Dan Kervick: The Fed is the Central Bank, and President Obama Should Treat It That Way

By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives

President Obama will soon name a successor to Ben Bernanke for the position of Chair of the Federal Reserve’s Board of Governors, and Brad DeLong recently offered his views on what qualifies someone as a strong candidate for that position:

To be good choices for Federal Reserve chair, candidates must pass three tests. They must have experience at a similar job: this is not something to throw somebody into and expect them to swim. They must fear high inflation as they fear a tornado, and feel in their bones the pain of the unemployed. And they must understand and properly weight the different models of how the economy might behave. Right now, this third means that a good Federal Reserve chair must give a relatively high weight to the Keynesian model, which has been so successful at describing and forecasting the economy over the last six years.

DeLong then goes on to argue that this proposed collection of qualifications narrows down the candidate list significantly:

Janet Yellen has a proven record of being able to build consensus inside the Fed. Larry Summers is the least likely to bind himself to an institutional consensus past its sell-by date. Only five potential candidates pass this threefold test: Larry Summers, Janet Yellen, Christy Romer, Alan Blinder and Laura Tyson. They are all, in my view, superior by far to others whose names have been mentioned.

And DeLong then opts gingerly for Summers, his former boss and a man with whom he has co-authored several papers in the past. But DeLong’s analysis leaves out what to my mind should be the most important factor among the qualifications for the Fed Chair position: central bank experience.

Let’s start with a simple question: What is the Fed anyway? The short answer is that the Federal Reserve is the central bank of the United States. But what does that mean?

In the US we have a highly integrated, hierarchical and centralized banking system. People and businesses – including some state-chartered banks that are not themselves Fed member banks – hold their deposits at the Fed member banks. Those Fed member banks in turn hold their deposits at the twelve regional Federal Reserve banks. And those regional banks are governed by the Board of Governors, which develops and implements the regulations governing the entire system, as well as deciding on certain aspects of monetary policy that lie under its control. The regional banks also elect some of their Presidents to sit on the Fed’s Open Market Committee, a twelve-person body that formulates and implements much of Fed monetary policy, but is itself dominated by the seven members of Board of Governors who are automatically members of the committee.

Although the direction of our financial system is increasingly subject to the actions of a “shadow” banking system of financial institutions that are not directly governed by the Fed, the Federal Reserve System still constitutes the most vital part of the financial machinery and infrastructure of our economy. Among other important aspects of that machinery is the Fedwire payment system which processes trillions of dollars worth of interbank payments each day, either directly or in conjunction with the Clearing House Interbank Payments System (CHIPS) that itself holds a Fed account, and through which its start-of-day and end-of-day transactions with participating banks are processed. These payments systems are in effect the financial circulatory system of our economy, and the Fed runs and supervises them to preserve their smooth functioning.

So the Board of Governors, all seven members of which are appointed by the President of the United States, sits at the apex of the nation’s integrated banking structure and governs this vast and economically fundamental system. When the financial system fails – as it did in 2007 and 2008 – the results can be economically catastrophic, as we all now well know. So, effective Fed oversight and regulation of our market-based financial system, a system that history shows is perpetually prone to bouts of fragility and crisis, is a governmental chore of the highest possible priority. The Chair of the Board of Governors is the active executive of the system who directs that board, coordinates its activities and decisions, and communicates those decisions to the public. The Fed Chair thus occupies a position of immense power and systemic responsibility.

The whole system is a large and complex financial machine, and so the people running it had better know how the machine works at a fairly fine level of detail. This is the kind of robust and detailed knowledge people generally acquire not simply by thinking, but by long experience in doing. To my mind, then, the number one qualification for the job of Fed Chief is that the candidate have some high-level hands-on experience in banking and finance, preferably central banking. (And by hands-on experience, I don’t mean just sitting on the board of a bank, a token sinecure that is bestowed on many well-connected individuals to build alliances and as a reward for services rendered.) The Fed Chair should also be someone who shows a knack for, and enthusiastic appreciation of, vigorous financial regulation.

By these criteria, Janet Yellen is the only person on DeLong’s list who qualifies since she has been at the central banking game since the mid-90′s, when she was first named to the Board of Governors. Yellen also served for six years as President of the San Francisco Fed. She is an established, very experienced and by all accounts highly competent and professional central banker, who has had hands-on, day-to-day responsibility for Fed governance and policy formation during the intense and politically high-pressured recent period of the Great Recession.

