Matt Stoller: End This Fed

By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller

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

Tom Ferguson, Professor of Political Science at the University of Massachusetts, Boston, from New Deal 2.0

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

Beyond Republican politicians, the public is beginning to rethink our monetary order. This YouTube video on quantitative easing has over 3 million views. The video slams the Fed for missing the dotcom bubble, the subprime crisis, for being fundamentally undemocratic and unaccountable, and for being engaged in collusive dealings with Goldman Sachs. Financial blogs and CNBC discuss the Fed, and its associated characters, with deep insight and passion. And Bernanke received 30 no votes in his confirmation hearing in 2009, the most ever for such a position, just four years after drawing almost none. The market nearly crashed on the possibility that Bernanke’s nomination would fail, before the White House stepped up aggressive lobbying efforts.

On the left, the last few years saw a remarkable grassroots coalition of economists and activists to bring transparency to the central bank, joining a long-sought libertarian crusade. I was a staffer for Rep. Alan Gryason working with that coalition to require an independent audit the Federal Reserve. Tomorrow, because of provisions put into Dodd-Frank by Senator Bernie Sanders and Congressmen Grayson and Ron Paul, the Federal Reserve will release details of its 2007-2010 emergency loans to the web.

This network of politicians, advocates, and bloggers will go to town on whatever revelations come out of that (though the Fed obnoxiously put its Maiden Lane disclosures in a non-copy or printable PDF format, so we’ll see how easy they make it to get this info). The defenders of technocracy are out in force as well. Paul Krugman is standing behind the institution, if not its every decision. The Democratic partisan class is going after right-wing Fed critics, while more liberal independents are pointing to the Fed in the 1940s and the Reconstruction Finance Corporation as a very different monetary model.

Not since the populist movement of the 1890s has there been this much discussion of monetary structures among the public, and so much dissent about how money is created and circulated throughout the economy. It’s happening for a reason. The public is now paying attention to finance. We did a focus group in Orlando last year, and one of the surprising conclusions was that nearly every independent voter knew who Ben Bernanke was. People don’t like the structure of our financial oligarchy, and they are talking about it. Even the deficit hysteria and the Fannie/Freddie GSE fights are a function of this monetary debate.

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

In 1989, Bill Greider published a remarkable book called ‘The Secrets of the Temple: How the Federal Reserve Runs the Country’ in which he described how Fed officials were the real decision-makers in the American political order. Shielded by the argument of ‘political independence’, most politicians wouldn’t and still won’t dare interfere with the workings of our economic structure, even though the Constitution clearly mandates that the monetary system is the province of Congress. The dramatic and overt coordination of this ‘independent’ central bank with the executive branch and the banking sector, and its flouting of Congressional and public scrutiny, have removed its institutional legitimacy.

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

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

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

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

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

The Reserve Banks are quasi-public and quasi-private entities owned by member banks. The New York Fed, for instance, pays dividends to JP Morgan, and has a .org web address. The Reserve banks are governed by Boards of Directors that are drawn mostly from the banking sectors of their regions, as well as large companies and the occasional union leader or university President. The Fed also has a large research staff, and funds most macro-economic monetary policy research. It is uncommon to find ‘credible’ economists in monetary policy who have no financial ties to the Federal Reserve banks. The Fed is actually one point of contention between the right-wing billionaire Koch family and the Ron Paul libertarians; the Koch’s are supportive of Federal Reserve-tied scholars, and Paul’s people are not (the Palin tea party had no involvement in the Audit the Fed fight, the Ron Paul tea party was the driving force on the right for that legislation).

This structure is the result of a political compromise in its inception, a holdover from the Wall Street-populist fights of the 1890s, the financial panic of 1907, as well as legislative shifts over 90 years. It is a deeply corrupt and indefensible system rife with conflicts of interest. The Reserve banks conduct a good amount of the regulatory work in our banking system. Their boards are staffed with bank leaders, and the President’s of the Reserve banks are actually hired by these bankers. Reserve banks even pay dividends to their bank members (attention Congresscritters who want to find a pay-for!). This ‘I’m a dessert topping and a floor cleaner’ identity allows Reserve banks – particularly the NY Fed – to intimidate courts and aide its allies on Wall Street.

Additionally, the Reserve banks aren’t subject to the same government policies regarding Federal wages, so they can pay higher wages and give lucrative and prestigious consulting contracts to economists. In one hearing in the 1960s, a Reserve Bank was busted for buying thousands of ping pong balls. That lack of accountability, while silly, was and is still the norm.

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

The list of failures goes on and on. But fundamentally, it is not corruption that is at the heart of the problem for this Fed system, it is a lack of democratic accountability. The Fed failed to stop the S&L crisis, the dotcom boom and bust, the mortgage boom and bust, and shoveled money to AIG with an overtly disdainful approach to the public.

Despite the best efforts of Fed allies, the center cannot hold. During Dodd-Frank, Chris Dodd and Barney Frank tried their best to protect the Federal Reserve, lavishing praise on Bernanke, and ultimately blocking the move to make the New York Fed President an appointed position. They did nothing about the egregious 14 year term, the banks appointing their own regulators, the dividends that go directly from the Reserve banks to private banks, the lack of ethics restrictions and pay scale restrictions, or the corruption of the macro-economics profession at the heart of the Federal Reserve’s research imperatives. Frank did not legislate out of malice; indeed he often expressed respect for democratic input into the legislative process, insisting for instance that the conference committee be televised. But ideologically, Frank took a Reagan-era liberal view that the goal of the banking system was to provide housing for the poor while protecting consumers’ rights. The rest of the capital markets structure was, as he put it in one caucus meeting, “rich people fighting other rich people”.

The new intellectual order dismisses this attitude as small bore. Institutionally, the environment has changed for the Fed and its traditional allies. Whereas at the beginning of the financial panic in 2007-2008, the Fed was a sole provider of expertise and credibility on finance to the political class, by 2010, the new financial blogosphere destroyed the Fed’s mythic stature. It is common for staffers to get more and better information from blogs, and for hearings to be driven by the conversation online, than from the Congressional liaison group at the Fed. Read this remarkable Q&A between Ben Bernanke and Senator Bunning during Bernanke’s confirmation hearing, which was a series of questions inserted into the record, questions largely drawn from bloggers. The public has changed its appetite as well. This YouTube clip of Elizabeth Coleman, the Inspector General of the Fed, was my boss’s most successful hearing appearance, and possibly the most consequential hearing put on YouTube, ever. Over 3 million people have now seen this official say that she wasn’t tracking where trillions of dollars have gone. I prepped Rep. Grayson for that hearing, and I used materials from the blogs to do it. Many members watched this hearing on YouTube, and signed on to the bill to audit the Fed as a result. And so tomorrow, we are going to get a peak at the Fed’s emergency lending activities from 2007-2010 because of this legislative activity.

Even before that, though, the Fed has become far more open and responsive to requests for information. We’ve already seen, via Maiden Lane disclosures, that the Fed has been lending money to random companies, like the Red Roof Inn, and buying up lots of toxic crap. We’re going to see a whole lot more. The conversation is no longer in the hands of the bankers.

This is a tremendous step forward. Of the many castle walls the Fed used to keep the rabble out, secrecy and complexity were critical. The Fed couldn’t keep its dealings secret, and financial bloggers are constantly explaining, explaining, and explaining. Those walls have fallen. A lack of public debate was another. That too has fallen. A monopoly of public information dissemination, via personal contacts between bankers and outlets like the Washington Post (whose owner in the 1930s was Hoover’s Federal Reserve Chairman), has broken down as well through internet communities.

Gradually, a new generation of politicians is gaining the confidence that the people themselves through their elected representatives should be making critical decisions about economic efficiency and banking. The Fed is adapting to these changes, building up its communication staff and doing town hall style meetings. Bernanke is on TV all the time, a far cry from the days when the Federal Reserve head simply refused to even brief Congress. In some ways, the hardest part of the fight is generating public debate, but that has been accomplished. The structure of our monetary system is now up for grabs.

