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July 20, 2009

There's Good News And There's Bad News

The good news is, we now have the tools and ability to turn America into a genuine, vibrant democracy.

The bad news is, this will require that at least a few of us learn how the Federal Reserve works.

The price may simply be too high.

—Jonathan Schwarz

Posted at July 20, 2009 12:14 PM

The price for justice is never too high. And there are already a few experts on the subjects, who have dedicated their lives to investigate the operations of the Fed. One of them is Dr. Ron Paul. Progressive liberals need to get on board.

Posted by: smdqr at July 20, 2009 12:49 PM

This is a slightly frightening post, I must say. Are you going to be talking about the Council on Foreign Relations and the New World Order next?

Posted by: abb1 at July 20, 2009 01:27 PM

This is a slightly frightening post, I must say. Are you going to be talking about the Council on Foreign Relations and the New World Order next?

Nah. They're both boring, predictable outgrowths of business. But a central bank like the Fed, while currently a boring, predictable outgrowth of business, is both necessary and potentially a source of real democratic power. But before that can happen we have to get it under our control, and before that can happen we have to understand what it is and how it functions.

(Also, I want to be fair to the boring, predictable people at the CFR. I've previously mentioned them and their plot to control mankind many times, especially here and here.)

Posted by: Jonathan Schwarz at July 20, 2009 01:34 PM

Central bank is a source of real democratic power?

Posted by: abb1 at July 20, 2009 01:41 PM

Central bank is a source of real democratic power?

Potentially a source of real democratic power.

Posted by: Jonathan Schwarz at July 20, 2009 01:44 PM

Well, besides open market operations, they don't really tell anybody what they do, so this is rather a tall order. Hell, for that matter they've getting rather circumspect in their open market operations.

Posted by: buermann at July 20, 2009 01:48 PM

Which, since so much of their capacity to do anything is premised on shaping expectations of what they're doing, rather than actually doing it, making them a democratic institution would probably entail undermining much of their power, so understanding what they're doing wouldn't be so important.

Posted by: buermann at July 20, 2009 02:00 PM

It's simple, really. The Federal Reserve doles out incomprehensible amounts of money to people that you or I most likely have never met for reasons that they'd really prefer that you didn't bother yourself with. See? Simple.

Posted by: laym at July 20, 2009 02:28 PM

I guess the hot and bothered would argue that a privately-owned central bank cannot be given the means of currency-issuance: Jefferson's line about waking up slaves in the very lands your ancestors fought for. Cue the martial music. At least that's how I understand the gravamen. As against the need for private markets in currency to regulate interest and exchange rates, keep them from see-sawing and inflicting great damage on economies.

It does seem not entirely cricket that the Fed gets to charge interest on something--money--that should be available to governments interest-free. As well, the Fed bankers bestow favor on friends, influence politicians and business people, certainly lesser banks, through their unparalleled clout. Central bankers, wielding that much influence (I mean, sheesh, the very power to issue a nation's currency) would seem to me deeply, profoundly ANTI-democratic, catering to the needs of hyper-wealthy bankers, ie. the consortia of owners of the privately-held bank.

I applaud your recent posts on what remains a controversial topic. Would be interested in your view on Fed ownership, and how such a narrow, exclusive group of owners would, mirabile dictu, have the interests of us commoners at heart.

Posted by: Oarwell at July 20, 2009 02:29 PM

I guess the hot and bothered would argue that a privately-owned central bank cannot be given the means of currency-issuance

Well, it's not exactly privately-owned. It's a strange public-private hybrid. Of course, in practice it's essentially owned and operated by the big boys in the financial industry for their own benefit.

Even given its public aspects, I doubt it could be a source of democratic power as it's currently structured. But it could be re-structured to be completely public and (with continued pressure) function in our interests.

What I do think is essentially impossible is the Paul-ian idea of getting rid of a central bank completely. That just leaves things directly in the hands of the financial industry, without even a figleaf of democracy.

