “weird”? Sounds like a lot of TINA to me.
The Chicago Plan was created by a classical economists and is now championed by neo-liberal economists using their Gee-Wow! mathematical models, the ones that failed to find anything wrong in the run-up to the crash. The entire structure of the plan is based on neo-classical misunderstanding of how our current monetary system works and would dismantle the current elite group of men and women who determine our monetary policy, then replace them with an elite group of men and women who will determine our monetary policy.
Do you really think you’ll get monetary reform from the same flawed thinking?
So, exactly who are all these neoliberal economists who are championing The Chicago Plan? I haven’t seen much analysis of it since Ambrose Pritchard article in the Telegraph more than a year ago, so all these spooky neoliberals must be having a hard time with the propaganda. That kind of ad hom attack reminds me of how the folks at ZH like to call Obama a Marxist, Those kind of labels are so effective in propagandists hands and it eliminates the need to actually make an argument, doesn’t it?
Regarding TCP, at least it includes the finance sector in its models, unlike your beloved MMT. Anyway, I find it intuitively appealing, and don’t put much trust in models in any case. IMO it would make looting more difficult for banksters since they would be taken out of the money creation business and their ability to use the leverage that creates financial crises would be limited.
Inflationphobia
Regarding TCP, at least it includes the finance sector in its models, unlike your beloved MMT.
This takes the prize for most uninformed statement of the day. Congratulations.
Dr. Wray doesn’t “face reality” and make arguments for wholesale monetary reform outside of the established and entrenched system because…
If you go round carryin’ pictures of Chairman Mao
You ain’t gonna make it with anyone anyhow
TCP has a broad appeal, imo. I was surprised to see debt free fiat being discussed on the Austrian school Mises.org website. They seem to be a little more open minded than the MMT fans/fanatics, and those guys (I like to call them Mises misers) see Marxism everywhere. Here is an quote from their “Social Credit and the provision of debt-free money directly from government” section of their Monetary Reform wiki:
“Both these groups (those who advocate the replacement of fractional-reserve banking with debt-free government-issued fiat, and those who support the issuance of repayable interest-free credit from a government-owned central bank) see the provision of interest-free money as a way of freeing the working populace from the bonds of “debt slavery” and facilitating a transformation of the economy away from environmentally damaging consumerism and towards sustainable economic policies and environment-friendly business practices. Many in both groups advocate the outlawing of fractional reserve banking and the enforcement of full reserve banking.”
http://wiki.mises.org/wiki/Monetary_reform
The fear of being labled a commie sounds like more progressive TINA rationalization.
To call it “debt-free fiat” is to fundamentally misunderstand debt and fiat. That’s why one can’t take this stuff seriously. Saying you want that sort of currency is no different than saying you want Klingons to be real: an impossible fantasy.
Actually, debt-free fiat can accumulate in the economy IF*:
1) The monetary sovereign never borrows.
2) The monetary sovereign never runs budget surpluses.
3) The monetary sovereign sometimes run budget deficits.
Then what is essentially debt-free will accumulate in the economy to the sum of those budget deficits.
When will you folks ever step away from your shredded money-must-be-debt mantra?
* I ignore the machinations of the central bank since such an abomination should not even exist,
“The fear of being labled (sic) a commie sounds like more progressive TINA rationalization”
Not the point at all. They are song lyrics. The song and that line in particular are not about fear of being labeled a commie.
Agree 100%. I like many of FM’s comments, but being succinct is not one of his strengths. He is obviously very well read, but can sometimes overwhelm the comments section.
Nonetheless, without people like him who care enough about the issues to comment in the first place, NC would not be as rich. It is the comments that make this a great blog
The problem is that fM is broadly read but not deeply read. A casual perusal of the quotes she often employs shows a pattern of lacking contextual understanding. It’s a common sort of thing for “skimmers” who don’t stay with complex subjects for the hundreds and thousands of hours necessary to really get a handle on them.
BJ,
That was an uncalled for and unsubstantiated response. Your MMT fanboi colors are showing and they don’t reflect well on you.
L. RANDALL WRAY said: The Fed is a lender of last resort to the banking system; it always has been. This is an important aspect of its “public purpose”.
from MEXICO: Well not according to John Kenneth Galbraith. Here’s how he tells it in Money: Whence It Came, Where It Went:
“As restraint on bank lending during the boom is a basic central-bank function, so serving as a lender of last resort is its main task in the ensuing depression. However, during the Great Depression not the Federal Reserve but the Reconstruction Finance Corporation, newly created for the purpose, served this function.”
L. RANDALL WRAY said: We tried operating a system that was subject to runs, relying only on the banks, themselves, to stop runs. When a financial crisis hit, it was all up to the Original JP Morgan to gather bankers into a room and lock the doors until they worked out a solution.
from MEXICO: Well again, Galbraith tells a very different account of that story:
”Well before 1907, trouble in the big-city banks was an occasion for public action. In the panic year of 1873, the withdrawal of the hitherto wicked greenbacks was halted, and $26 million was reissued to provide reserves and ease tension in New York. In subsequent panics the Treasury deposited government funds to help the big banks withstand runs. In 1907, J. P. Morgan, who is celebrated by all historians for saving the Trust Company of America after declaring that the panic might as well be stopped right there, appealed to Secretary of the Treasury George B. Cortelyou for deposits to save the Trust Company. Resources subscribed for the rescue by other New York bankers, including Morgan’s, were insufficient. Cortelyou was not authorized to deposit public funds with a trust company. This was a detail; $35 million was promptly deposited in the national banks and just as promptly reloaned to the Trust Company of America. It was thus provided with the funds that persuaded its depositors that it was safe.”