As we move forward in this debate, it is important to understand that Sarah Palin is coming from a genuinely rooted tradition in American economic debates, from the era of the late 19th century, when Wall Street came together to finance railroad mega-corporations. Her argument is one against the mutability of money; she rejects the idea that money is a political object, because that implies that it is collective decision-making that determines property values and ultimately the social hierarchy. She believes in a natural and fixed social hierarchy, which is a very conservative idea deeply held by the business class.

Palin is using the lack of legitimacy of the modern Fed, the failed technocratic screw-ups and the elitist tendencies, to push for the equivalent of societal debtor’s prison. She is speaking for creditors, and many of the conservative forces within the Federal Reserve agree with her. It is important to understand that reflexively defending the Federal Reserve, which is what the Democratic establishment is doing, is a foolish and anti-populist attempt to pretend that the Fed is a legitimate decision-making body. It isn’t. It is powerful, but not legitimate.

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

Instead, let’s recognize that the Fed doesn’t fulfill either part of its mandate, and work towards a better and more plausible system of monetary stability. That’s not a longterm process, it’s a constant process. D’Arista argues that the Fed must connect itself to the shadow banking system and force credit to flow. This necessarily implies important changes in how the Fed interacts with financial services firms and entities. To give some idea of what this might look like, at least conceptually, Timothy Canova paints the portrait of a more democratic Federal Reserve financing the government debt during World War II. Cooperating with a phalanx of institutions, such as the Reconstruction Finance Corporation, and government boards that directed wartime rationing, the Fed was able to bring unemployment down to 1% and dramatically equalize economic opportunity and wealth-building for the middle class.

Another possible conceptual framework, though one that wouldn’t work today for obvious reasons, is the subtreasury plan put forward in the 1890s by the Populists, which would tie the monetary supply to real economic activity, in that era agricultural output. I’m not sure how to tie intrinsically worthwhile economic output to the growth of the money supply, but it should be quite obvious that growing money to help credit default swap traders is a deeply corrupt way to think about how we as a society should define money.

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

Leaving aside whether the Fed made a good decision on that particular regulatory decision, this is no way to run a legitimate institution in a democratic society. With a loss of legitimacy comes a lack of public trust and a vulnerability to any form of critic. The Fed is now less respected than the IRS. And so, Sarah Palin has her opening, as do the conservative hard money creditor interests.

Liberals should stop their love affair with conservative technocratic myths of monetary independence, and cease seeing this Federal Reserve as a legitimate actor. At the very least, we need to begin noticing that these people do in fact run the country, and should not. We must also begin to internalize the new forces of openness and rethink how a monetary system can function in an internet-enabled society. This will require thinking about Fed 2.0 from the perspective of the social web, as well as building upon the increase in transparency being forced on governing elites by such groups as Wikileaks. The top-down backroom system just won’t work if it relies on retaining secrets between Bank of America and the Fed that a third party or a court can release. The Fed can’t print its way out of a public that has lost faith in the banking system and the dollar. If we rethink money creation properly, however, we will be able to remove money creation from the hands of the oligarchs, and strike deeply at the uncompetitive nature of the American political economy. I do not know how to do this, but it is possible.

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

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

From p. 754 of Dodd-Frank:

(c) PUBLICATION OF BOARD ACTIONS.—Notwithstanding any other provision of law, the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities pro- gram, foreign currency liquidity swap lines, and any other program created as a result of section 13(3) of the Federal Reserve Act (as so designated by this title)—
(1) the identity of each business, individual, entity, or foreign central bank to which the Board of Governors or a Federal reserve bank has provided such assistance;
(2) the type of financial assistance provided to that business, individual, entity, or foreign central bank;
(3) the value or amount of that financial assistance;
(4) the date on which the financial assistance was provided;
(5) the specific terms of any repayment expected, including
the repayment time period, interest charges, collateral, limitations on executive compensation or dividends, and other material terms; and
(6) the specific rationale for each such facility or program

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  1. attempter

    End the Fed. Not “this” fed, but the Fed. The thing serves no legitimate purpose. We all know the government should directly issue money, and that the only reason for it not to do so is to give the private bank racket its main rent extraction role. We all know the Fed is a proven failure at eveything it’s supposed to do. By definition anyone who wants to keep the Fed is an extremist advocate of Wingnut Welfare. Has anyone, anywhere, failed as consistently as the Fed?

    Another possible conceptual framework, though one that wouldn’t work today for obvious reasons, is the subtreasury plan put forward in the 1890s by the Populists, which would tie the monetary supply to real economic activity, in that era agricultural output.

    I’ve long been 100% serious in advocating exactly the subtreasury plan as a model for what we can, should, and must do. I’m sorry, but the alleged reasons it wouldn’t work are not at all obvious to me. Can someone explain them more clearly?

    The only thing obvious to me is the cowardice of most people who claim in theory to want real change, but shrink from any proposal which could possibly work, or which could possibly help smash the banks.

    The answer is indeed to absolutely reject liberal elitism, but aggressively replace it with something just like the Populist plan the post cryptically disparages. Together with MMT and other educational tools, this time we might have a better shot against the hard money hacks. This is especially imperative when we see how maintenance of the Fed-based system, the “austerity” offensive, and the nascent calls for a gold standard are all elements of the same bankster assault on the people. Fighting one has to mean fighting all.

    Since politically the Fed may be the fat target, and one which may help split the conservatives, as the post describes, that looks like a good line of attack.

    End the Fed, and have the government issue productive money, Main Street Money. No more phony funny Wall Street money.

    1. Frank Powers


      Well, yes – economics as a profession. (I wouldn’t dare to call it a “science”. Physics might be listening. Hell, even Psychology would be enraged, and rightfully so.)

      And then, there were these people called “politicians”…
      But I get your point.

    2. Frank Powers

      Quote: “Has anyone, anywhere, failed as consistently as the Fed?”

      Well, yes – economics as a profession. (I wouldn’t dare to call it a “science”. Physics might be listening. Hell, even Psychology would be enraged, and rightfully so.)

      And then, there were these people called “politicians”…
      But I get your point.

  2. Matt

    The Fed is the symptom, not the disease. MMT and government issued money may have a chance. Until the debt is money cycle is broken we are debt slaves.
    Replacing the Fed with a system where banks create money by issuing debt leaves us exactly where we are now.

  3. Ellen Anderson

    Straight line resource-to-waste industrial economy has to go. No sense in setting up a more rational way to destroy the world.

  4. cs

    End the Fed’s monopoly and let the people transition to what they want to replace it with – HR4248 (Free Competition in Currency Act).

    1. Ignim Brites

      A constitutional right to buy and sell gold and to trade with gold would go a long way towards liberating the nation from the FED. It would not, of course, provide us with a collectively determined money. Whatever that would be. Perhaps something like the old Soviet money which lead to the joke: “They pretend to pay us and we pretend to work.”

  5. Rex


    Great article, but I think all of the links in it are broken. Most of them contain the correct link but are preceded by a NC tag that leads to a 404 error. Some have only the the NC tag, so it is impossible to get to the correct link, even with editing the URL.

  6. dave

    Its a nice post and all, but can we take anyone that criticizes Volcker’s efforts in the early 80s seriously? It was painful, I get it, but if he hadn’t beaten double digit inflation things could have gotten very out of hand in this country.

    Arguments like this are why people worry about left wing Fed reform and why the “independent” Fed argument gets so much credence. I would like a more democratically accountable Fed who took its regulation job seriously and didn’t put bankers interests first, but I don’t want that to turn into bleeding hearts keeping rates too low because they think with their emotions rather then their heads.

    1. Rex

      Well heck yeah, Dave. Why should anyone consider rocking the boat when the Fed has been doing such a terrific job of keeping us out of trouble and then immediately fixing the few tiny problems that eventually crop up?

      Or was your post satire?

      1. dave

        I don’t think the Fed has done a good job. I think its been making wrong decisions for decades. However, beating inflation in the early 80s wasn’t one of them. People who criticized Volcker at the time now seem laughable, and beating the inflation of the 70s is probably the greatest policy triumph of the last few decades.