The fact that Yellen’s actual experience in the central banking system is not often pointed to as the key qualification distinguishing Yellen from among all of the candidates for succeeding Ben Bernanke has been somewhat mysterious to me, but I think I know part of the solution to the mystery. There is a distorted view of the Fed that is widely popular in some quarters of the popular press, the blogosphere and among some economists that seems blithely ignorant of the fact that the Fed is primarily a bank: the bank of all banks that backstops, regulates and holds the deposits of its members, as well as running the interbank payment systems. This impoverished picture of the Fed leaves out great quantities of important operational facts and constraints, and treats them as though they merely irrelevant details. For example, pundits frequently ignore the facts that when the Fed issues money to purchase financial assets, those financial assets and their associated cash flows are thus removed from the private economy as a result, and so the total sum of net financial asset value is little affected. They also ignore the fact that the so-called “reserves” of Fed member banks are mainly just the deposits in these banks’ accounts at the Fed that they are required to hold in order to settle their daily interbank payment obligations via the Fed’s payment system. There is also widespread ignorance of the fact that, with the exception of small fluctuations in the quantity of physical currency held by banks, bank reserves in the aggregate do not move “out” of the reserve accounts of commercial banks when those banks make loans. They only move from bank to bank.

An enthusiastic core of Fed fanboys in the punditry seem to view the Fed as some kind of sulking and reticent macroeconomic superhero that inexplicably refuses to use its superpowers to restore demand, production and full employment throughout the land. This style of discussion, treating the Fed as a nearly omnipotent macroeconomic titan and potential messiah, has undermined political pressure for economic policy action from other directions, and has helped spread an unhealthy press culture of obsessive Fed-watching and neurosis. The enthusiasts for the superhero picture first promote outlandish obsessions over the Fed’s role, and then recommend policies based on exploiting these obsessions by attempting to behaviorally manage them. They seem to see the Fed as running a vast game of macroeconomic Simon Says that can coordinate almost every kind of economic behavior and manage demand throughout the economy. But despite the intensity of these discussions among the zealots, the number of economic agents who are paying very close and minute attention to the Fed and its precise statements is actually relatively small.

The superhero conception of the central bank also tends to ignore the fact that the primary channels through which the Fed does influence broader economic activity – when it can influence that activity – run through the banking and credit system. Boosters of greater Fed activism seem to think the role of the Fed is to drop money or demand into the “economy” from some serene aerie poised high above it all. But the Fed interacts with the real economy through the banking sector and through its regulation of the conditions of bank lending. It doesn’t have helicopters; it doesn’t have ways of reaching out and touching non-financial businesses, households and individuals to turn us into greater “demanders”. Its statements might have this kind of psychological effect on some participants in the economy, but this is a highly subjective and variable business that depends on that agent’s background understanding of the Fed’s role, and the behavioral impact on these varying understandings can thus cut in several conflicting directions at once.

Now certainly Fed governors should have a great deal of economic knowledge as well as institutional experience, and Yellen has also maintained an ongoing and distinguished academic career while attending to her institutional responsibilities at the Fed. But the Fed is not really a good place for academic macroeconomists to try out their theories and models in a complex institutional setting in which they have no real experience operating. That would be like putting a lifetime academic nuclear physicist in charge of a nuclear power plant. The scientist might be brilliant and the intellectual background is certainly highly relevant to the job, but there is no reason to think the knowledge of pure physics would make a person a competent executor of the very different engineering responsibilities of running a power plant. Nor, as bright as the scientist might be, could the community that depends of the safe functioning of the plant afford to wait many months as the new appointee learns all the ropes about how the machinery works.

The Fed Chief does not go to work each day and manipulate the nation’s aggregate demand curve and aggregate supply curves on some godlike control screen. The Fed is not the all-purpose Department of Macroeconomic Control, and its chair is not the Czar of the Macroeconomy.

Recent commentary on the Fed Chair position has been heavily focused on monetary policy, and the various fads and flights of monetarist fancy that tend to drive discussion of the Fed in the press and academia. But during the next phase of the Fed’s history, overseeing the regulatory role of the Fed will likely be the most important job for its chief. Among other things, the Fed will be involved in implementing the modified Basel III capital requirement rules and the provisions of the Dodd-Frank Act. Many observers think these new rules are too weak to address the fundamental sources of instability in the system. But as with any system of broad rules, whether they work or not often depends on how aggressively they are implemented.

Consider a story that we all became aware of a couple of weeks ago. A little noted change in Fed regulations in 2003 has allowed big investment banks like Goldman Sachs and J.P. Morgan to become major players in warehousing physical commodities like aluminum and copper. It could be very risky if these “systemically important” financial firms eventually become just as much Too Big To Fail in the commodities world as they are already in the financial world. We could be on the way to re-creating the old gilded age system of vertically integrated and oligopolistically coordinated trusts. Dismantling that system was the chief concern and achievement of the progressive era in US history. This is the kind of thing that we need the Fed to keep a very close watch on.