L. RANDALL WRAY said: That [“relying only on the banks, themselves, to stop runs”] didn’t work well, either. Indeed that was the major impetus to creating the Fed in the first place (unlike the earliest central banks, which were created to provide government finance). And, yes, it was in large part the bankers’ idea to get a central bank. They convinced Congress to finally do something about the US monetary mess. Our history of financial crises stood out like a sore thumb in comparison with early-adopters of central banks. We had a financial system that was not ready for the 20th century.
from MEXICO: Well again, Galbraith has a different version of that story:
These arrangements were ad hoc and unreliable.20 They also lacked compassion. In 1907, when Charles Barney, head of the desperately beset Knickerbocker Trust, went to J. P. Morgan to seek help, he couldn’t get in to see him. Barney thereupon shot himself. A central bank would at least have let Barney in. Partly to help beleaguered men like Barney, but more to serve the interests of more important men, the United States in ensuing years revived the idea of a central bank.
[….]
As an answer to the great panics, the System was notably defective. In 1920-1921, seven years after the System was established, there was a severe one, and this was followed ten years later by the worst depression of all time. There is much evidence, which orthodox professional opinion does not reject, that Federal Reserve policy made all worse — that it helped finance the antecedent speculation and helped intensify the ensuing contraction in both 1920-1921 and 1929. Nor was it better as an antidote for an alarming epidemic of bank failures. In the twenty years before the founding of the System there were 1748 bank suspensions; in the twenty years after it ended the anarchy of unstable private banking, there were 15,502.
To be continued……
Re the Lender of Last Resort:
Galbraith is writing pop-history. It’s not wrong, the essence is right, but it skips technical details that are relevent when you start splitting hairs. Here’s a link about the subject:
http://research.stlouisfed.org/wp/2012/2012-056.pdf
See pages 4 – 10.
All right, the Fed is the creature of Congress, and Congress is the creature of us, you and me. That is banal. The Fed is not the same institution as it was when Lyndon Johnson grabbed the Fed Chairman by the lapels and demanded lower interest rates. I think the evidence shows it is entirely the creature of the Treasury now. The profits from its balance sheet are paid to the Treasury, in an amount above $100 billion a year now, so it is tantamount to a taxing authority. If we assume the most efficient way to collect taxes is direct payment by payroll deduction, then the Fed is the most inefficient taxing authority, because at each step, from the time a homeowner writes a mortgage check to the time part of that money ends up in Treasury accounts, middlemen collect their fees. I have heard mortgage-backed securities represent perhaps $2 Trillion of the Fed’s balance sheet. It is also inefficient, because the vacant homes left all over the place by the servicing banks are depreciating and depressing valuations. I would argue this whole ridiculous structure sprung up because Congress has refused to raise ordinary taxes enough to pay its bills, and Treasury needs the revenue. Meanwhile, Congress is back in session to resume not working.
All central banks are on the same path, some just further down the road than others, but the end point is the same for all. To know where the Fed will eventually end up, just look to Argentina and Venezuela today. It might take another 50 years, but the end will eventually come for the Fed, too. Only perfect human beings could be given such power without becoming corrupted by it.
‘Congress should mandate that the overnight rate ought to be set at 0 or 25 or maybe 50 basis points and left there forever.’
Regulation Q all over again, as it were, but with real teeth this time! To echo Randy Wray’s own sad refrain, we tried that and it didn’t work.
http://en.wikipedia.org/wiki/Regulation_Q
It sounds all warm and fuzzy, though — easy money forever! What could possibly go wrong?
Along with free money, Congress should also give me a pony.
Well, if we get the family farms back that were stolen by the banks, I don’t see why you can’t have a pony UNLESS you weigh too much for the poor thing.
You should probably look up the difference between a regulation and a statute before you post something like this.
That’s not Haygood’s style, man!
Haygood’s style is to pick a random sentence from an article, slip on his Wayfarers, pop his collar, crack his knuckles and type whatever random information comes to mind. Context, history, even specific definitions and critiques are obstacles dismissed backhandedly on his way to promoting the Haygood agenda (whatever it is).
Before you ask, yes, I do have a specific critique of the latest in Haygood.
Regulation Q was primarily a ceiling imposed on the amount commercial banks could pay in interest on demand deposits. The federal funds rate is the interest rate (set by the FOMC) at which depository institutions lend balances at the Federal Reserve to other banks overnight. These are two completely different policy mechanisms. Your wikipedia cite provides no basis for assuming that the failure of Regulation Q necessarily means that a mandated FFR set by Congress would also fail.
Interesting that, on one hand you persistently argue that every monetary policy tool as employed by the Fed is inflationary and doomed to failure, yet you don’t want Congress to take away one of those tools by mandate.
Haygood says: free the Fed!
L. RANDALL WRAY said: But Congress passes the laws that tell the Fed what to do, and can change them if it doesn’t like what the Fed did.
from MEXICO: Did Congress pass a law telling the Fed to abdicate its regulatory responsibility in the lead-up to the GFC? Did Congress pass a law telling the Volcker Fed to “embrace”the shadow banking system, “if only in secret at first” as Jeffrey Snider charges in “The Fed Is Opaque Because It’s Flying Blind”?
L. RANDALL WRAY said: Some argue that the Fed is captured by Wall Street. Heck, I’ve argued that for years! So is the Treasury. So is the entire darned Administration of Obama, and that of Bush, Jr, and that of Clinton. We’ve got the best Government that Wall Street’s money could buy. I agree. That was not the issue I was discussing in the two part series. If the critics are trying to argue that is what they mean by the Fed being “independent” then they can also argue the Treasury is independent of government, as is the Obama Administration, as is the Supreme Court of the United States. They all work for Goldman Sachs and JP Morgan and and Citi and Bank of America and AIG, and so on. Or, in Timmy Geithner’s case, for Warburg Pincus. (Literally.)
from MEXICO: This is what I call the Adolph Eichmann defense, since it was the same defense he argued in his trial. But as Hannah Arendt rejoined in Eichmann in Jerusalem:
”What you meant to say was that where all, or almost all, are guilty, nobody is. This is indeed quite common conclusion, but one we are not willing to grant you… [G]uilt and innocence before the law are of an objective nature, and even if eighty million Germans had done as you did, this would not have been an excuse for you.