        1. tar, etc.

          Clearly you didn’t read “Secrets of the Temple” that presented the Fed’s record in detail. Not only has the Fed been consistently wrong in its economic assessments, but one of Greider’s main points was how the Fed made some people pay a horrific price for its cure.

          Perhaps you were among those who benefited – possibly east coast, maybe in the booming finance sector. If you were one of the fly-over people who lost everything, you might not remember Volcker as a saint, although, I must admit that the Reaganites came off as more incompetent than the Fed.

          1. dave

            There are a lot of reasons manufacturing areas declined in the last few decades. I can assure you that double digit inflation would not have helped the situation. Plenty of countries have managed to maintain manufacturing bases without runaway inflation. This country had its huge post war industrial boom under the tame inflation of the 50s and 60s.

    2. Matt Stoller

      I suppose you supported Volcker’s secret bailout of the national banks during the Latin American debt crisis, too. Very hard-headed.

      1. dave

        No, I don’t. However, I do support his decision to beat inflation by clamping down on growth in the money supply.

        1. Jason Rines

          The reference to the Unions and Volker was a political talking point. The Author was the advisor to Alan Grayson. I didn’t intepret it as a slam on Volker’s interest rate policy.

          1. dave

            Perhaps we can keep vague partisan talking points out of serious policy discussions if one wants to be taken seriously.

        2. Greg b

          See here is where you go off the tracks. Volcker didnt suppress the money supply he made savers wealthy as hell with high interest rates and crushed borrowers. The fed is in capable of changing money supply since they only affect interest rates. Only the treasury can change the supply of money.

          Many people had a vast increase in the money available to them by getting double digit on govt bonds, didnt have to work an hour for that either, while others paid 500,000 for a 100,000 dollar house over 20 years.

          This obsession with wage inflation is not good for the worker. I want inflation. Give me wage inflation every three years. Screw the savers! If you want something get it now. There should NEVER be an impetus to punish workers just so savers can get what they think are their just rewards……… NEVER.

          1. dave

            After a decade of having their savings stolen through negative real rates the only way to stop inflation from spiraling out of control was to reassert positive real interest rates. Since the Fed blew its credibility in the 70s it took very high real rates for a few years to restore it. Simple.

    3. Externality

      Why not explicitly limit the Fed to simply setting interest rates and a ministerial accounting role? The Fed’s regulatory functions could be transferred to the Treasury Department, FDIC, etc. The Fed would be permanently stripped of its ability to do another AIG-style bailout under 13(3) of the FRA act, set up SPVs such as Maiden Lane, buy mortgage backed securities, or buy junk paper in violation of its charter.

      The ability of the Fed to spend trillions of dollars without a congressional appropriation, or even congressional or presidential oversight, is both unconstitutional and incompatible with even a semblance of democracy. Even more disturbing is the way that Congress was threatened with martial law unless it passed TARP and acquiesced to the Fed’s actions. Would anyone tolerate some obscure board in the Pentagon deciding to bypass Congress and the White Houe, appropriate and spend trillions to bailout the defense industry, and threaten martial law to get its way? Would anyone tolerate the Transportation Department doing this? If not, why would anyone allow the Fed to do this?

      1. dave

        I don’t support any of those things. I’m making myself pretty clear here, I support the steps Volcker took to control the money supply and beat inflation. Those steps were painful but necessary. They stand as the greatest modern era example in favor of an independent Fed. There are lots of examples of why an unaccountable Fed is bad, but if we can’t separate between the good and bad things the Fed has done we can’t move the debate forward.

        Left wing criticisms of the Fed and our monetary system tend to have a lot of good points. But they tend to be way to utopian as well. One of the worst examples of it is criticism of Volcker’s inflation fighting as unnecessary. It was certainly necessary. I have a hard time trusting anyone who can’t see that with the power to create money.

        1. alex

          Since Externality said that the Fed should be able to control the money supply (interest rates), where’s you disagreement with him?

          I like Externality’s suggestion. There is merit to the idea of a monetary authority independent of short term political considerations, but the Fed has become a shadow government. Moreover even the setting of monetary policy should be done with more than just the banks in mind.

      2. DownSouth

        Externality said: “Would anyone tolerate some obscure board in the Pentagon deciding to bypass Congress and the White Houe, appropriate and spend trillions to bailout the defense industry, and threaten martial law to get its way?”

        Well I think the Pentagon comes pretty close to what you describe. This from Monday’s “Links”:

        Is this just a fantasy? A pipedream of a bunch of unbalanced, angry and frustrated neoconservatives?

        I wish I could tell you that it is. Sadly, it is much more. For example, we now have nearly 1,000 U.S. military bases in other countries. We have the troops and weapons in place to act anywhere in the world. The Bush administration maintains publicly that it has the authority to do so. The previously operative law, the War Powers Resolution (P.L 93-148 of 1973), which was passed by Congress over the veto of President Nixon, limits the president’s authority to commit American troops into hostile situations and requires him “in every possible circumstance” to consult with the Congress before so doing. In the aftermath of the September 11, 2001 attacks on the World Trade Center and the Pentagon, President Bush convinced the Congress to grant him full authority (P.L. 102-1 of September 18, 2001) to “use the Armed Forces of the United States as he determines to be necessary and appropriate in order to (1) defend the national security of the United States against the continuing threat posed by Iraq; and (2) enforce all relevant United Nations Security Council Resolutions regarding Iraq.” President Bush has taken the position that this resolution gives him even wider authority over anywhere he deems a threat to exist. With this in mind, the Department of Defense, under Secretary Donald Rumsfeld, created a special secret force, said to number 55,000 men with a budget of about $80 billion, which does not have to report to Congress or even to civilian representatives of the Government, the ambassadors, but is authorized to carry out assassinations and even to overthrow governments. Members of this force were active in the Somalia invasion and are already said to be involved in covert activities in Iran. We learned on September 11, 2008 that some of them had been sent into Pakistan despite the refusal of its government to allow them.


        We must demand government transparency and accountability. Today, the non-partisan Congressional research organization has publicly admitted that it cannot find out how the Defense Department spends out money. Congress does not even demand that testifying officials take an oath to tell the truth, and all they get asked for are sound bites. The pathetic testimony of General David Petraeus is a good example. He never gave a clear answer to a single question on American overseas military actions, pathetic as the questions he was asked were.

    4. fladem

      And so the left, utterly confused and cut off from any real understanding of economics, enables the right.

      It is truly remarkable. If you read Krugman or Stiglitz, both will in large measure praise the Fed’s response. Were there were mistakes: absolutely. Did the Fed get enough for its money? No. But the basic truth is that absent their action we would be in a global depression.

      In fact, anyone with a basic grasp of modern economics knows that a consensus has developed around the Great Depression. From Friedman to Krugman, we know that the contraction of the money supply played a significant role in deepening the Great Depression. Those on the left add to that understanding the necessity of fiscal stimulus.

      This is a hard won understanding, and it helped avoid a Depression this time. A Conservative Republican pursued an expansionist money policy. That is not a sentence that would have been written 50 years ago.

      The “populist” conservative forces are outraged because government intervention worked. A Great Depression was avoided – and in so doing the Austrian nonsense they have been touting for decades lies in ruins.

      They cling to their “populist” understanding of the Fed the way they deny global warming. Damn the evidence. Damn the fact that virtually every other country in the world has an independent monetary authority.

      The fact the FED reaction pretty much disproves Austrian economic theory seems beyond the dreamers of a “transpartisan coalition”.

      Some on the left, dream of a “transpartisan coalition” with these idiots. As bad as some of Obama’s deals have been, this is worse.

      The Palin’s in the world don’t care. Government, to them, is an evil and contrary evidence to the contrary must be disposed of.

      I expect it from the them.

      I don’t expect us to be enabling it.

      1. KnotRP

        fladem seems to think the Depression has been averted.
        I submit that it’s only been deferred, in exchange for letting
        the problem grow bigger and meaner.