And on that score, one final thing needs mentioning: The Fed governorship is not a job for a political crony; it’s not a job for a person with a track record of old boy friendliness to The Street and its taste for reckless, high-rolling and systemically destabilizing money-making; it’s not a job for a regulatory softie who is plugged into the political networks of money guys, boosters and campaign funders, a person who might have trouble saying “no” to insiders and donor cliques who run and prop up political parties. One hopes that the President has not settled for a shallow partisan diagnosis of the crisis of 2008 and has advisers who actually understand the roots of the crisis lie in three decades of bipartisan zeal for deregulation, desupervision, decriminalization and misguided enthusiasm for the self-sufficiency of markets. The key economic architects of that failed order should not be rewarded now with the opportunity to put their flawed judgment to work again in a setting where it might prove devastating.

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  1. Jim Haygood

    The Federal Reserve is a bank cartel masquerading as a quasi-government agency.

    Proper treatment would consist of shutting down the Creature From Jekyll Island before it reaches its hundredth birthday on 23rd December.

    Ninety-nine and a half years, with a 95.7% dollar devaluation, is more than sufficient evidence of its malfeasance.

    1. profoundlogic

      Agreed. Kervick continues to crack me up with this BS.

      “We could be on the way to re-creating the old gilded age system of vertically integrated and oligopolistically coordinated trusts. Dismantling that system was the chief concern and achievement of the progressive era in US history. This is the kind of thing that we need the Fed to keep a very close watch on.”

      LOL! Yeah, we need them to keep a close watch on that, kinda like the NSA is keeping a close eye on everything.

      Thanks Dan, for taking us down the metaphysical rabbit hole once again.

      1. Dan Kervick

        I didn’t notice any metaphysics in the piece. It’s just about some of the many contemporary myths about the Fed – particularly the myth that the Fed can control the whole economy and rate of employment with QE and similar policies. My main target was monetarist enthusiasts for QE infinity, NGDP targeting and other innovations in monetary policy that never seem to grapple with the fact that the Fed is essentially a bank, and who constantly neglect financial regulation and stability when they talk about the Fed. All they can focus on is whether or not the next person will keep pushing on the QE string. They are growing desperate, because monetarism is on the verge of another historic failure, as it has failed in the past.

        My other target was Larry Summers, who along with the insider Third Way clique in the Democratic Party from which he hails, I think is very bad news. I’m hoping people will use this moment of political opportunity to take a bite out of that clique.

        1. profoundlogic

          Something tells me you’re going to need more than a “bite” out of that clique to see any substantive change.

          Perhaps you could spend more time discussing how the Fed actively facilitates the control fraud in our economy via the artificial spread of risk.

    2. Dan Kervick

      I can never understand the significance people attach to that 95.7% figure, which I see repeated often.

      Money is just a medium between the labor you provide and the goods and services you can obtain for that labor, and those terms are set by the social conditions of the market for labor, and the power people do and don’t possess in that market. If dollars could purchase 20 times the quantities of goods and services they purchase now, people would receive 20 times fewer dollars for their labor than they receive now.

      By the way, what price index are you using to derive the 95.7% figure? Not gold I hope.

      1. Edward

        It is not the current value of labor that is most affected by US dollar inflation, but the 30 to 40 year lifetime accumulation of savings that is most affected when the Fed policies consistently allow inflation/devaluation of our currency. Current Fed policies also create a nasty choice for people in retirement: either choose safe, but zero yield investments that will consistently lose purchasing power or choose risky investments that may not be available when you need to withdraw funds to live on.

        1. Dan Kervick

          If inflation was lower, the yields on those savings would have been lower too. The nominal rate of interest tends to float up and down roughly along with inflation.

          Honestly, although the financial sector certainly does suck a lot of parasitical rents out of the real economy, I think the Ron Paul conspiracy theories about the illuminati or Rothschilds or whatever secretly stealing everyone’s savings via inflation or gold price fixing etc. have people barking up all the wrong trees. And the laissez “reforms” they propose wouldn’t improve anything a whit. Just a bunch of bitter, destructive, angry, crackpot conspiracy theorists bringing nothing viable to the table.

          Tons of misinformation put out about the Fed as well. The Fed has returned vastly more income to the US Treasury than its so-called “stockholders” – both historically and right now – but the wingnut conspiracy mongers are convinced the whole thing is a private conglomerate delivering untold dividends to its owners.