L. RANDALL WRAY said: If you want to call the Fed “hybrid” public and private, so is the Treasury. Indeed, so is Government Sachs, since it not only runs a bank but also holds many of the top positions in the US government.
from MEXICO: But isn’t this antithetical to MMT’s secotral approach? When we’re talking about TPTB, the private and governmental sectors meld together seamlessly. Here is a video interview of Noam Chomsky (beginning at minute 27:54) where he debunks the myth of the separation of the public and private sectors:
http://www.youtube.com/watch?v=b1J9ybfRWSk&feature=player_detailpage#t=1673
L. RANDALL WRAY said: Politicos do not have a pro-hyperinflationary constituency. The true danger is always, has always been, will always be, in the opposite direction. Politicos hate inflation and do not mind unemployment.
from MEXICO: But didn’t Wray quote Adolph Miller in Part I of this series, where he said the very opposite:
”The American people will never stand contraction if they know it can be helped. Least will they stand contraction if they think it is contraction at the instance, or with the consent of an institution like the Federal Reserve System.”
Isn’t the raison d’être of the Fed, and its highly touted independence, to inflict contraction on the American people while at the same time allowing Congress and the administration plausible deniability?
L. RANDALL WRAY said: We need a central bank. It needs to serve the public purpose. It needs to be held accountable. We need to improve governance of the Fed. And we need to increase transparency. The Fed is a creature of Congress. It is up to Congress to improve democratic accountability, governance, and transparency of the Fed.
from MEXICO: This just basically confirms Joseph Huber’s criticism of MMT:
”MMT does not recognise a need for monetary reform. Central bank and government together, it is assumed, exert effective control over banks’ creation of credit and deposits. Fractional reserve banking on the whole is seen as efficient and benign. To NCT this is just another example of fictional economics, for the actual situation today comes close to one of capture of the state’s monetary sovereignty by the private banking sector. Realities today, far from representing a sovereign currency system, represent a state-backed banking rule. In spite of a long list of dysfunctions of fractional reserve banking―from lack of money safety via the distortion of economic and financial cycles, to monetary and financial instability and proneness to crisis―that system is maintained on grounds of an almost inextricable mutual dependency of government and banks; with governments running high levels of deficits and debt, and banks creating overshooting money supply and BIP-disproportionate levels of financial investment (asset inflation).”
Notes from the Roach Motel.
well you really do make a number of good points. I’m not sure economists realize how hard it is to make sense using the analytical framework and conceptual/linguistical structure of meaning they’ve inherited from their discipline.
its like a mathematician arguing over ax + by + c = T/V and not entirely being clear on what x and y are. And not realizing there’s a “z” variable that’s hidden.
I’m heartened to see others don’t swallow the alleged clean division between public and private. I never could.
Nevertheless, I appreciate Professor Wray’s history of the Fed. Since I’m way to lazy to read any books about it. Now I can be sitting at an office meeting and if the conversation goes there I can say “Actually, the Fed isn’t a fully independent agency since it’s beholden to the will of congress, although it has leeway in its range of tools and operational strategies.” That should be enough to shut people up and make it seem like I know what I’m talking about. That’s efficiency!
Also, I’d say that flying witch might be real. I’m not kidding or trying to embarrass Mexican policeman. It’s a phenomenon that the narrow and provincial scope of “science’ has yet to enlarge itself to see. Same with money and economics, which is locked in its quantities and Newtonian metaphors, restricting its field of perception and analytical vocabulary, rendering it unable to make sense as a descriptor of reality.
Didn’t Keynes refer to “animal spirits”? Gets my inner shaman dancing. What if economists saw fit to move on from Newtonian metaphor to quantum. That’s kind of similarly spooky isn’t it?
What I don’t understand is why can’t someone explain to me exactly how the Fed works without someone else cutting in and saying, “No, you (idiot, jerk, neo-lib, Satan-in-disguise or what-have-you), it’s not like that at all. It’s like this.”
Oops, sorry. That was me. I’m that other name on another posting site. Didn’t mean to mix “handles”.
from MEXICO: But isn’t this antithetical to MMT’s secotral approach? When we’re talking about TPTB, the private and governmental sectors meld together seamlessly.
This may be the most uninformed thing you’ve ever posted, and that includes all the off-topic quotes you don’t seem to understand the context of.
Sectoral Balances is about accounting relationships, yet you think it’s an ownership model. You really don’t get any of this, do you? I’ve spent all this time responding to someone who doesn’t have the slightest clue what he’s talking about.
You really need to stop, dude. This is just embarrasing.
Dude? I thought you said FM was a she? Or is dudette passé?
(To be clear, we have 4500 honest banks. LR Wray
Wrong. Every government-backed bank is a thief of purchasing power. Read a few banking quotes to get the jist: http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/ (Note: I don’t necesaarily and probably don’t endorse the solutions proposed by any site I quote but the diagnosis is often accurate.)
We need a central bank. LR Wray
Wrong again. The monetary sovereign clearly has no need for a central bank and as for the private sector it can surely (e.g. common stock) come up with ethical private money solutions.
Does this expose make any difference at this time? It comes 30-years too late?
Is the FED solvent? Are the banks solvent? How long can the dollar remain a global reserve currency? So what is next for the FED — more QE? But if the Fed runs QE to buy just the T-bills, isn’t this essentially a MMT operation that this forum would approve off, no?