  7. F. Beard

    If we rethink money creation properly, however, we will be able to remove money creation from the hands of the oligarchs, and strike deeply at the uncompetitive nature of the American political economy. I do not know how to do this, but it is possible. Matt Stoller

    Why must we fight over a single money supply? The government should have its own money supply that would only be legal tender for government debts (taxes and fees), not private ones and the private sector should be free to develop private monies that are only good for private debts not government ones.

    The above should allow government to tax the economy without distorting it via monetary policy. A win, win for for both the economy and the government. And a big win for alternative private monies such as common stock.

  8. DownSouth


    A brilliant, multi-disciplinary performance that goes a long way to demolish the myth that economics, politics and culture can somehow operate independent of each other.

    Here’s the part that caught my eye:

    This structure is the result of a political compromise in its inception, a holdover from the Wall Street-populist fights of the 1890s, the financial panic of 1907, as well as legislative shifts over 90 years. It is a deeply corrupt and indefensible system rife with conflicts of interest.

    This begs the question: Can such a deeply corrupt and indefensible system be reformed?

    If we subscribe to the political and theological philosophies of the disciple Paul, St. Augustine, Tolstoy, Max Weber, Frank Knight or NY Times columnist David Brooks, the answer is a resounding “NO”. But fortunately there are those who do not subscribe to the doctrinal teachings of these particular sects of historical determinism or Christian passivism. Amongst the dissidents is Amitai Etzioni:

    Max Weber, a sociological giant, argued that once a society’s moral foundations deteriorate they will continue to crumble. New societies rise out of the ashes of old ones, not through the rejuvenation of decaying ones. This sociological thesis is reflected in several well-known historical studies about the rise and fall of regimes such as the Third Reich, the decline and fall of ancient Rome (or the capitalist West, in Paul Kennedy’s account, which should have been written about the Communist East). It is much more difficult to find a magnum opus about the decline and rise of well-known societies. In effect, we are mainly aware of cultures that deteriorated without reviving, including those of ancient Greece, Babylon, Egypt, and the Aztecs. ..

    My interest here, Max Weber notwithstanding, is which conditions and processes may make possible a regeneration of the moral order of societies that have lost it.
    –Amitai Etzioni, The New Golden Rule: Community and Morality in a Democratic Society

    And fortunately, history has provided two excellent antidotes to the doctrines of St. Paul, St. Augustine, Tolstoy, Weber, Knight and Brooks in the persons of Gandhi and Martin Luther King, Jr. Instead of withdrawal and retreat from governmental and worldly affairs into a well-fortified bunker of the self, they urged joining battle in the public arena.

    So I think there are great insights to be gleaned from men of action like Gandhi, MLK, Alan Grayson and you. There is certainly much to be learned from reading, studying and theorizing. But there is also much to be learned by doing.

    1. lambert strether

      I like the article. I think that both Grayson and Stoller have a ways to go before they’re classed with Ghandi and MLK. Which is no knock on either of them — I’m thinking that both those world-historical figures were supported by strong networks, and their strategic thinking spanned decades. The left is just starting to be able to do either, after a generation of destruction starting at least with Reagan.

  9. weinerdog43

    Matt, GREAT and timely article. I beg you to cross post this at Zero Hedge. While it is a bastion of Libertarians, your post would do wonders for showing common cause on a worthy project.

  10. Mob Dodd

    Tame, too tame, written as one would expect by a political operative. ‘Organized crime, fraud, outright criminality, theft, illegitimate authority, tyranny’ – those are words with power. Bernanke is either the most incompetent son of a bitch in the world, or like so many others in DC simply didn’t have a goddamn clue, was criminally negligent, or are simply on another plane of reality and refuse to see citizens heads being shoved into the ground by financial violence.

    The author uses words like “intellectual gravitas”, I prefer conspiracy at the expense of millions of people in this country. Kudos to Grayson but he’s gone now.

    1. reprobate

      You praise Grayson and criticize Stoller? Who do you think did much if not most of Grayson’s policy thinking? Look like he’s done his homework on the Fed and then some, Grayson’s positions didn’t come out of a vacuum.

      1. lambert strether

        Well, there’s no point arguing without evidence. Who has links to Grayson on “Organized crime, fraud, outright criminality, theft, illegitimate authority, tyranny”? Anybody?

  11. AR

    In order to find the intended links in this article, all you have to do is right click your mouse with the cursor hovering on this page, and then click ‘view source’. Then do a search for each of the phrases that are hyperlinked. This will take you to the intended link embedded in the text with the ‘a href’ HTML code!

  12. Ed Beaugard

    You wrote:

    “The structure of our monetary system is now up for grabs.”

    Good luck with that! Even if the Fed is made more open and democratic, have you considered that that may not change things all that much?
    I submit that this is a possibility since the real problem is bad ideas, not so much secrecy, or conflicts-of-interest.
    As an example of a bad idea, if you believe in the Green approach to global warming, that is reducing everyone’s carbon footprint, then you have no basis on which to argue for an improvement in people’s living standards. The Green approach to global warming means: reduction in wage levels, no unions, less social services, higher poverty levels, etc. since carbon emissions reduction is the goal, is that not right? So, according to the Green view, Paul Volcker’s effort to drive down the wages of working people in the early 1980s is a good thing, since that means ordinary people consumed less and polluted less, right?
    Sadly, this incredibly misguided view dominates the Democratic Party and the so-called “Left” in general, making any real resistance to austerity a non-starter for the most part.

    1. Ellen Anderson

      ” if you believe in the Green approach to global warming, that is reducing everyone’s carbon footprint, then you have no basis on which to argue for an improvement in people’s living standards. The Green approach to global warming means: reduction in wage levels, no unions, less social services, higher poverty levels, etc. since carbon emissions reduction is the goal, is that not right? So, according to the Green view, Paul Volcker’s effort to drive down the wages of working people in the early 1980s is a good thing, since that means ordinary people consumed less and polluted less, right?”


      However, if we keep on trying to preserve the industrial model there are many people (I will not characterize them as ‘left’ or ‘right’) who believe that there will be no human race at all. Comments like yours try to paint such people as leftists and/or elitists.

      This political/financial system is going to collapse whether you like it or not and you would do better to think about how whatever is left can be distributed more equally and how the remnant can take advantage of all of the knowledge that we have accumulated over the past 300 years.

      Also, who can possibly think that the financial system can or should be insulated from the political system? They are completely entwined.

      Lynn Harding

      1. Septeus7

        You are confusing the collapse of the financial system with industrialism itself. They are not the same.

        Malthusian/Luddite Greens want to reduce industrial power i.e reduce humanity power for production. Industrial development isn’t the problem. The problem is the power structure that supports the FIRE sector that actually reduces investment in industry because of it’s rent seeking nature.

        The problem with the Green is that they want to keep enough rent seek for the FIRE and Government sector to prevent industrial development. True Freedom lovers wish to banish monopoly rent entirely and free humanity to higher and higher platforms of cultural and physical development (development isn’t the same as growth).

        Malthusian Greens want to imprison humanity on Earth under a authoritarian regime of population control and “resource” management and production lock-in called “sustainability.”

        The reality is that only thing that isn’t sustainable is idea of “sustainability” itself because the universal constantly changing and therefore the only sustainable course is to orient toward constant development.

        The Malthusian Green movement is the product of British Imperialism in India under the guise of the so-called “science of forestry” where the British drove the Indian population off their lands and blocked them from using the forests for sustaining themselves during famine of 1876-1878 which was caused the imposition of “free trade” by British in gain markets which collapse domestic production. The result was that 6-10 million Indians where starved to death.

        Oligarchy from the time of the ancient Greeks has used “Mother Earth” religions protect their power and today is no different. Calls for energy austerity and sacrifice by the people while Elite pig out as much as they want are fundamentally no different from austerity in the forms cuts to social programs, education and public infrastructure.