          1. Thisson

            You completely ignore transition effects in your position. Each impulse of inflation benefits those closest to its source, to the detriment of all others. Further, inflation makes it harder measure real changes in prices throughout the economy.

            Inflation has real costs to the economy and to decisionmaking – to simply posit that everything else adjusts to a new equilibrium regardless of the absolute amount of currency and credit sloshing around is doing us all a disservice.

            1. F. Beard

              Each impulse of inflation benefits those closest to its source, to the detriment of all others. Thisson


      2. Yancey Ward

        I don’t know what price index you use, but I use the BLS which tells me 95.7. You got a better one?

    3. F. Beard

      Actually Jim, that is 95% loss from 1913 to 2006 using The US Bureau of Labor Statistics CPI Inflation Calculator. To 2013 it’s 96%.

      So let’s see:

      1913 average US wage $740
      2006 average US wage $49,300 = $2420 in 1913 dollars

      2420 / 740 = 3.27 times.

      So average real wages have gone up 3.27 times IN 93 YEARS = 1.285%/yr

      So average real wages have grown 1.285%/yr. And this includes high earners!

      That’s the Fed Danny is defending. Oh, and have I mentioned recently that Ben Bernanke admits that the Fed caused the Great Depression, a major cause of World War II which killed 50-86 million people?

      Danny has admitted at Mike Norman’s that credit creation allows the rich to steal from the poor. Yet he is in favor of government privileges for the banks! And he doesn’t have an excuse since he should know by now that private money can issued as shares in equity and that that form of money creation does not require government privileges because, for one thing, IT DOES NOT STEAL.

    4. F. Beard

      Actually Jim, that is 95% loss from 1913 to 2006 using The US Bureau of Labor Statistics CPI Inflation Calculator. To 2013 it’s 96%.

      So let’s see:

      1913 average US wage $740
      2006 average US wage $49,300 = $2420 in 1913 dollars

      2420 / 740 = 3.27 times.

      So average real wages have gone up 3.27 times IN 93 YEARS = 1.285%/yr

      So average real wages have grown 1.285%/yr.

      That’s the Fed Dan is defending. Oh, and have I mentioned recently that Ben Bernanke admits that the Fed caused the Great Depression, a major cause of World War II which killed 50-86 million people?

      Dan has admitted at Mike Norman’s that credit creation allows the rich to steal from the poor. Yet he is in favor of government privileges for the banks! And he doesn’t have an excuse since he should know by now that private money can issued as shares in equity and that that form of money creation does not require government privileges because, for one thing, IT DOES NOT STEAL.

  2. kevinearick

    Fed Focus: A Community Conference
    Fairmont Hotel, San Jose, California
    For delivery September 21, 1999, at approximately 8:35 am Pacific Daylight Time
    (11:35 am Eastern)
    by Robert T. Parry, President, Federal Reserve Bank of San Francisco

    “Finally—and very importantly—the Fed’s conduct of monetary policy
    contributes to the long-run health of the economy by promoting maximum
    sustainable employment and stable prices.”

    How’s central control of maximum sustainable employment / price control working for you?

  3. denim

    The Fed is more than a bank. Much more. It is a major regulator of the economy.


    And that is why your closing paragraph is so approriate:
    “And on that score, one final thing needs mentioning: The Fed governorship is not a job for a political crony; it’s not a job for a person with a track record of old boy friendliness to The Street and its taste for reckless, high-rolling and systemically destabilizing money-making; it’s not a job for a regulatory softie who is plugged into the political networks of money guys, boosters and campaign funders, a person who might have trouble saying “no” to insiders and donor cliques who run and prop up political parties.”

    1. Dan Kervick

      Yes, the vital regulatory role is completely overlooked by people who think the Fed’s role is all about QE, and that the only issue on the table is whether to be a supposed “hawk” or “dove” on asset purchases and inflation.

      But here’s Fed governor Tarullo speaking recently on Basel II and Dodd-Frank implementation:


      There is a lot of room for discretion in the implementation of these rules. Why aren’t the pundits talking more about this stuff?

      Some people have heard about the fact that the Fed has a mandate to achieve “maximum employment”, and have swallowed simplistic monetarist views about the Fed’s role that lets the political branches off the hook and scapegoats the Fed for not achieving the results of a goofy mandate that was a legislative artifact of monetarist wet-dreams in the 70’s and that no central bank is actually in position to achieve.

      There are way too many people out there who think the Fed has a knob that allows it to choose between full employment and low inflation, and that the only reason that there is high employment is because the Fed has “chosen” high unemployment so as to preserve low inflation.