As I see it, central banking is a dying beast. When US dollar loses its reserve status, and with peaking credit cycle, the FED becomes redundant.
I think the credit structure we have built is pretty dangerous and the deleveraging could be pretty brutal with bail-ins etc..
Liquidity Factory and the Reserve Currency
In his book ‘Extreme Money: Masters of the Universe and the Cult of Risk’ (2011) Satyajit Das talks about the ‘Liquidity Factory’.
On an inverse pyramid at the bottom little pinnacle are the central banks, 2%, then there are bank loans, 19%, then securitized debt, 38% and then derivatives 41%.
This is all considered liquidity ie the lubricant that allows the global economy to run. And 79% of it is derivatives and securitized debt which are largely unregulated and full of fraud. And the $16 trillion of US Treasuries used as collateral to back it all up is a small little fraction.
This is financialization run amok and what he calls ‘cotton candy’ which is spun sugar composed mostly of air.
No wonder Draghi doesn’t want us to be able to examine bank balance sheets but just have the taxpayer continue to bail them out while imposing austerity measures.
This mountain of debt being supported by this little pyramid needs to be dismantled before the right grain of sand causes it to crumble.
Countries shouldn’t have to pay back loans that their former dictators stashed away for themselves in off shore accounts. Students shouldn’t be indebted for most of their lives by college loans, medical bills shouldn’t be the major cause of household bankruptcy, homeowner’s who were given predatory loans so that the banks could repossess their house should have principal reductions to reflect actual value.
If US Treasuries continue to support cotton candy they will lose their validity as a global reserve currency.
If US Treasuries continue to support cotton candy they will lose their validity as a global reserve currency. financial matters
Not such a bad thing since what do we need from the rest of the world? Not even energy if we’d get serious about it.
But we could have the strongest yet very abundant currency if we just created it ethically. The US has PRETENDED to be honest for a long time; we should actually do so if we wish to continue to be privileged.
I do note the Swiss, another great money center, are thinking of a guaranteed income for their citizens. What do they know that we don’t?
Is the FED solvent?
The Fed is a currency issuer. It can never be unable to service its liabilities.
Are the banks solvent??
Not the big ones
How long can the dollar remain a global reserve currency?
Until it doesn’t as nothing lasts forever. There’s nothing in the near-medium term that can really replace it though, so I wouldn’t worry just yet.
So what is next for the FED — more QE? But if the Fed runs QE to buy just the T-bills, isn’t this essentially a MMT operation that this forum would approve off, no?
Like most people you probably have a checking account and a savings account. Banks have these things too, the former called “reserve” accounts and the latter “securities” accounts. When the Fed buys Treasurys it’s just transferring dollar balances from the banks’ savings accounts to their checking accounts without actually increasing the number of dollars in the system.
But the securities, unless issued by the monetary sovereign*, are not necessarily worth their face value, hence the need for 100% voluntary depositors.
*But that’s fascist since the MS has absolutely no need to borrow.
They are issued by the monetary sovereign. The banks hold government securities in those securities accounts.
More disengenuity since mortgages are large components of a bank’s balance sheet or at least were before they were allowed to dump them onto investor dupes.
But that’s not what Ben Johanson was talking about.
So banks don’t own Mortgage Backed Securities themselves?
This is an interesting statement and may reflect the problems we would have with money markets in the next deleveraging credit freeze-up.
“”The Fed’s response was twofold. On September 17, 2008, the Fed and the Treasury announced the Supplementary Financing Program (SFP), under which the Treasury would issue special bills, independent of its normal borrowing activities. The immediate effect of Treasury bill issuances under the SFP was a reduction in the supply of system reserve balances and therefore an easing of downward pressure on the federal funds rate. Over the longer period, funds acquired through the issuance of SFP bills could be used for the Treasury’s participation in subsequent Fed LLR initiatives, as would become the case with the Troubled Asset Purchase Program. However, in practice, the Treasury’s SFP had little impact on the fed funds market. The Fed ultimately was unable to gain an appreciable degree of control over its operational target until after October 6, 2008, when it began paying interest on reserves, ultimately setting a floor to the level to which the federal funds rate could fall.””
http://www.levyinstitute.org/publications/?docid=1739
“Neoliberal dictatorship representatives in Greece continue to spread the propaganda concerning the Greek banks. Various mouthpieces continue to propagate the false perception that the Greek banks are, at the moment, under the state control and some of them claim that this is a proof of the Soviet function of the economy!”
http://failedevolution.blogspot.gr/2014/01/greece-only-public-in-banks-is-debt.html
MMT does not recognise a need for monetary reform. Central bank and government together, it is assumed, exert effective control over banks’ creation of credit and deposits. Fractional reserve banking on the whole is seen as efficient and benign.
In my piece last year “From Central Bank Independence to Democratic Public Finance” I argued for several reforms of the system of public finance, and for more direct government control over the central bank by moving the entire thing to the Treasury Department, thus ending the artificial barrier between the part of the government that prints non-interest bearing currency and the part that issues interest-bearing bills and bonds.
However, I am strongly of the opinion that a modern economy needs a central bank in some form: a central bank in which resides the authority to issue and regulate the national currency, that has supervisory control over the nation’s banking system, that can play the lender of last resort function, and that can coordinate deposit guarantee and payment system programs with other parts of government and with foreign governments.
I have no sympathy at all for the various libertarian proposals and bugbears, whether that includes moving to a gold standard, permitting free banking,adopting laissez faire currencies and finance, or ending fractional reserve credit which would burden the financial system with the need to pile up pointless mountains of non-circulating reserves to satisfy non-existing liquidity requirement. Ron Paul’s plan, Bitcoin, the free bankers and the Chicago Planners all seem to me to be recommending backward steps.
