Randy Wray: The Greatest Myth Propagated About The FED: Central Bank Independence (Part 2)

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally posted at New Economic Perspectives

Last time we took a historical perspective on supposed Fed independence. In this blog we look at the myth of Fed independence from its creator, the Congress and from the Treasury.

Independent from Congress: Discretion in Selecting Tools

The strongest case for Fed independence would be in its discretion to choose the tools and targets to pursue Congressional mandates. Congress has shown little interest in interfering with the details of monetary policy implementation, preferring only to mandate the ultimate goals. The period from 1979 to the mid 1980s was an exception as Congress had become enamored with Milton Friedman’s monetarist focus on growth of the money supply. Even after the Fed had dropped money growth targets from serious consideration, Congress still wanted the Fed to provide them. However, for the most part, Congress leaves these details to the Fed.


If we recall the old textbooks, there was a distinction among tools, targets, and goals. Goals are usually defined in terms of unemployment, inflation, and growth; in the case of the US, there is the dual (or quadruple) mandate but it is itself vague. The Fed does not set specific goals (ie, specific inflation rates or unemployment rates), although a number of central banks have adopted narrow ranges for acceptable inflation rates. In that case there is a synthesis of target and goal—the central bank targets an inflation rate that serves as a measure of monetary policy success; employment and output growth are then expected by-products of hitting the inflation target. However, the Fed has not followed that practice, preferring greater discretionary leeway.

Since inflation, by itself, would not seem to be a sufficient goal of policy-making, either the inflation target could be changed if it were inconsistent with other goals, or the other goals would be moved to the sphere of fiscal policy. The less extreme policy (and the one adopted in the US) is to target “the” interest rate to hit the goals. In practice there are many interest rates, so central banks typically target the overnight interbank rate (fed funds rate in the US) with a view to affecting other market rates. However, as there is no close correspondence between “the” interest rate and the Congressionally-mandated goals (that are themselves vague), the Fed has a great deal of discretion over its setting of the interest rate target. In practice, almost any rate target could be justified as consistent with the goals.

The old monetarist preference was instead for a quantitative target (reserves) that would allow the central bank to control money growth. That was then supposed to allow the central bank to keep inflation low—although monetarists tended to argue against accelerating inflation rather than against inflation as the economic costs of a low-to-moderate but stable inflation rate were not believed to be high. In any case, except where legislative mandate sets an inflation target, central banks are typically left to choose their targets (except when it comes to war finance—as discussed below). Modern central banks have dropped monetary (quantitative) targets in favor of interest rate (price) targets—both because they are easier to hit and because current thinking is that they are more reliably linked to the goals.

That then leaves the policy tools available: open market operations and discount window lending rates. Again, these typically are seen to be within the discretion of the central bank. In the case of the US, the early Fed relied on the discount window until it “discovered” open market effects on bank reserves; there was a debate in the early postwar period about the relative advantages of each (with Hyman Minsky arguing forcefully for reliance on the discount window rather than open market operations—and monetarists taking the opposite position), largely decided in favor of open market operations.

The dominance of that “market” approach was all the more obvious in the GFC as the Fed created an alphabet soup of facilities to provide reserves “to the market” through auctions rather than lending them to banks at the discount window. The argument has long been that forcing banks to the discount window penalizes them through demonstration effects or “frown costs”. (Canada has for some time offered an alternative, in which the central bank pays interest on positive reserve balances and charges an overdraft fee for banks that are short; there are presumably no “frown costs”.) During the debate in the 1960s, monetarists preferred open market operations on the argument that this better protects market forces—to allocate reserves and also to determine interest rates. However, if the Fed sets the discount rate and announces a fed funds rate target, the market is not setting those rates. Still, the way the Fed auctioned reserves during the crisis would seem more consistent with the market-based approach.

In conclusion, “independence” could refer to choice of tools—discount window versus open market purchases to supply reserves, discount window or overnight markets to determine interest rates, and required reserve ratios to determine deposit multipliers.