      It’s abject nonsense. The Fed has no magic money knob that can turn “demand” or “employment” up to 11 whenever it wants. The Fed operates primarily through the banking system and controls most of the conditions of bank credit. But that’s it. If the conditions for ultra-low interest rates and cost of funds are in place and still the economy sputters, that’s it. The Fed is then basically out of bullets.

      A lot of so-called liberals have taken their eyes off financial stability completely, and have been begging the Fed to save Obama from his political weakness and incompetence by creating more credit bubbles. They don’t put it this way of course. They say the Fed should turn up the NGDP knob, or the inflation knob, and think the Fed has some kind of money spot that operates outside the banking system. It’s silliness. But by focusing so idiotically on the Fed they have given the politicians a four year pass.

      Capitol Hill does have the ability to turn employment up to 11, whenever they want.

        1. NotTimothyGeithner

          Its easier to put blame on something other than voting habits. My sister’s high school was named after the son of Senator Glass of the Federal Reserve Act of 1913 and the Glass-Steagall Act of 1933. He was a newspaperman by trade, not a big city newspaperman. The World War and Republican Control of Congress put Glass out of a position to regulate the Fed, but as my local paper of record in my youth would indicate, the Federal Reserve can be controlled and regulated by Congress, not even Congressmen with banking backgrounds or MBAs!

      1. Susan the other

        +100. But we do have socialism for the rich in this country, which stricter regulation might not put a dent in. Also to be blamed on congress. But, I’m one of those characters who believe it serves the Fed in its effort to save the insolvent banksters to keep zirp in place which channels all the money into the stock market and creates a situation where corporate stockholders are all demanding their dividend and to disperse it the corporations take it out of labor. Now they are saying we should lower corporate taxes because they also take their taxes our of labor. So the Fed is just perpetuating this because it has no choice.

  4. craaazyman

    Faaaaaaak Just Imagining It Makes me Smile

    I wonder what would happen if they put Master Po in charge of the Fed.

    Would he see the irresolvable dualistic tensions in the nature of money that make summation of individual possession into society-wide numeration an exercise in quantitative quackery and metaphysical malpractice? He probably would.

    Would he perform Kung Fu stick fight exercises in the Fed’s dining room? Only between meals, no doubt.

    Would he mentor young Fed economists with wisdom from the Tao in offices lit with candles? Yes, undoubtedly.

    Would he suck up to spiritually diseased Wall Street looters? Faaaaaaak no.

    Faaaaaak, he’d invent a form of monetary logic so sparse and transcendent it would stun people into total confusion. They may not be able to handle it, actually, and all hell would break loose.

    Oh well, forget it then. Just get somebody who’s willing to kick a few butts and smile when their foot hits hard. That won’t happen, but it’s a nice thought anyway.

  5. PaulArt

    What is more infuriating about this brouhaha is not that the Obum would say ‘Carpe Diem’, wink at Bob Rubin, high five Tim Geithner and float Larry Summers as his choice. No, that is not a surprise or anything notable. What is notable is the depravity of people like Krugman and Delong who squawk from the sidelines trying very desperately to hedge their bets and revealing to one and all their Wall Street brown nosing. Look at Delong, I mean, I have no clue why Krugman still keeps quoting him and linking to his blogs in whatever he writes. Delong lost all credibility a very long time back. I mean, the man has absolutely no talent in hiding his secret passion for Wall Street. ‘..fear inflation like a tornado’. What absolute bilge water.

    1. Dan Kervick

      As far as the economic blogosphere goes, Krugman and DeLong are often thought of as the two key guys on the “progressive” side. That shows how strange the contemporary culture of US political economy has become.

      DeLong and Summers are peas in a pod. They have co-authored numerous papers. Of course DeLong is going to back Summers; it would be shocking if he didn’t.

      And Krugman was in the Reagan administration! He hits back whenever the issue of inequality comes up, as it has frequently in the discussions of Stiglitz’s book. It clearly makes him uncomfortable.

      Now some rank-and-file Dems are true believers in the neoliberalism developed during the years in which Krugman, DeLong, Summers, Rubin and others have been dominating economic policy thought in their party. But most are not. They have genuinely progressive and egalitarian impulses but their policy attitudes are scrambled up in tangles of double-think. And what they always fall for are partisan heroes. If DeLong or Krugman effectively mock Bush or other prominent Republicans with some rapier thrusts of learned and satiric snark, the Democratic Devoted fall all over each other in their slavish admiration for their rhetorical champions. It’s unbelievably pathetic. Rank-and-file Democrats are emotionally incapable of making a break with three decades of economic destruction and plutocratic attack on the working poor, the unemployed and the middle class, because that would require them to acknowledge that their partisan heroes are not progressive, are servants of the plutocracy, and have done a bad job.