Posted by: Jonathan Schwarz at July 20, 2009 02:48 PM

This need not be all that complicated. Why doesn't anyone ever start with the basics? (I'm not sure you really need to know much more if you have any intuition.)

The private member banks of each Federal Reserve branch OWN the Federal Reserve. I don't think it is publicly disclosed how much of the Fed is owned by each of the private banks, but I presume the big banks own the most. If not, you can call me crazy.

So, let's do some rocket science, since the private banks OWN the Fed, whose interests should we reasonably conclude the Fed strives to protect? Again, call me crazy, but I'm betting the Fed protects the interests of the entities that OWN it.

Are the interests of the big banks the same as the interests of the average person? (whom I believe is usually a debtor, especially lately)


Maybe Jonathan Schwartz can find somebody who will put this into a song and dance number. I nominate Mel Brooks.

Posted by: N E at July 20, 2009 03:35 PM

central banks are one of the things that gives you recessions instead of depressions. everybody important knows that. unless you're a liquidationist, you like the backstop.

the debate about the need for central bank "independence" seems warm-to-hot among sane economists. the fed's balance sheet now though is so screwed up and helpless without the US treasury, "independence" is aspirational now.

"the fed" is a huge complicated operation, but people fling around the token roughly how they say "the gold standard" -- like they're comparable.

the public doesn't have to run the fed to prevent it from laissez-faire-ing us to death.

a green development bank will still be necessary.

Posted by: hapa at July 20, 2009 03:39 PM

apropos of nothing, 99% of today's equipment and buildings need to be scrapped or retrofitted for compliance with ecological limits. sometimes i think "liquidation" is the other way to accomplish that outside of devastating war. it's hard to figure whether the bigger force is momentum or stupidity.

Posted by: hapa at July 20, 2009 03:47 PM

The Federal Reserve Banks are indeed owned by the private member banks. There is, of course, a public compoent to the whole system, but the Fed banks are owned by the private member banks.

Here is the spin the Federal Reserve Board puts on it:

"Who owns the Federal Reserve?
. . .

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year."

So, the upshot is, the Federal Reserve Banks do not operate for a profit, but they have a board of directors that is controled by their shareholders, just like a corporation, and those shareholders who control it do very much operate for a profit.

I guess that does make it a "strange public-private hybrid,' but it's only strange that we let the control of the money supply, a question committed in the Constitution itself to Congress, to private banks. On the Right, many have called this an "unconstitutional public-private hybrid," but for some reason the Left has never seemed to grasp the significance of the issue.

For those who are still reading, we have to have either the Fed or a Central Bank. A Central Bank would be controlled by the government, which in theory at least would mean it would be democratically accountable. The Fed certainly isn't that. In any case, some entity has to try to regulate the money supply and the national economy. A completely laissez faire approach to the aggregate economy would not be progressive, just, workable, or any other good thing. And I think we're about three centuries past it being something to seriously consider trying, though there are some libertarians who still seem to think the gold standard would work. I don't think we'll get confirmation of how that wouldn't work anytime soon, thank God.

Posted by: N E at July 20, 2009 04:09 PM

I believe Greenspan insisted that applicants be devotees of Ayn Rand and know an elaborate handshake. I think our team can BS on the first one well enough.

Posted by: Batocchio at July 20, 2009 04:39 PM

THE FED is a bank, BUT unlike U&I can print money, an ancient and honored tradition among banks. IN ITS BOUNDLESS GENEROSITY when Sam comes around needing a dollar or 2, WHY, they just up and INVEST in ALL the T-bills Sam cares to print up for such occasions. AT INTEREST of course, NOBODY rides for free.

Posted by: Mike Meyer at July 20, 2009 05:33 PM

Its ALL those squiggly little lines, don'tcha see. Congress has legislated that ONLY those documents that have those squiggly little lines can be accepted as LEGAL TENDER 4 DEBT. APPARENTLY ONLY The Fed KNOWS how to make those squiggly little lines. Should for some strange twist of Fate, YOU should learn how to make those squiggly little lines, why, THE ATF WILL kick down YOUR door.