        In fact, I think we will see an alliance between the Malthusian Greens and the Deficit terrorist on issues of high tech infrastructure like high speed rail, trans-aqua and irrigation projects, large scale hydroelectric and new dams, plasma converter based waste management, alternative fuels from plastics, advanced thorium based nuclear power, fusion research, and hundreds other kinds of “expensive” and “high energy” technology.

        Instead the only investment will be in useless solar and wind farms which create an urban heat island effect, kill insect populations, increase noise pollution, are fire hazards, and increase the price of electricity.

        I hope someone does for Solar and Wind what “Gasland” did for “clean and green” fossil (natural) gas.

  13. Paul Tioxon

    A main feature of the landscape of the social order of America is the great number of associations that citizens were forming, joining and operating to further various political, economic, cultural goals. The Masons, which have a huge temple, right across the street from city hall in Philadelphia, was a society which cut across all religious and political persuasions in Colonial America. Its membership is clearly on display in the public museum it operates daily for the public. Aside from the most famous of the founders of our republic were many prominent, but less studied members. These members and their various local Masonic organizations formed the backbone, an academy of political, business, religious, scientific, educational leaders who occupied almost every important public office as well as private enterprise throughout the early American social order. This of course was obvious to who were not in the club. In an early study,”The Anti-Mason Party: A Study of Political Anti Masonry in the US 1827-1840″,by Charles McCarthy, a counter movement, located in the fundamentalist protestant churches of the day, beat back the influence of Masonry in our society almost to extinction. These early attacks were similar to subsequent movements against elitists. What is striking to me, is that these elitists were among the closest relatives, friends and associates of the most esteemed patriots who fought the British Empire and gave us the republic. Apparently, this contribution did not impress other citizens who wanted to savor the fruits of liberty, commerce and prestige and saw a class of tightly associated Masons as a barrier to a better future for those and theirs.

    Subsequent battles of populist, farmers, trade unionist, women voters, civil rights activists, anti war protesters and more have transformed the nation to what we have today. I would hope that the ridiculous assertion that power is not well understood that headlines this post would be laughed at for what it is, nonsense. But, I forget that there seems to be an astounding outpouring of new found rage and world weariness from so many of the comments here. Of course, PoliSci departments are the ideological mates of the classical economics departments. If they ever told us more than how many gay precincts were voting republican in the suburbs, they would be banished to working at 4 community colleges, in 3 different counties just to make $8.75/hr.

    Power is discussed in diplomatic history for starters. It is also studied in many planning departments. If you want to see local power at work, put up a zoning notice for a variance in your neighborhood for a pool hall, or nail salon or a mosque, and watch democracy in action. Most amazing of all, power is quite openly studied on a regular basis within the federal government, as the nice clip from Mr Grayson shows.

    Here is one of my favorite GAO reports, that reports that 2/3 of all American corporations pay no federal taxes at all from 1998-2005. This study was done at the instance of 2 Dem senators. Now, no taxes, that looks like power to me.

    But, anecdotal items are hardly a replacement for a solid, academic overview. I would suggest Immanuel Wallerstein.

    I can not urge people enough to visit this site:

    Who Rules America?, the title speaks for itself, by William Domhoff.

    Finally, Perucci and Wyssong, “The New Class Society”.

    Because we are a point in history, where the event to be measured can at least be observed, the hollowing out of the middle class and the de-industrialization of America are painfully obvious. But, there are reasons and analytical tools that are available, and we do not need to be mystified by pronouncements such as the Fed is an enigma, wrapped in secrecy, disguised as a crossword puzzle, written in invisible ink. After all, we have a division of labor, we are society of specialists, and micro specialists. There are a lot of secrets that are not secrets, it is just not something that a well paid academic career can be built upon and it certainly will not lead to abundant face time on msnbc. Just ask Norman Finkelstein.

  14. Toby

    If we rethink money creation properly, however, we will be able to remove money creation from the hands of the oligarchs, and strike deeply at the uncompetitive nature of the American political economy. I do not know how to do this, but it is possible.

    Please at least get in touch with the American Monetary Institute, if you haven’t already. They have a mature plan — recently adopted by The US Green Party, and Kucinich is also on board — to do just that.

    Thank you for a very thoughtful article.

  15. Doc Holiday

    Re: “collusive dealings with Goldman Sachs”

    I had to stop reading right there, because I see no collusion — just an outright open partnership that involves DOJ, FTC, SEC, FBI, Homeland Security…. blah, blah, blah… I see no reason to sugar-coat this partnership as a behind closed door orgy that is some secret relationship.

  16. Don

    If the author happens back, please ask your boss to ask just one question of one person for me: “Mr. Paulson, while you were CEO of Goldman Sachs in 2006, did you know how your company was making money?”

  17. John Merryman

    In nature, the circulatory system precedes the evolution of the nervous system. Money, an economic medium, is more fundamental than government. Those who control that medium own the economy. Eventually we will have to make banking and money a form of public utility and public commons. Monarchists thought monarchy was indispensable, but it became more trouble than it was worth and we had to make political power a public trust. Now we have to do the same with private banking.

    Money serves as a store of value and a medium of exchange. As a store of value, it is private property, but as a medium of exchange, it is a public utility, without which markets cannot exist. As property, there is the desire to accumulate as much as possible, but as a medium of exchange, more money than productive value degrades the value of the money. Money should only be treated as a public utility. In that way, it would be similar to a road system. You own your car, house, business, etc. but not the roads connecting them and no one seriously cries socialism over that. The fact is that money already is the property of the government. Just try printing some and see who owns the copyrights. By creating the misperception that it really is personal property, society is careless as to how money ingratiates itself into every possible transaction and this gives that much more power to the banking system and the government. Treating money as form of public commons would make people very careful what value they would take from social relations and environmental resources to convert into currency in the first place. This would be healthy for society, the environment and even the monetary system. We all like having roads, but there is little inclination to pave more than we need. If we applied the same principle to money, life would be in better shape. Instead of valuing ourselves by how big our bank accounts are, we would have to invest more of our efforts in our communities and environment, as well as being able to maintain resources for the future.

    If banking became a public function, it would have to be bottom up. Local credit unions would use local deposits to loan to local enterprises and use the profits to fund local needs. They would then form regional banks for broader investments and managing the currency. This local governance would limit the amount of regulation that would otherwise be required of a top down, national banking structure. As with any structure, the strength must be in the foundation, not the bulk of the proportions.

    In this system, savings above a certain level would start to be taxed at a progressive rate. Savings are like fat to the body. Necessary in some amount and evenly distributed. Supportable to a larger amount, but beyond that, increasingly unhealthy. So this would encourage people to put their efforts into building stronger communities and healthier environments, which are far more conducive to the actual security savings are supposed to provide, than numbers in a bank account would, when the streets are unsafe.

    Federal spending is designed to overspend, because there is no budgeting process. Budgeting is to list priorities and spend to the limit that can be afforded. Instead we have a system where the leadership puts together as big a budget as they can possibly get away with, then add whatever it takes to coerce enough of the less powerful legislators to vote for it. Then the president’s only option is to pass or veto it in whole. The result is inexorable debt growth. The private banking system then lends the money the government guarantees in the first place, back to it. Pattern seem familiar? Run up the debt, foreclose on the property? Ring any bells? The next step is having the government sell off public property to these private interests, for the same money the government guarantees.

    In the spirit of actual budgeting, a possible solution would be to break the spending bills down to their constituent items and have every legislator assign a percentage value to each item and then re-assemble the bills in order of preference. The president would draw the line at what would be funded. This would divide responsibility, allowing the legislature to prioritize, while giving the president final authority over total spending. Since making the cut would be graded on a curve, there would be much less incentive to trade favors and the percentage system would allow legislators to fine tune their granting of favors to other legislators and lobbyists. As the particular items at the cutoff line would have a far smaller constituency than those being asked to fund them, there would be limited political motivation to overspend. A local public banking system would cover much of the lost federal funding of local projects.