  6. E. Gerry Spaulding

    While its possible to credit the Bernank for some truly innocvative and actally helpful initiatives, facilities and progrms post-Criis, the gratfailure of the Fed ove the past dece wa ts lack ofprevention o he Crsi from happenin ithe frs place.

    That quality of understandig our financial and monetary systems includes, of necessity, the recognition of their weaknesses and susceptibilties, espcially to the xcesses of private profit and corprate greed.

    The Bernank failed here.And Summers was a major ontributing factor to the evolution of the deregulated state of the structur of global finace,and espeally the new threats that evolved out of the Harvard Business School.

    Summers’ presence in the discssion reflects his Rubinesque connectedness with Democratic Party politics.


      1. jsn

        I enjoyed your book, compares well to Mr.Schacth’s.

        It’s great to see the sod can’t keep you down!

  7. jfleni

    Why this grossly excessive reverence for “central bankers”? If the Secretary of the Treasury were the real Finance Minister, he or she would serve at the discretion of the President, be subject to impeachment by Congress (like the President), and in general be responsible for his or her actions.

    Private bankers subject to a board of mostly irresponsible academic economists, and more slimy bankers will never be accountable to the people or their elected leaders. A legitimate system would have found “Timmy” out panhandling on Constitution Avenue when he took the first step toward destroying the Republic. A pox on “economists” of whatever persuasion.

  8. ifthethunderdontgetya™³²®©

    Anyone connected with Bob Rubin ought to be immediately disqualified.

    =>It gets worse: these attitudes survived the financial crisis. (And they paid well, too. In addition to his lucrative part-time job at a hedge fund, he was paid $2.7 million in speaking fees in the year before joining the Obama Administration by Wall Street firms then on the public dole.)

    As the head of Obama’s National Economic Council, Summers and his protégé Treasury Secretary Timothy Geithner shoved Paul Volcker’s proposals for more assertive re-regulation of the financial sector off-stage, where they were re-written by company hacks. “They considered me an old man,” out of touch with the realities of modern finance, Volcker told his biographer.<=

    Of course, our Hope and Change President's track record shows that he won't consider anyone who isn't a Rubin protege.

    1. Dan Kervick

      Summers mocked people who worried about derivatives as “luddites” who failed to recognize the wonderful risk-spreading genius of a great new financial invention.

      He’s still doing the same thing, in effect, arguing that financial firms need to be very large and very diversified in order to spread risk across many products. He doesn’t seem to get the fact that that was precisely the recipe that for stability that was cooked up for the whole economy pre-2007 and failed catastrophically in 2008. The dilution and spreading of risk across the economy via derivativization didn’t make the economy more stable. It just increased the incentive and opportunity for control failure and control fraud.

      1. Susan the other

        There is nothing diversified about an explosion of one sub-species of financial instrument spreading like the plague across the world. That is the opposite of diversified. How this will create stability better than controlling the interest rate at a very low (zirp) and guaranteed level – so nobody has to panic and write bogus interest rate insurance… derivatives are insane. Why doesn’t the Fed just guarantee zirp like good MMT policy, and forget it?

      2. Thisson

        Derivatives aren’t the problem – lack of reserves and leverage are the problem. There’s nothing inherently wrong in hedging or speculating on price movements. That’s what makes a market.

        1. Dan Kervick

          Higher capital and leverage requirements, but not reserves.

          Problem is everybody moving risk off of balance sheets where it floats in limbo and is systemically dangerous, but individual managers aren’t on the hook for it.

  9. allcoppedout

    You guys may as well forget the revolution and hand the FED over to the BoE!
    We are all suffering the same lunacy. Bankers and finance are the problem and not part of the solution. Nearly all working people are worse off than in 1980. The reason for this is we have non-modern economies in thrall to all this creating the right economic and fiscal conditions nonsense. It works very well for hot money and rich people. End of story.
    If we break from this the sky will fall. I don’t think you could put Yves in charge of the FED and see much change, or Steve Keen at the BoE.
    Look at stuff like broken windows policing. My local plod, a really decent guy, thinks this is about zero tolerance and cracking don hard on what they let go now. In fact, Braxton and his ilk get rid of about a third of existing management and the broken windows bit is a crude motivation boot at the bottom end. Genuine FED/BoE/ECB change would have to be sweeping and banksters would have to fly on gibbets for a few months.
    We’ve been stiffed. Ash what we’d have to do if the people growing our food, building homes and actually making things tried to take the financial slice of the cake. We mostly can’t do their jobs, but nearly all of us could work a bank. What are we so scared of?