Posted by: Mike Meyer at July 20, 2009 05:46 PM

When you say that a central bank is necessary in order to be progressive you are ignoring the large shadow that such an organization leaves. Don't mind me, just look at the footprint of the US government on poor people worldwide since the 1913.

The very things that "progressives" fight for are the things that cause the things they are supposedly against. It's a good idea to look at the body count of a philosophy before you take it up.

Posted by: tim at July 20, 2009 06:14 PM

When you say that a central bank is necessary in order to be progressive you are ignoring the large shadow that such an organization leaves. Don't mind me, just look at the footprint of the US government on poor people worldwide since the 1913.

There's something to this, but by no means everything. Essentially every country on earth has a central bank, but not every country on earth has crushed poor people the world over. Plus the US was quite capable of wiping out the Indians, enslaving millions, and killing off gigantic numbers of Filipinos before it had a central bank.

I guess you can imagine an alternate history in which the non-establishment of a central bank helped lead to anarcho-syndicalism in the US in the 20th century, but that's so far from where we are now that I'm not sure it's worth thinking about.

Posted by: Jonathan Schwarz at July 20, 2009 06:36 PM

tim, what is your evidence that central banks make people poorer? no, skip it. instead put together your material and try suing those institutions for damages. see if you can convince a jury that the world would have been more and more evenly prosperous with cutthroat banking.

large shadows are what large populations cast, country boy.

Posted by: hapa at July 20, 2009 06:43 PM

With PERSONAL ownership of GOLD, one would carry around a purse containing GOLD or SILVER or PRECIOUS STONES and barter for goods. Say, perhaps a pound of GOLD for a pound of butter.
With money one need not carry the WEIGHT of ones purchace in GOLD as a 1 gram dollar bill could buy a gram of butter and YET a one gram 100 dollar bill can buy the whole damn cow. ALL BANKING ECONOMIES are based on that "convience".

Posted by: Mike Meyer at July 20, 2009 06:53 PM

I guess you can imagine an alternate history in which the non-establishment of a central bank helped lead to anarcho-syndicalism in the US in the 20th century

no frakkin way. the combination of information asymmetry with the exhausting imperial wars could only lead to dominating smoothing institutions and "level playing fields," either commie or capitalist. bombs and busts were too dangerous to let roam free.

Posted by: hapa at July 20, 2009 07:01 PM

These guys remind us that there was a time when economics was called "political economy" because it was understood that economic decisions (like what the money supply should be, whether we should be on the gold standard, etc.) were inherently political decisions. That is, we had choices, and which choices we made would benefit one class or another, and so which choices we made should properly be the subject of class struggle.

Then economics became a science, and everything went to hell.

Posted by: SteveB at July 20, 2009 07:48 PM

NE wrote

--So, the upshot is, the Federal Reserve Banks do not operate for a profit,

Guess that depends how you define 'for.' The ability to anticipate interest rate moves by member banks is an enormous marketplace advantage. Of course, that's an off-the-books benefit of ownership, not reflected in that modest-sounding 6% dividend, amongst many, many others.

To whose advantage is it to keep the ownership of the regional reserve banks hidden? Why can't we know which banks own what percent, particularly of the NY Fed, the most important in determining Fed policy. Why can't the American people be trusted with the knowledge of who the top 10 owners of the corporation that prints their ever-devaluing currency?

And what, really, is the 'public component?' The rubber-stamping by the president of the next Fed head? I see very little public oversight, as made manifest by the recent grilling of the auditor general by Grayson. The only real public component seems to be the ability of the Fed to demand taxpayer-financed bailouts for over-extended investment banks: if getting the taxpayer to back the bad securities cooked in the Fed's low-interest-rate environment, then yes, that's public participation.