    As for how Volcker cured inflation with higher interest rates;

    Loose money policies start inflation, but higher rates only reward those with money to lend, while punishing those wishing to borrow it. How do you cure an oversupply, by hurting demand? By the Fed’s own logic of selling debt, surplus money is in the hands of those with a surplus of wealth. Seems quite simple, but also understandable why those with the money and power would wish to obscure the logic.

    What is the difference between the Fed selling government debt it is holding and the Treasury issuing fresh debt? The Fed simply withdraws that money from circulation and pays the holders interest for the privilege. On the other hand, the Treasury spends the money back into the economy, mostly in ways which tend to encourage further private sector investment. This not only serves the same function as the Fed’s borrowing, but has a multiplier effect in the need for private capital. So it was quite likely that deficit spending was a major factor in curing inflation.

    It has been preached for decades that the wealthy create jobs and they shouldn’t be taxed heavily. Now if someone is making lots of money and using it to invest back into their own business, this is true, but if they are investing on other businesses, it is those businesses which are growing the economy. The lender is the fuel tank and the borrower is the engine of economic growth. Capital is subject to the laws of supply and demand and it is demand which determines how much wealth the economy can support. Unfortunately those with the wealth have more political power than those wishing to borrow it, so the supply grows while demand is squeezed at every opportunity.

    What has fueled the bubbles of the last few decades hasn’t been irresponsible borrowers, but those needing to invest more wealth than the economy can support. So not only does the banking system lower its standards, but creates enormous circulation bubbles of derivatives. When this money can be borrowed into existence at rates lower than speculative growth is increasing value, a feedback loop is created and enormous amounts of money/debt are created to feed it. Eventually “providing liquidity” creates a flood that washes away any viable financial system. It then becomes impossible to actually invest in productive purposes and one can only try to guess which bubble will blow up next.

    The conversation of what will replace the current system will continue to grow and take on more meaning, as the situation continues to deteriorate.

    John Merryman
    Sparks, Maryland

    1. Doug Terpstra

      Great post, John. Your points about treating banking as a public utility are similar to Attempter’s above:

      “End the Fed, and have the government issue productive money, Main Street Money. No more phony funny Wall Street money.”

      I suppose the rub is in how you incentivize risk and reward real merit; bureaucracies (central committees) can be as corrupt and self-serving as banksters. A real democratic meritocracy seems to be an elusive unicorn.

      1. John Merryman


        I do think banking and government have to be kept somewhat separate, but that doesn’t mean both can’t be public utilities. As I pointed out, the monetary system is society’s circulatory system, while government is its central nervous system. In plants they essentially function as one, just as in more basic societies.

        While government needs some executive function, banking might work better from the bottom up. Cities, towns and larger counties could have fairly self sufficient community banks and these would invest local savings back into local businesses and form regional coops for regional investments.

        While voting for government positions is a right of citizenship, I think voting for bank leadership should be reserved for taxpayers. This would go a long way toward tying the responsibility of paying for society’s upkeep to the right of deciding who runs the system.

        I spend a bit of time arguing physics and a point I like to make is that ultimately energy dictates information, not the other way around. This applies to society as well. Power determines laws, not the other way around. If we want society to serve its citizens, and not just those at the top, we need ways to productively channel the energies of an educated and engaged citizenry, otherwise the situation will spin out of control.

        Too much control and it’s North Korea. To little control and it’s Somalia. We want to keep some form of happy medium.

        1. attempter

          North Korea and Somalia are simply flip sides of the same coin. Somalia is what you get when extreme state capitalism like in North Korea or today’s US collapses.

          Somalia is nothing but capitalism taken to its extreme. (And has nothing whatsoever to do with anarchism, although that seems to be the standard Luntz-approved smear.)

          1. John Merryman


            They may be flip sides of the same coin, but it’s a fairly fat coin.
            Capitalism and free markets are not the same thing. Markets require a medium and when one party controls that medium, the market is subservient to that party.
            Markets are an ecosystem, with individual economic entities as the organisms competing in it. There are also ecosystems within organisms, such as in the gut.
            With Capitalism, the rest of the economy is an ecosystem within the gut of the financial entity. One has to only look at the actions of the last two years to understand the degree to which banking owns the economy.
            Power as a public trust does require some give and take and can be fairly a fragile contract. Ancient Athens was a democracy prior to the tyrants, as Rome was a republic before the Caesars.
            As much as we aspire to ideals, the reality is that we rise and fall from essentials.

          2. attempter

            With Capitalism, the rest of the economy is an ecosystem within the gut of the financial entity. One has to only look at the actions of the last two years to understand the degree to which banking owns the economy.

            That makes me think of how the productive people with their real economy need to burst out of financialization’s gut leaving it shredded and dead, like in Alien.

            (Sorry to be gross.)

          3. John Merryman

            It is a bit gross. Think what was involved to bust out of the gut of the private political corporations, aka, monarchies, which took from the American Revolution through World War One. If you study the history of private banking, it is very much a product and holdover of that process.

            The term for someone who sucks the life blood out of the circulatory system is vampire.

      2. attempter

        I suppose the rub is in how you incentivize risk and reward real merit; bureaucracies (central committees) can be as corrupt and self-serving as banksters. A real democratic meritocracy seems to be an elusive unicorn.

        I know this part (as opposed to getting rid of the banks) isn’t easy to set up.

        But for example the subtreasury idea dismissed in the OP would have based government issue on the loans farmers required at the beginning of the season, and would then have discharged those loans at harvest. (No speculators or rent extractors involved at any stage.)

        Under those conditions, it would be difficult for the money supply to become too untethered from agricultural productivity.

        Macune wanted to extend the idea to industrial coops as well, although I’m unclear on the details.

        But in principle it’s not hard to see how the thing would work, if we had the political will to do it. That, of course, is the only obstacle.

  18. Bill Greider

    Dear Matt — A noble contribution to the malformed debate over Fed power (and thanks for mentioning the Temple). Can you contact me? I don’t know how to reach you now that you are back in the ranks of private citizen. We have urgent things to discuss. Congrats and best regards, Bill Greider

    1. Fractal

      Wow! The real Bill Greider! Can you tell us where are you writing, publishing, blogging or otherwise available?

  19. Doc Holiday

    Sorry, I can’t shut up … Re: “the lawyer behind the whore-like Inspector General Elizabeth Coleman”

    It is interesting to watch the choreographed synchronization between
    the lawyer nods and the well rehearsed responses from the whore-like Inspector General Elizabeth Coleman. Without a doubt, this Kabuki Theater is the normal chess game challenge that takes place during this retarded match between people that are “in congress” and people that are “in the mafia”. The line between these two actors is like the layer in-between Corexit and oil…. and in this age of nano biotech, I’m sure the relationship is far closer than anyone can imagine!

    This does give me hope that there will be endless entertainment out there like this, where one can watch Golden Globe performances from the past, or perhaps watch real-time dramas on-the-fly, kinda like the BP oil spill cam. I’m obviously already excited about finding new clips to share…. ROTFLMAO.

    I hereby submit a request for a contest for the Best Performance by a lawyer at a Congressional Hearing, Best Performance by Congressional Page, Best Supporting … never mind.

  20. Doc Holiday

    Probably not related to the whore-like Inspector General Elizabeth Coleman…. but I wonder if she looked at any transactions between Goldman and ….. never mind. I mean gads, she must bump into these people in her office from time to time…. or have a cell phone, or maybe she doesn’t actually do anything besides rehearse for performances… who can say?

    Re: “Goldman Sachs used the Term Securities Lending Facility 52 times, Citigroup used it 65 times, and Morgan Stanley used it 34 times. The Term Securities Lending Facility loaned Treasury securities to certain investment banks for one month in return for pledged collateral. The program was aimed at boosting confidence in those firms. TSLF was closed on Feb. 1, 2010.”

  21. Associated Pressing

    WASHINGTON – The Federal Reserve revealed details Wednesday of more than $3 trillion in emergency aid it provided to U.S. and foreign banks during the financial crisis.