And while people debate these grand plans for monetary reform, it is important to bear in mind that we already have adequate tools for running deficits, expanding public spending, and achieving ambitious public purposes thereby. What MMTers have tried to focus on primarily is eliminating public paranoia and ignorance about public deficits and public debt.
http://neweconomicperspectives.org/2013/01/from-central-bank-independence-to-democratic-public-finance.html
I have no sympathy for fascists and you are one and a hypocrite too because for all your talk of equity and sharing and common good you oppose a money form that is based on all three in favor of an inherently crooked, discriminatory and unstable money system that the world’s major religions, some of the most famous men in history and 320 years of actual history, including the Great Depression and the resulting World War II condemn.
There is zero reason for thinking that the use of common stock as money would do one single thing to advance justice, the common good, sharing or equality. It really boggles my mind that anyone could think that, since stock-market driven capital accumulation has been the foundation of modern capitalism for several centuries now. There is nothing wonderful or righteous about private ownership claims in private companies. Nor is there anything inherently bad about it. Everything comes down to how a society regulates these claims and activities.
I really do appreciate the humane influence of moral and spiritual traditions on economic thinking, which can sometimes becomes barbarous and inhuman. But in your case, these religious doctrines just seem like an obtuse dogma which you believe has been revealed to you, and that gives you a license to avoid critical thinking – and to insult, berate and threaten everyone who disagrees you.
You’ve been repeating the same slogans over and over and over for a couple of years now, with no sign of any intellectual growth whatsoever. I really wonder if you have read a single paper or book in the areas you profess to be concerned about.
You don’t listen. Of course combining a government-backed credit cartel with corporations is a recipe* for huge injustice and so it has turned out and so I have said for a long time.
Spare me your patronizing wrt my spiritual beliefs; I’ve done more original thinking wrt to money and money creation than you have by a long shot and I credit it to taking the Bible seriously. You, otoh, keep trying to retread old Progressive ideas but this time they’ll work?
Quit your high-horse condescension and learn, you pompous ass. The issues at stake are much higher than your personal ambitions, you would-be-tyrant. The fight against unethical money/credit creation is centuries old and YOU, silly YOU, pick the wrong side as if the lives of millions weren’t at stake. Dante had a place for people like you and he may not have been far wrong, now that I’ve dealt with your type.
*Because corporations are very often the most so-called creditworthy.
Making assertions without any actual data to support, is speculation, it should not be forwarded in any other manner. That said ethics and morals are established via consensus of the group, and not not by individuals welding their favorite book.
Skippy… the “totality of thought” is dangerous… that’s why most check their biases… and those that do not… are commonly viewed as a bit off….
So you have a problem with “Thou shall not steal” especially from the poor and helpless? Is that not indeed the general consensus EXCEPT in actual practice because of the government-backed credit cartel.
“Thou shall not steal”
You have absolutely zero clue, do you want me to unpack stealing in a more contextual aspect across all human – market activity’s. You really like throwing around loaded phrases and pleas as simple moralistic ploys, when your agenda is all you actually care about e.g. common stock et al.
When I say the Austrian in you is still strong, its because of your foundational a priori are still there sans the hard money. You still want the same societal system.
skippy… personally I find you a quasi Libertarian Austrian would-be-tyrant, those that supposedly that are fighting the never ending – good – fight.
No intellectual growth? You ninnie, I began my study of money and banking with a precious metals bias but have since learned enough to repent of that bias and to send the gold-bugs packing when they dare show their heads.
I’ve grown plenty since I began including from Mosler, Wray, Ellen Brown, and a host of online opponents too. You, otoh, learn only to defend the basic model of government-backed theft by credit creation. You give a very strong imitation of someone running for Fed Press Secretary.
Dan, amidst your otherwise excellent analysis, you say: “There is nothing wonderful or righteous about private ownership claims in private companies. Nor is there anything inherently bad about it. Everything comes down to how a society regulates these claims and activities.” But there is something inherently bad about it: to the extent that private companies own and control the means of production, as they do under capitalism, private ownership claims in them are undemocratic. Undemocratic ownership and control of the means of production (and thus its fruits, i.e., our entire economy) is inherently bad, if one claims that democracy is good.
Your third sentence remains technically valid, of course–like all (non-socialist) progressives, you can argue that the inherent evils of undemocratic ownership and control of the means of production are outweighed by other benefits, when appropriately democratically regulated. You can argue that TINA to capitalism, hence that whatever (residual, minimal) evil remains, after regulation, is unavoidable. But unavoidable inherent evils are still inherently evil.
Of course, being a socialist, I see no evidence for the TINA argument, or I wouldn’t bother making the above point, except as a matter of logic. But logic eventually becomes important in changing minds, so I hope that you and other advocates of TINA will at least be clear about the situation–private economic power, however inevitable and tolerable you think it is, remains inherently unjust, given a fundamental belief in democracy.
After the final defeat of the populist movement in 1896, they dynamics of American politics increasingly concentrated on proper administration. L. Randall Wray, the Levy Economics Institute, New Economic Perspectives, the Ford Foundation, and the entire progressive tradition can be seen as primarily interested getting administration right (while basically leaving the structure of power in tact) whether in monetary policy, fiscal policy, foreign policy or democratic policy.
As Wray states in his above analysis: “The Fed is supposed to protect us. The Fed is a lender of last resort to the banking system. It always has been. This is an important aspect of public purpose.”
Later he goes on to argue “But what the Fed did during the GFC bail-out stunk. It was disgusting. Congress should not let that happen again. This is what my project is about. We do not want the Fed to have that kind of political independence.” “We need a central bank. It needs to serve the public purpose.”