Sunshine the best disinfectant.

Posted by: Oarwell at July 20, 2009 10:27 PM

I'm intrigued, but I'd like to know more of what it is you're talking about. Just stating this stuff is no better than reading bumper stickers.

Posted by: Constantine at July 20, 2009 10:57 PM

No profits does not = no dividends. I'm SURE the shareholders get a little sumptin' in the envelope at the end of the month.

Posted by: Mike Meyer at July 20, 2009 11:31 PM

"I'm intrigued, but I'd like to know more of what it is you're talking about. Just stating this stuff is no better than reading bumper stickers."

--I agree with that, and I'm by no means an expert, like, say, Alan Greenspan.

Seriously, I and some other people around here would recommend that you read Dean Baker to get opinions that are knowledgeable and have been prescient. I think Krugman is usually easy to follow too and certainly has been wiser than the bankers. I am sorry to say I haven't read Greider's book on the Fed, Secrets of the Temple, so I can't say how dated it is. I assume it's right about the basics of the Fed, but the capital markets and Wall Street, especially now in the age of derivatives and phantasmagorically complicated financial instruments, have become so complex that i don't understand much about them except in a coloring book way. I thought Matt Taibbi's Rolling Stone article The Great American Bubble Machine on Goldman Sachs was great, and I believed it even more when Goldman responded by saying it was just a bunch of conspiracy theories. (You just wait, when the next effort to destroy social security and medicare is made, the bad guys will accuse the opposition to their necessary "reforms" as being a bunch of conspiracy theorists.)

I'm not sure what the latest in academia is on the debate between having a central bank or the Fed. I believe there is a belief that it's really hard to control the money supply now because the capital markets have become so sophisticated and adaptive. Whether its junk bonds or mortgage backed securities or derivatives or all sorts of crap I can't even name and struggle to conceptualize, there are a lot of substitutes for old fashioned money.

But all that aside, my sense is that apart from their political power, both in its open and concealed varieties, and through their influence over (or control of) the Fed Reserve Board, and through the economic power bestowed by their humongous resources, the megabanks can just wreak havoc with the economy if their interests require it. Big problem that. We all squeal like pigs in the stockyards, but we don't seem to be getting a lot done about our precarious situation either.

Going after the megabanks with the Justice Department's Antitrust Division will be a war, but it's a war that is eventually going to have to be fought. Either that or just accept debt peonage in our bankocracy.

Posted by: N E at July 21, 2009 12:48 AM

India's central bank has been relatively progressive, and even in the age of (neo)liberalization has kept a relatively firm grip on currency fluctuations and interest rates. they also do their bit to promote banking in rural areas where agri-credit is required

Posted by: almostinfamous at July 21, 2009 03:07 AM

Great reading about this subject can be found in Web of Debt by Ellen Brown.

From a web site for the book:

"Web of Debt unravels the deceptions in our money scheme and presents a crystal clear picture of the financial abyss towards which we are heading. Then it explores a workable alternative, one that was tested in colonial America and is grounded in the best of American economic thought, including the writings of Benjamin Franklin, Thomas Jefferson and Abraham Lincoln."

Posted by: Bruce at July 21, 2009 08:50 AM

Hi Jonathan...

Which books, resources you recommend for understanding Federal Reserve?

Posted by: Ajit at July 21, 2009 10:52 AM

doug henwood (print-only LBO article, "web of nonsense") on ellen brown:

Diagnosis. Why is this wrong? Starting with the easy part: isn’t internationalism a good thing? Shouldn’t people and ideas and art should be free to move around without being blocked by borders or suspicious provincial minds?

The financialization part is harder, but here’s a quickie version. The whole point of production under capitalism is not the satisfaction of needs, but the accumulation of money. In other words, it’s impossible to separate the economic world into a good productive side and a bad financial side; the two are inseparable. The monetary surpluses generated in production -- the profits of capitalist businesses -- accumulate over time and demand some sort of outlet: bank deposits, bonds, stocks, whatever. It’s going to be that way until we replace capitalism with something radically different.