    1. Glenn Condell

      ‘If we break from this the sky will fall. I don’t think you could put Yves in charge of the FED and see much change, or Steve Keen at the BoE’

      Surely you would, though they would have their work cut out as diamonds cutting through all that rough. I sometimes daydream about being able to instal people like Bill Black or Warren Mosler in the top jobs. They would have to be anti-Obamas and use their bully pulpit to destroy the carapace of interests now rusted on to the machinery of public finance. More dangerous than Ed Snowden in other words.

      The Fed Chair should really be elected, though not tied to any party. Anyone with a bank account should be able to vote preferentially for independent candidates who set out their stall (a charter of intended reforms and overall aims) on a federally funded and transparently open source website. No more Congress dog and pony shows. No more crony foxes overseeing generational theft. No more Maestros fleecing the masses.

      1. allcoppedout

        I too would love to see people like Yves, Bill and Steve Keen in influential policy jobs, cutting away. I fear our establishments are now so bent that the individual now can’t do the job (if ever). We have a fairly decent old cove, Vince Cable in the UK as business secretary and sadly he was immediately compromised in power and is now as useless as anyone else.
        I think we need to understand the ‘great leader’ stuff is nonsense and we need another form of radical change. We should be trying to make economics work around active projects, not this stuff about fiddling with monetary levers, especially when the system is so corrupt we used mass unemployment as one of them.
        I’m an odd combination of ex cop and scientist who teaches business-economics. In science our accounting systems are very open to checks, balances and public scrutiny. In business-economics accounting systems are obscure and related to ideologies such as folks like, say, Summers, having mega-skills. The only such skill I can see in practice is psychopathology.
        I reckon anyone who can mist the mirror and wear a suit can do these jobs – as the real work is done by the bureaucracy. We could just sit about taking the pay and learning to mouth various latitudes like ‘learning lessons’, ‘fiscal prudence’ and other gunk we ‘teach’ students in death by powerpoint.

  10. Sagebrush

    Central banks are organizations of efficient financial parasites masquerading as banks. The FED has been helping the elite plunder hard working americans for over 100 years. From 1913 to 2012 the Fed’s monetary policy miss-management has managed to assist the dollar in losing 95% of its value via The FED’s profligate issuance of money and credit. The original purpose of the Fed’s creation was to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today, the Federal Reserve’s responsibilities fall into four general areas.
    1. Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
    2. Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
    3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
    4. Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.

    It has completely failed to accomplish any of these directives, except maybe to transfer the wealth of the american people from the U.S. treasury to the financial institutions here and abroad to line rich pockets. It’s time to repeal the Federal Reserve Act under section 31 and have the organization’s officers past and present investigated for crimes against the American People. Think about this. According to the Minneapolis Federal Reserve branch’s own website, what you could buy with $1.00 in 1913 would now cost you $22.55. The parasites are draining the blood of our nation an destroying it’s future.

  11. MikeNY

    Give Summers credit for speaking these truths: Bernanke’s QE is exacerbating wealth inequality, fostering misallocation of resources, encouraging bubbles, and creating precious few good jobs.

    I’d be more enthusiastic about Yellen if she voiced similar concerns about QE. Monetary policy CANNOT solve the jobs crisis — so, lose the Messiah complex. QE is a Band-Aid, an aspirin, an excuse for Congress to do nothing as the patient hemorrhages. Less than nothing.

    More of the same Fed policy is not going to work, except for the 1%, as today’s S&P rally once again shows. Do we really need another trickle-downer in charge of the Fed?

    1. Flim Flam

      I was reading this thinking, gee, Ben Bernanke would be a good choice for Chairman, but he had his go ’round and people seem to be unhappy. Too bad QE isn’t sent to the right recipients.

    2. The Rage

      Summers didn’t say that. He says QE does nothing…..literally nothing.

      It is bonds that would be bought anyway. Get rid of QE, you still have huge wealth issues(which are still far less than in 1900).

      QE is nothing and does nothing.

      1. MikeNY

        I’m a bit embarrassed for you, Rage, that you deny that Summers said what I attribute to him. The easiest of internet searches proves my assertion is true, and Ambrose Evans-Pritchard wrote on it again just the other day in The Telegraph.

        You’re entitled to your own opinion, but not your own facts.

  12. Hugh

    We live in a kleptocracy. The next chair of the Fed will be someone who can bring a certain gravitas to their role of being a sockpuppet of the banks.