In a recent major report entitled”The Lender of Last Resort: A critical analysis of the Federal Reserve’s Unprecedented Intervention after 2007.” (April, 2013) of which Wray was an important contributor, it states on pg. 6 that: “We have argued that quick, decisive, and even secret action of the Fed was warranted in the earliest phases of the crisis but the Fed response continued for years. (poor administration)
Again this critique is primarily administrative and as stated on pg. 88 of the Lender of Last Resort Report :”In this year’s report we have focused on the LLR function of central banking–the duty to stand by to lend to banks when no one else will. While we are critical of the way that the Fed. handled the responsibility; there is no doubt that LLR intervention was necessary, and the crisis would have been unimaginably worse if the Fed had not acted as LLR. This does not, however; justify the precise manner in which the Fed pursued LLR activities.”
I am sure Paulson, Goldman, Citibank, Summers and the rest of the establishment boys and girls would agree with this “critical” assessment.
Back in 2006-2008 there were a small group of commentators (from both the populist left and populist right) who argued against exercising LLR functions because it was apparent at that time that the real public purpose of such intervention was to save only the contemporary structure of financial/political and economic power from collapse. Unfortunately the Progressive tradition, in its primary concern for proper administration of the status-quo, once again saved the system in 2008, as it did in 1933.
We are now faced with the consequences of this administrative save–a more powerful and concentrated financial structure (both public and Private) with administrative decisions by the Fed continuing to be made largely in secrecy now acting in conjunction with the neo-totalitarian NSA (also operating in secrecy)—to serve the new public purpose–searching for lucrative ways to privately cash in or cash out–all under the guise of protecting the general public.
Well said!
Wray and Co should have taken to heart the message of the Lord of the Rings – NO ONE could wield the Ring and remain uncorrupted – the only solution was to DESTROY it.
I disagree with your politics I think, but think your analysis is not far off. The MMTers come out of the economic tradition of Keynes, Lerner, Robinson and Galbraith and the political tradition of the New Deal and labor left. It’s a tradition mainly focused on what government can and should do, and looks to a significant role for planning, regulation, and organization by a democratic political community to achieve important social goals that individuals and private corporations can never achieve on their own.
There are a variety of populist traditions which in our time tend in a much more libertarian direction. Their focus is all on what they the government to get out of. When it comes to the banks, there idea is that the government should get out of the banking system, and leave it to each bank to stand or fall on its own as some kind of self-subsistent economic entity.
I would go the other way. I don’t at all want to get rid of powerful government institutions capable of bailing out a tottering financial system. I just think those institutions should have bailed out everyone else as well, and should give as much attention to debtors as they give to creditors. And when we bailed out the banks we should have demanded more of a public ownership stake in the broken institutions we were repairing. The banking system is a single, integrated public-private sector institution. Good! I think we should organize and regulate it even more firmly, put it even more firmly under the thumb of government, and chase out the exploiters, hucksters, greedsters and plutocratic bag men, and turn the whole thing into something that does a better job serving the public interest – with modest middle-class salaries for the managers, not gigantic bonuses and yacht-worthy incomes. Of course, then it will be a Big Government institution, which terrifies the libertarians and so-called “populists”.
Personally, I’m a Big Government guy. I think we made a bad mistake when we allowed the neoliberals to “liberalize” everything and decrease the role of government in American economic life. We got more inequality, more financial instability, more thievery and criminality, more consumerist excess, collapsing social systems and a loss of social solidarity and morale. We exalted the infantile, the hedonistic, the vainglorious and irresponsible elements of American life, and ran down the very ideal of a mature, adult public-spirited citizen.
At this point, I don’t want more “liberty”. I’m an American child of the late 20th century, which as far as I can tell already makes me one of the titanic brats of human history. We have forgotten the practical fundamentals of what it means to run a society and hold it together, and we are losing our democratic ethos because each of us is too special, and spoiled, and sacred and individually sovereign to submit even one iota of our out-of-control narcissistic wills to governance by our fellow-citizens.
I agree with your argument for government to be big enough to do the job we ask it to do for us.
I would ask the government to outlaw private wealth accumulation and banking.
I would ask our government to provide a banking utility for all.
I would ask our government to limit inheritance or get rid of it entirely as part of eliminating private wealth accumulation.
I would ask the government to outlaw private wealth accumulation and banking.
I would ask our government to provide a banking utility for all.
So you mean you want it to get rid of private banking then, right?
And do you want it to prevent you from accumulating your private wealth, too? Or do you just mean you don’t think the accumulation of wealth should be permitted beyond a certain point?
I am conflicted about getting rid of inheritance altogether. That said, I would be ok with having all “death excess” go to the common good but fear it is too much of required mental evolution for many.
I certainly think that inheritance needs to be changed so that none can accumulate enough to effect public policy.
And yes, I would like to see us give a shot to only sovereign banking and get rid of all plutocrats and their inherited or questionably “earned” private or private/public money and control.
The progressives brought us corporatism, but the New Deal took it to an extreme. In 1932 and 1933, when the world was in depression and old-style capitalism, two deceptive models. These were Stalin’s Communism (socialism projected by violence) and Mussolini’s Fascism (corporatism projected by violence). Hitler in Germany and FDR is the U.S. chose to model corporatist rather than social solutions, though FDR was no Fascist or Nazi. Both FDR and Hitler consulted with Keynes, by the way. The U.S. Administrative Procedure Act, enacted in 1946, institutionalized corporatism and made it the de facto constitutional practice of the present administrative state.
Of course, the FDR and New Deal progressives did not set out to create the system of crony capitalism and regulatory capture that we now endure, any more than Woodrow Wilson did when he signed the Federal Reserve law, because they did not foresee that its logic embedded in what they were doing. But we arrived where we are anyway. The scary thought is that drug-influenced Aldous Huxley possibly did foresee a lot of it when he published “Brave New World” in 1932–scary, because our condition has so much come to resemble the Brave New World condition that we no longer find disturbing, but quaint.