And we have a consumer debt problem not because of some sinister conspiracy of bankers, but because our managerial class has kept wages down for the last 35 years. In order to maintain some semblance of a middle-class lifestyle, people have borrowed from the rich who’ve claimed most of the gains of an expanding economy. In other words, you can’t easily separate finance from the so-called real economy.

There’s also a curious affinity between these financially oriented critiques and classical anti-Semitism that helps explain why the two go together so nicely. Several writers (like Moishe Postone and Slavoj Zizek) have noted that a lot of the imagery of classic anti-Semitism -- greed, deviousness, the hunger for money -- separates out some of the bad features of capitalism and pins them all to the mythical demonized figure of “The Jew.”

Let’s leave the paranoid oversimplifications to the far right, where they belong.

Posted by: hapa at July 21, 2009 02:14 PM

Alternatively, you could read the book and draw your own conclusions.

Posted by: Bruce at July 21, 2009 05:00 PM

"i disagree with doug's criticisms in the following ways..."

Posted by: hapa at July 21, 2009 06:19 PM

What criticisms? The quote above has little to do with the book. That should be obvious to anyone who visits the link I provided above.

Posted by: Bruce at July 21, 2009 06:40 PM


Which books, resources you recommend for understanding Federal Reserve?

In all seriousness, just begin with the wikipedia page. Or their own website. It's useful to start by knowing the basic facts of how it's structured.

Then if you want more, I highly highly recommend Secrets of the Temple by William Greider.

Then, start reading the Financial Times or Wall Street Journal.

Posted by: Jonathan Schwarz at July 21, 2009 10:28 PM

Two books I've read recently that have been very helpful in understanding the economic crisis, including the role played by the Fed:

The Looting of America: Discusses financialization of economy, argues that trillions of dollars used to create financial speculative sector represents wages stolen from workers because wages have not risen at the same rate as worker productivity for the past 40 years, recommends massive redistribution of wealth and measures to strengthen of working class (including legislation such as EFCA.)

The Great Financial Crisis offers a Marxist perspective, argues that financialization is an inevitable result of the declining rate of profit in mature industries and industrial overcapacity which leaves few opportunities for productive investment. Claims that stagnation is the natural state of capitalism and prosperous post-war years were the result of historical factors that cannot be repeated. Speculative bubbles are the only means that mature capitalist economies have of producing "acceptable" rates of growth, government bailouts and government role as "lender of last resort" is now a normal and necessary part of the system. Ever-larger speculative bubbles will continue until the size of the crash exceeds ability of government to issue debt for bailout. We haven't gotten there yet, be next crash could be the one - then we get a chance for a fundamentally different system, perhaps socialism.

Both of these books diverge from the standard liberal analysis that pins the blame on the wave of financial deregulation that began under Reagan (not that the authors are against regulation, they just think the problems are deeper, and the massive growth of the financial sector is a symptom rather than a cause.)

Posted by: SteveB at July 22, 2009 11:24 AM


Those books sound interesting, and the conclusions sound basically consistent with that of Robert Brenner in The Economics of Global Turbulence, which I suppose might also be considered a Marxian analysis, sort of, though really only because there are so many empirical questions that economists otherise don't even look at. The rate of profit has been declining, there has been a tremendous shift out of manufacturing, and the big money in the US in the last 40 years has been made in FIRE (finance, insurance, and real estate).

Brenner is hard for me, as is a lot of real economics (though he is as much historian). Those questions are way beyond the basics of how the Fed works. That stuff just isn't taught to anyone who hasn't signed on to play for the Business Team and paid the high dues in tuition that are necessary first.

But notithstanding Ron Paul and Alan Grayson, I don't think we're going to be making the Fed subject to sunshine laws and democratic accountability in the near future. That's too bad.

Posted by: N E at July 22, 2009 04:01 PM