    1. The Rage

      The banks are irrevelent. Even if the FED had “properly” regulated them and stopped the mortgage fraud bubble, the US would have had one long recession still going today since 2001. You can’t fix banking.

  13. The Rage

    The US economy is doing quite well, sorry, but the peak occurred in 2000 and nothing is going to bring that back with the demographics for the next several years.

    Without the mortgage/RE fraud, there is no mid-00’s “recovery”.

    No ideology nor intellectual viewpoint will help at this time. There is no “output” to get, no confidence to improve, no “assurance” needed.

    Economic growth isn’t going to lift all boats. Some ideas, could threaten Americans fo finally lose it and decide they need a Ceasar or Pompei to restore America and abolish the Judicial/Legislature part of the Constitution.

  14. rich

    How six months before WWII Britain gave Hitler $9-million in gold (that belonged to another country)

    There is more to the tale of Czechoslovak gold being stolen by Germany than the Bank of England’s embarrassment – the Bank for International Settlements actually financed Hitler’s war machine, says Adam LeBor.

    The documents reveal a shocking story: just six months before Britain went to war with Nazi Germany, the Bank of England willingly handed over nearly $9-million worth of gold to Hitler – and it belonged to another country.

    The official history of the bank, written in 1950 but posted online for the first time on Tuesday, reveals how we betrayed Czechoslovakia – not just with the infamous Munich agreement of September 1938, which allowed the Nazis to annex the Sudetenland, but also in London, where Montagu Norman, the eccentric but ruthless governor of the Bank of England agreed to surrender gold owned by the National Bank of Czechoslovakia.

    The Czechoslovak gold was held in London in a sub-account in the name of the Bank for International Settlements, the Basel-based bank for central banks. When the Nazis marched into Prague in March 1939 they immediately sent armed soldiers to the offices of the National Bank. The Czech directors were ordered, on pain of death, to send two transfer requests.

    Declassified documents in the American intelligence archives reveal an even more disturbing story. Under an intelligence operation known as the “Harvard Plan”, McKittrick was in contact with Nazi industrialists, working towards what the US documents, dated February 1945, describe as a “close cooperation between the Allied and German business world”.

    Thus while Allied soldiers were fighting through Europe, McKittrick was cutting deals to keep the Germany economy strong. This was happening with what the US documents describe as “the full assistance” of the State Department.


    central banksters….scumbags then, scumbags today.

  15. allcoppedout

    We all get some proportion of the joint wealth we can create or are left to starve to death. The key feature of leadership in history has been finding ways to hoard and control distribution. Violence has always been a key part of this.

    The story of Nazi gold has been known a long time – ‘Conjuring Hitler’ (1995) by Guido Preparata has a lot of the details, including the ‘recent’ revelations. I think economics as we have it is in the same condition as our general misconceptions on WW2. ‘We’ see it as the triumph of the US and UK against fascist Germany and Japan from 1939. It really started in 1931 in China and the massive casualties were in China and the USSR – the latter also broke 90% of the Wehrmacht. Economics describes finance when the real issue is the way we can organise and create decent society.
    The USSR and Germany grew massive productive capacity in the 1930s – nearly all in the hapless pursuit of war. In Germany, Schact (half-American) used Mefo bonds to finance rearmament. Our financial systems still allow massive amounts to be funnelled to purposes and in proportion none of us agree with. Plus ca change …

  16. Brick

    If the position was solely on merit and not partially politically motivated then some of the following most likely would be considered. You can perhaps argue that their knowledge of the US central bank is limited, but surely a bit of a shake up is required.
    Stanley Fischer of Israel who has been perhaps unofficially targeting NGDP and is considered one of the best central bankers in the world.

    Philipp Hildebrand ex swiss central bank chairman who really upset UBS and Credit Suisse.

    Amando Tetangco Jr of the phillipines named as one of the best central bankers in the world.

    Sir John Vickers who believes big banks should be broken up.

    The position will almost certainly be horse traded away by the politicians, so no doubt it will be a bank friendly chairman.

  17. washunate

    Qualifications? Experience? Technical understanding? Thanks for the laugh.

    President Obama is looking for someone who will cover up past misdeeds and pursue new ones as requested. The Fed chair doesn’t make decisions; it implements them.

    Do Dem academics understand that the current chair of the Fed was appointed by the Obama Administration and approved by the Reid Senate? The whole point is to look forward, not backward. To continue the looting rather than prosecute it.

  18. Helga Delacruz

    The operations of the Reserve Banks are funded by interest earned on U.S. government securities, interest on loans to financial firms and fees charged to banks.

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