The banking system is a single, integrated public-private sector institution. Good! Danny K
From the horse’s mouth! Dan Kervick admits to being a enthusiastic fascist!
The same is true of the criminal justice system, and the medical system, and the education system, and the retirement system. Do you want to get rid of all of the government involvement in them too, and privatize them because public-private integration is fascist?
You are a snake to suggest I want to privatize the criminal justice system.
But here’s the distinction: Government is force and the private sector is or should be voluntary cooperation. One cannot mix the two without destroying the latter.
Does the government interface with the private sector? Yes, of course it does, but with strict guidelines (competitive bids, etc.) to prevent favoritism.
“snake”, “fascist”, “ninnie”, “shrew”…etc
2/27/08
“Name Calling”
NAME CALLING
Something curious happens,
When you call someone a “name”…
they never quite get over it,
nor look at you the same!
You might as well “punch” ’em,
there really is no excuse….
your’e verbally assaulting them,
“round here, we call that “abuse”!
So don’t just shrug your shoulders,
and say” it’s no big deal”….
the damage done by your “carelessness”,
cause “bruises” that may never heal!
If others consider the words you use,
to be rude or rather appalling…..
It’ll be hard to make new friends,
just because of your “name calling”!
So make a pact with yourself,
to always use language that’s “kind”….
folks will be attracted to you,
a nicer person, you will not find!
Coach A,
http://poemsfromthecoach.blogspot.com/2008/02/name-calling.html
This is the sort of opinion which, when taken to its logical conclusion would render breathing a bad act because, hey, the Nazis breathed, too.
So much for your credibility. Talk about a straw man argument.
But thanks for conceding defeat.
“the entire progressive tradition can be seen as primarily interested in getting administration right”–but I don’t see it that way. The tradition is “corporatist,” in the same sense that Mussolini’s regime was “corporatist.” By this I mean that the bearers of the progressive tradition seem to be interested in taking the details of legislative deal making (which is to say, the mediation of corrupt bargains) out of the (visible) hands of elected legislators and into the (less visible) hands of appointed bureaucratic agents, called “regulators”, who are beholden to legislators if the agency is called “independent”, or otherwise beholden to the president. There are alleged justifications for this regulatory state based on arguments about efficiency and institutional competence, but the tradition is actually a formula for regulatory capture of the bureaucracies: over 100 years of experience with the administrative state has shown this to be true.
However, I did not say that our current regime is Fascist, and my reference to Mussolini was not intended to drive that far. Fascismis the form that corporatism takes when those who control thee state project its power by overt violence, more than by blackmail or the spreading around of money. We live in corporatist system in which power is projected more by the spreading around of money and by blackmail, and less by overt violence, comparatively speaking.
Dr. Wray wrote: Yes, private banks are nominal “owners” of regional banks. Really it is more of a “membership fee” since their “stock” in the Fed is nothing like normal equity shares. They join up and then get a return based on Fed profits. Profits above 6% go to the Treasury. Policy, however, is set by Congress. The power resides with Board of Governors, with narrowly defined monetary policy established at FOMC meetings.
With “ownership” comes “liability.” From the U.S. Code:
§502. Liability of shareholders of Federal reserve banks on contracts, etc.
The shareholders of every Federal reserve bank shall be held individually responsible equally and ratably, and not one for another, for all contracts, debts, and engagements of such bank to the extent of the amount of their subscriptions to such stock at the par value thereof in addition to the amount subscribed, whether such subscriptions have been paid up in whole or in part under the provisions of this chapter.
(Dec. 23, 1913, ch. 6, §2, 38 Stat. 252.)
U.S.C. 502 – Sec. 502 – Liability of shareholders of Federal reserve banks on contracts, etc. :: 1999 US Code :: US Codes and Statutes :: US Law :: Justia
Yet MMTers maintain that Federal Reserve Banks, bank consortia to which USG must surrender assets if it wishes its checks to clear, are US Government entities.
MMTers claim to be promulgating a description of institutional arrangements, not a theory. (Kelton, 4/28/2010). Is there any reason this description should not comport with the public laws that govern the institutions involved?
I’m not sure I understand what it means to say the treasury has to “surrender” assets to the Fed for its checks to clear. The Fed is simply required by law to hold the deposits of the government and serve as its fiscal agent. That’s not surrendering anything. When I deposit my money in a bank, I haven’t surrendered my assets to them. They are just functioning as a depository institution that holds my assets is is obligated to pay them out on demand.
EconCCX, the unremarkable statute you quote does not provide any evidence to refute Dr. Wray’s opinion that FRB membership shares are not like normal (for profit corporation) equity. I believe that members of homeowners’ associations, common interest developments, labor unions, and cooperatives have analogous liabilities to their associations, but they actually don’t own them. No one does.
I don’t believe our concern is whether the ownership shares more resemble those of for-profit or non-profit entities. MMTers believe these to be government entities, something not claimed for HOAs and all the rest. If you walk around a Federal Reserve Bank, the signs don’t say “US Government Property” because it isn’t.
If the concern you mention is not our concern, then why did you quote the language that raised the concern in your original post?
According to my state constitution, the State Bar of California is a public corporation, and every lawyer licensed to practice in the state is a member. By law, those members must pay dues if they are to keep their licenses. The State Bar functions as the administrative arm of the California Supreme Court. Is it a governmental entity, or not? According to your logic, it wouldn’t be a government entity if a member can be assessed for unpaid dues in the invent of its insolvency.
I say the State Bar is a governmental entity, not based on any MMT ideology, but just based on knowledge of the law. I say the Federal Reserve is a governmental entity based on the same kind of knowledge.
>According to your logic, it wouldn’t be a government entity if a member can be assessed for unpaid dues in the invent of its insolvency.