    Newly released documents show that the biggest recipients of aid in the U.S. included Citigroup Inc., Morgan Stanley, Merrill Lynch, Bear Stearns, Bank of America Corp. and Goldman Sachs & Co. Among the largest foreign bank recipients were Bank of England, Swiss National Bank, Barclays and Bank of Japan.

  22. acat


    Keep on , you have it down pat. What passes for public info would never fly in an Oliver Stone rant of the most paranoid kind.

    When I dare to turn on the “hearings” , etc. I just bust out laughing.

  23. Matt

    Republicans whining about monetary policy are like firemen telling a homeowner whose house is on fire that using the kitchen extinguisher is a stupid idea – after the firemen have refused to use their trucks to do anything about the fire.

  24. john bougearel

    Geeezuz Matt!

    Your marked observation villifying Volcker as anti-wages stands in stark contrast to the perception that he single-handedly tamed the inflation tiger on his way to becoming the champion that ushered in our disinflation era

    Congrats on a lengthy but well thought out post. Had no idea you were becoming such a Fed expert. :-) Keep up the good work

  25. Doug Terpstra

    Wow! Thanks, Matt.

    OMG! Responding to Grayson’s elementary questions, IG Elizabeth Coleman turns in an academy-worthy perfomance of cluelessness and cavalier lack of shame. Truly mesmerizing, stupefying.

  26. lambert strether

    You’re gonna have to learn your clichés. The cliché you’re looking for: “dessert topping”… “floor wax”. Just saying. To substance. You write:

    it is not corruption that is at the heart of the problem for this Fed system, it is a lack of democratic accountability.

    Surely these are two sides of the same bent penny? We know that accounting control fraud is pervasive, and, by definition, it takes place at the elite, CEO/CFO level, since they control the accounting systems. It’s very hard to believe that Fed personnel, who move, as you point in, in the exact same elite circles, aren’t aware of this. At best they’ve turned a blind eye. Which is a fine definition of corruption, no?

  27. George Washington

    Thank you for the fantastic article, and thank you for your outstanding efforts to audit the Fed and to strip away its power. You deserve our special thanks today, now that the Fed has released data.

  28. lambert strether

    From the perspective of this political blogger, here’s the nut graf:

    Palin is using the lack of legitimacy of the modern Fed, the failed technocratic screw-ups and the elitist tendencies, to push for the equivalent of societal debtor’s prison. She is speaking for creditors, and many of the conservative forces within the Federal Reserve agree with her. It is important to understand that reflexively defending the Federal Reserve, which is what the Democratic establishment is doing, is a foolish and anti-populist attempt to pretend that the Fed is a legitimate decision-making body. It isn’t. It is powerful, but not legitimate.

    First sensible statement I’ve heard on Palin in years. Best of all, there’s not a hint of PDS. +1000.

  29. craazyman

    There wouldn’t be this focus on the Fed if the idiot-savants in New York and morons in D.C. hadn’t systematically dismantled the regulatory regime that kept the psychopathically demonic strain of human nature in check in the financial sphere — more or less — since the 1930s.

    I’m not sure it’s totally helpful to stand the Fed up like in acient fertility God, and then dismember it when the skies don’t rain and the crops don’t grow.

    This is really right out of The Golden Bough. This is really a very very deep archetype at work, spreading its metaphor through property-money-spirit. It always amazes me to see these archetypes spin their protean and delusional magic.

    No, the conscious mind — and the conscious tribal collective — has to know and control its own demons. It can’t let them run, and then wonder in a pious rage why when the shit hits the fan.

    P.S. I gave Alan Grayson $50. I hope he runs again, but sometimes he comes across a little thuggish in these interviews. Being tersely polite is free and sometimes it works even better. :)

  30. Kathryn Huff

    This is very long on hysterics, populist hand wringing, and hyperbole but very short on any credible theory or research on central banking and central banks. And I say this as a monetary economist who used to work for the FED with no love lost between us and no monetary interests in them what-so-ever.

    Do you suppose the Europeans designed their central bank on the FED because they’ve got a deeply held admiration of all things American? Have you read any of the research that shows that any central bank attached to political bodies usually gives into the urge to abandon sensible monetary policy and is a sign of a failed or failing regime?

    The reason the Fed has had to interfere with the shadow banking system is that the SEC and other regulation on that area was completely gutted by lobbying interests. If those entities were more free of political whims, perhaps they’d have done something other than watch derivatives take down multiple markets.

    A central bank is the bank of bankers. It’s not some status grabbing political wing of either party and shouldn’t be.

    I’ve never read so many words with so little substance in my life. I can see you’ve spent a good deal of your career around congress people.

    1. Matt Stoller

      Have you read any of the research that shows that any central bank attached to political bodies usually gives into the urge to abandon sensible monetary policy and is a sign of a failed or failing regime?

      Plenty of ex-Fed officials have been horrified at sacrifice of democracy implied by the merger of monetary and fiscal policy over the last few years. It is that merger and not the reactions of the political system that has jeopardized the Fed.

      In terms of those studies, I believe the official talking point from the Fed when they were trying to hide their secret lending of trillions of dollars was that they engage in central banking ‘best practices’ or something like that. I’m sure Bagehot would be proud of the Fed lending on shitty collateral at low rates.

      1. Kathryn Huff

        There’s a big difference between the laws congress passed recently to compel the FED to open the discount window to nearly every one in town and around the globe and the usual business of targeting the FED Funds rate via some modified Taylor rule. The FED is audited all the time. FED records are available. The only part that doesn’t get audited on immediately and isn’t made immediately available is ongoing monetary policy operations which is a lot like asking to make public the detonator codes to missile silos.

        There is a Fed Reserve audit conducted by the GAO annually that is also made public and sent to Congress for review. The NY office of Price Waterhouse audits the NY FED’s financial statements. Independent audits are made available to the public on the FEDs websites and in print as well with those reports submitted annually to Congress for review.

        As for blowing bubbles, what exactly did the FED do to encourage the derivatives market which led to the Mortgages gone wild operators? Why wasn’t congress all over the derivatives market since it was driving the demand for all those bizarre loans made in a totally irresponsible manner?

        Congress basically gives the fed its marching orders through laws but it can’t pass fiscal responsibility to the FED because the FED can’t tax and the FED can’t borrow or spend Federal Money. So,I have absolutely no idea what you’re saying on that account. Right now, there is really no cogent fiscal policy. It’s tax cutting for votes and austerity for ideology!

        If congress doesn’t want your so-called “secret” lending, then all they have to do is to write into law who can go to the discount window under what terms. I’m sure the FED wasn’t keen on opening it up and probably has no intentions of doing so again unless congress compels them again. And, that’s still not fiscal policy.

    2. Toby

      Hello Kathryn Huff,

      I popped over to your site to have a look at your thoughts and where you’re coming from, but can’t quite make it all out. Granted, I didn’t spend too much time there, but got a general impression nevertheless.

      You seem to believe that independence of a central bank is possible, a reality even, because, independently of each other, most nations of the modern world have set up their CB systems in the mold set by the FED, a CB independent of politics and power — a somewhat circular argument I feel, even including the reference to South Africa. What I did not read in your article was any discussion or mention of the money-power axis and the subsequent and inexorable tendency of power concentration towards the system that has money creation power. The FED is, as are other CBs, but one component of that money-creating system, so discussions of the FED as some disembodied entity devoid of power and influence strikes me as odd, if not disingenuous. It is often the case that economists don’t look at power.

      You wrote:

      “The FED has no role in the stock markets and could not do anything to prevent or cause bubbles there. So, any one that tries to say the FED caused any stock market bubble is out there in la la land. The FED can provide liquidity to credit markets through its open market activities and its activities to influence the FED FUNDS rate. It only directly controls the rate at which it lends to financial institutions; the discount rate. The FED FUNDS rate is a market established rate and reflects the price of loans between financial institutions. In some cases, it is a substitute for loans from the FED.”

      How is provision of cheap liquidity (it’s hardly going to be expensive) to the credit markets irrelevant to stock market bubbles?