It’s not my logic, it’s that of the statute, which assigned liability of the shareholders for debts OF the bank, not their own debts TO the bank. Randy and Dan’s narrow arguments that FRB shares are not exactly like shares in for-profit corporations do not advance the argument that they are government entities. The statute does demonstrate that if these banks were to issue liabilities without obtaining assets, they’d be putting their shareholders on the hook.
In the words of Joe Firestone:
The Treasury Bonds held by the Federal Reserve are not owned by the Board of Governors or the Federal Open Market Committee. They are owned by the regional Fed banks. Those banks are privately owned and the bonds are among their assets. Privately owned companies will not sacrifice their assets forgiving the Government’s debts. Nor should they! The Government is obligated to pay those debts by the Constitution!
How could Washington avoid a debt ceiling default? Mint a few trillion dollar platinum coins. Seriously | AEIdeas
Thank you for your three-part series, Mr. Wray, and particularly for your final section. There is much of substance for me and other voters to consider here and in some of the comments from readers.
Dan wrote: When I deposit my money in a bank, I haven’t surrendered my assets to them. They are just functioning as a depository institution that holds my assets is is obligated to pay them out on demand.
A safe deposit is a bailment as you describe. A savings or checking account is a mutuum whereby the bank takes absolute ownership of your reserve notes and coins, and you become its unsecured creditor, owning only private bank debt.
Similarly, USG sells a T-Bill, its own promissory document, to the banking system in exchange for checkwriting credit. Federal Reserve Banks cannot simply tear up those IOUs and still clear checks for the government. I’ll have to find the article wherein Dr. Wray advocated the sale of National Parks to the Central Banks. He believes they’re government entities, but the evidence makes clear they’re not.
But if I then own a bank debt, it doesn’t seem accurate to say I have surrendered my assets. I have exchanged one kind of asset for another kind of asset. And although it might not be secured by bank collateral, that doesn’t make the bank’s obligation to redeem it any less strong. If they face liquidity problems, they will have to convert other assets into liquid ones to redeem it. And if they are in really deep stuff and facing insolvency, then my deposit up to $250,000 is guaranteed by the government. For a little guy like me I would say that’s all the security I need.
On the ownership issue, I think the entire Fed system is a public-private affair. But the governance of the system at the top is clearly public, since every single member of the BoG is a government appointee.
For people who are convinced the Fed is a private entity, I would like them to point to a single other private entity whose entire governorship is appointed by the President with the approval of Congress.
Dan, will you agree that selling post offices and artwork to procure checkable bank debt or reserves qualifies as surrendering assets?
http://www.accuracy.org/release/degraded-postal-service-part-of-a-manufactured-crisis-and-a-daylight-heist-of-new-deal-art/
Do you believe that with its role in the governance, not ownership of the Reserve Banks, that USG can command these entities to clear its checks with surrendering assets of equivalent value to them?
For people who are convinced the Fed is a private entity, I would like them to point to a single other private entity whose entire governorship is appointed by the President with the approval of Congress.
You’re attempting to surmise logically that which documentation has already established. Again, why doesn’t the documentation substantiate the theory? I’m now looking for the link that describes the compensation owed the owners should these Reserve Banks ever be liquidated.
EconCCX and Dan: You are arguing matters of opinion, and legal opinion at that, as though they could be resolved factually by reference to evidence. Yet the evidence EconCCX adduces consists of what, exactly? Legal documents, that’s what. Legal documents whose meaning and interpretation are matters of opinion.
Of course, some opinions are unwarranted, others are not, so all opinions are not created equal. The Fed System is controlled as Dan says it is, which means the government controls it, as well as continues its existence.
Reference was to this quote:
LRWray: However, here’s a better idea. We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell–and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our Nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two. …
(Note I was recently in Colombia and found that the central bank does own and run museums–and does an excellent job. When you’ve got the magic porridge pot, you can afford good housekeeping.)
http://www.economonitor.com/lrwray/2013/10/09/flash-from-the-past-why-qe2-wouldnt-save-our-sinking-ship/
He’s imagining that these would continue to be public assets, owned by the Board of Governors (“Uncle Ben or Aunt Janet”) rather than the regional banks. That propaganda term “The Fed” elides that distinction, but the documentary evidence makes it absolutely clear.
So Congress passes a law that establishes the Federal Reserve Board, which is appointed by officers of the government, and requires federally chartered banks, which are private corporations, to become members of regional Federal Reserve Banks (and to capitalize them), which the law also establishes as the means through which which the Federal Reserve Board will regulate these private banks, and the question before us is whether the resolution of some significant political, economic, or philosophic issue depends on whether the regional Federal Reserve Banks are properly characterized as public (governmental) or private entities?
If someone took a blank coin and stamped “private property” on one side and “public property” on the other, what kind of property would it be? Would it matter who owned the coin before it was stamped? Would it matter which side was stamped first? Would the intention of the stamper matter? Or the expectations of someone who came into possession of it? Would the answer be different if instead we stamped “crony capitalism” on one side and “regulatory capture” on the other?
I say the fact there is confusion and dispute about what parts of the Federal System may be private or public is more significant than any ideological answer one may arrive at. I say there is no correct answer. I say that our system is undemocratic and corporatist, that it blurs the distinction between what is private and what is public, intentionally–so that crony capitalism can be practiced, and the corrupt bargains of regulatory capture carried into effect, without being seen to be as irregular and objectionable as they are. I say that when we debate the question as an “either/or” proposition we lose sight of the “both/and” nature of public/private partnership undertakings as the feature that enables the crony capitalism and regulatory capture to flourish, the obverse and reverse sides of the corporatist coin.
If someone took a blank coin and stamped “private property” on one side and “public property” on the other, what kind of property would it be? Would it matter who owned the coin before it was stamped? Would it matter which side was stamped first? Would the intention of the stamper matter? Or the expectations of someone who came into possession of it?
Yes.