      You say the FED influences the FED FUNDS rate via its activities in one sentence, then later say that rate is market established. My question here is, how influential are the FED’s activities in this area? Do you see the FED as part of the market?

      If it can lend to financial institutions at a rate it determines, how might this not be a contributing factor to stock market bubbles?

      That the FED has a mandate to establish the economic conditions for stable growth and full employment necessarily means it needs power. If anyone tasked me with that objective, my actions would have no effect whatsoever — I have no power. The FED has power or it is pointless. If stock markets’ behaviours are significant to the economy, and the economy must be behaving in a certain way to ensure growth and employment, the FED must be able to influence markets. If not, it would be ineffective by design, no?

      The money system is but numbers and percentages, surely? But, the most important aspect of that system is how money is created, under what conditions it is brought into being, who benefits from money creation, and how. At the moment we have a debt-money system, in which the CB has a very important role to play. The nature of the debt-money system has all sorts of systemic effects which seem not to interest you, at first reading. It is this area that interests me the most, and I think others who comment and write here at NC. And surely, surely, the idea that politics or government and money creation can be kept separate is foolish.

      The struggle to understand is long and ongoing, and any help along the way is always welcome.

      1. Kathryn Huff

        Since the discount window serves as a substitute for the FED Funds market for some institutions(more now than there used to be), it influences where an institution may borrow if it borrows at all. Since it’s a substitute, it depends on the cross elasticity of demand for borrowed money. When interest rates are really low, you get the liquidity trap effect with less interest rate sensitivity. Monetary policy becomes less powerful under those conditions.

        Also, the driving force behind a lot of the bubbles is not the cheapness of money. For example, in the case of subprime mortgages, the demand for the derivatives was what led to the increased supply of mortgages. That demand was not responding to cheap rates for borrowing but unreasonably high rates of returns for the derivatives. To provide the derivatives, you had to originate the underlying assets.

        If you read Friedman and Schwarz’s seminal work on The Great Depression, you’ll see that one of the things that made it the “GREAT” Depression was that the FED was trying to stamp out a bubble in the equities market and instead impacted the real economy and made things worse. That is the problem with the FED trying to tackle bubbles in asset markets. It’s policy transmits to the real economy in a much stronger manner than it does to a particular asset market.

        Hope that makes my position clearer.

        1. John Merryman

          Ms. Huff,
          You are very right that it was the demand for investment vehicles which drove the sub-prime bubble.
          The fact is that capital is subject to the laws of supply and demand and with such enormous supplies of surplus supply, demand has to be created wherever possible. Unfortunately the current system is designed to squeeze the life out of the borrowers because the lenders have the political power and so everyone looses in the long run.
          What no one wants to admit is that the surplus of capital is in the hands of those with a surplus of capital. When the Fed sells debt to draw down the money supply, it isn’t selling those bonds to people living paycheck to paycheck and asking for higher wages.
          Bubbles, like most things, take more energy to start than maintain and it was Greenspan who kicked this one into gear, after the tech crash. After that, all it takes is to keep them slightly lower than the bubble is growing.

        2. Toby

          Thank you for that clarification.

          My reading of your position now is that the FED indeed has power, but ought to be careful using it, along the lines of ‘Hand, The Invisible is mighty and wise, don’t mess with him.’

          I do not presume to know exactly how bubbles are formed, but would be very surprised if cheap money played no part.

          John Merryman’s response touches on what I was trying to get across in my original set of questions and statements, that power is what matters here, indeed is always what matters. Sadly, mainstream economists seem to pointedly ignore power’s role, as they do the nature of money itself. The debt-money system is the heart of the problem, not the details of how that system best sustains itself in the interests of those sustaining it.

          1. Kathryn Huff

            If any thing, the congress should be protecting the FED’s independence in terms of making sure the executive branch stays out. That was part of the problem in the 1960s and 1970s. The Fed monetized the debt for both Nixon and LBJ. That’s how the inflation cycles got started.

            That was never an issue in Japan or Germany at the time because both of their central banks had horrible war time experiences with hyperinflation. They stayed independent.

            Charges are being levied against the South African Central Bank right now. Markets panic if they think the Central Bank is being impacted by politics and not by economic theory.

            You know that appointees can only serve one 14 year term right? Many serve through a president or two. Most that are appointed are academic economists that are appointed to be above politics. Good reason if you study monetary history.

  31. Gesell Got It Right

    I see Gesell rarelly named when talk about monetary reform sparks. This man got it all figured more than a hundred years ago, if you still don’t know him (or you figure why he is rarelly mentioned), you should read his main work on money ‘The natural economic order’, meanwhile read more about him on the wiki:


    Enjoyed the read.

    However, and in the roll of the devil’s advocate, or in this case the Fed’s advocate, I have to ask myself fundamental questions and not try to sugar coat any of the answers. Do I really want Congress running the financial/economic show…seriously, the Franks, the Dodds, etc.? No disrespect intended towards anyone, or their boss…and feel free to take your pick from either side of the aisle, but I really would just assume to keep a grown-up or two in the room with regard to the country’s monetary system. Exposing a great deal of that system to some sunlight wouldn’t hurt my feelings, but I just don’t see the Fed as neutral player with no impact outside of its publically professed mandates.

    We’re always quick to point the finger at the Fed and say; “End This Fed”…I’ve even said similar things in similar conversations. However, and if I’m a passionate believer all of the glowing praise that I continue to hear from various forms of media, my university professors, hedge fund guru’s who collapse British Sterlings, etc., for all of the beauty and wonder of ideas such as a Centrally Controlled Economy, the compassion of Socialism and fairness of Redistribution, then I would have to consider that the Fed is exactly the type independent, secret, and all knowing, all seeing, and all powerful entity structure that is being praised. If I’m blindly buying-in, then they’re the smartest guys in the room, and the people and their elected representatives are the drooling masses and clowns who consistently race us off the cliff out of some form of irrational exuberance…am I wrong?

    Which is it? A central control model, a free market, or a continued mixed variation both? What’s more efficient? What works? Or perhaps it’s simply when it’s expedient “Fed Bad”, and when it’s not “Fed Good”? I’m not sure, but I am sure that I’ll be getting ear full of expert opinions and what some might call irrational anger for asking the questions.

    For example I hear, and to a large extent actually believe it to be true, that Corporations can be flawed in the direction of S/T success and top end looting over that of L/T success and consistent dividends. Okay, there are lots of reasons for that, and the simply of the point is certainly debatable, but can we generalize and assume structure and culture might have a great deal to do with that. Now, can we flip-the-script and look at the Fed…it’s never, ever, limited itself to S/T solutions, or for that matter the two mandates that have been cited in the piece. Again, I would tend to agree with a great deal of the article, but the Fed is about L/T strategy on a global scale. Congress is about congress, over the period of each election cycle. Yeah, there’s no agency problem there.

    If I look at the actions of the Fed over the past several years, then what I can see is a continual and L/T strategy to imbalance various economies, including the U.S., to the point where an opportunity can be reached to re-balance on a global scale. Recent Fedhead comments make no bones about that.

    Can we use the metaphor of a leveraged buyout to draw realistic conclusions about the circumstances, the players, and path? Bear with me on this, the Fed has placed the U.S. (trade deficit economy) on the path of a leveraged buyout via China (trade surplus economy), with Goldman as the primary broker, and QEx and inflation as the re-balancing/redistribution mechanism. Now tell me, what did Congress do…besides insure/ensure the U.S. real estate put was in-the-money, and that the opportunity for the leveraged buyout could exist in the first place?

    The next phase of this thing signals towards China’s economic model, and I have to wonder if James Chanos hasn’t been on to something big for more than a year now. And again, while I’ve cursed the system and its players for many a S/T absurdity, I can’t help but wonder…what would Congress do in its stead?

    1. psychohistorian

      If the government ran the money supply instead of the uber rich of the world that own the banks including the Fed then us pond scum citizenery might have a chance in hell of electing people to get us a public monetary utility instead of the wage slave inducing system we have currently.

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