Independence from Treasury: Fiscal and Monetary Policy Operations

The US got its central bank only in 1913, although it had brief experiments with the First and Second Banks of the United States and as well with special rights granted to national banks. With those exceptions, the Treasury, itself, provided most of the central banking functions until the FRA of 1913 created the Fed. MacLaury summarizes the evolution of Fed and Treasury sharing of responsibilities as follows:

The central bank is in constant contact with the Treasury Department which, among other things, is responsible for the management of the public debt and its various cash accounts. Prior to the existence of the Federal Reserve System, the Treasury actually carried out many monetary  functions. And even since, the Treasury has often been deeply involved in monetary functions, especially during the earlier years. At the beginning of World War II, it appeared desirable that the Treasury be able to issue debt at relatively low interest cost and also on a basis that assured purchasers that securities would be marketable at near face value. Because of the urgency of this need, the policy was agreed to and continued after the war until 1951. During this period, the Treasury was, in effect, deciding the monetary policy of the country as it made its decisions as to how much debt needed to be funded. Because the central bank supported the market for government securities, it was forced to purchase amounts of securities necessary to maintain low interest rates and the par value of securities. Thus, as the Treasury issued additional debt, the central bank was forced to acquire part of that debt. This process resulted in direct addition to bank reserves. Following the 1951 accord between the Treasury and the Federal Reserve System, the central bank was no longer required to support the securities market at any particular level. In effect, the accord established that the central bank would act independently and exercise its own judgment as to the most appropriate monetary policy. But it would also work closely with the Treasury and would be fully informed of and sympathetic to the Treasury’s needs in managing and financing the public debt. In fact, in special circumstances the Federal   Reserve would support financing if unusual conditions in the market caused an issue to be poorly accepted by private investors. The Treasury and the central bank also work closely in the Treasury’s management of its substantial cash payments and withdrawals of Treasury Tax and Loan account balances deposited in commercial banks, since these cash flows affect bank reserves.

In modern theory, central bank independence seems to refer additionally to operational independence. As discussed, the central bank of developed nations is often prohibited from directly financing government budget deficits—as in the US where the FRA mandated a separation of fiscal finances from central bank operations. This is a deviation from the traditional role of the first central banks, which was quite explicitly created to provide state finance. And as MacLaury explains above, the Fed returned to that central role in WWII (as it had done in WW1), but the Treasury Accord restored the separation. So, in the US, the Treasury is required to make deposits to its account at the Fed before it can write checks (today, Treasury spending is increasingly accomplished through electronic payments, but that amounts to the same thing). Still, as MacLaury makes clear, the Fed works closely with the Treasury to ensure that fiscal operations proceed smoothly. If they did not, one can presume that the Fed and Treasury would cooperate to change the procedures.

The Treasury and the central bank also work closely in the Treasury’s management of its substantial cash payments and withdrawals of Treasury Tax and Loan account balances deposited in commercial banks, since these cash flows affect bank reserves. Most economists seem to think that this constrains the Treasury—since it cannot spend unless it has deposits at the Fed.

Frank N. Newman , former Deputy Secretary of the U.S. Treasury, shed light on the way the Treasury views constraints on financing its deficits:

I recall from my time at the Treasury Department that the assumption was always that there was money in the fed account to start with. Nobody seemed to know where it came from originally or when; perhaps it was established in biblical times. But as a matter of practice, if the treasury wanted to disburse $20bn a given day, it started with at least that much in its fed account. Then later would issue new treasuries and rebuild its account at the fed. (I do not recall ever using an overdraft.)

In my view, this is still consistent with the MMT perspective that you mentioned, and in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount, thus restoring the money supply and the Treasury’s Fed account to the levels they were prior to that round of spending. Every cycle is: spend first, then issue treasuries to replenish the fed account. The fact that Treasury started the period with some legacy funds in its Fed account is not really relevant to understanding the current flow of funds in any year.

(In practice, Treasury varies its issuance not only to match outlays, but also to deal with seasonal factors, and to avoid wide swings in new-issue sizes; so at one point of a year, treasury might actually issue some extra securities because the next month was expected to have low tax revenues, or might not fully replenish recent spending because the next month was expected to have high tax revenues. That seasonal process doesn’t really affect the overall flow of funds over a year. The substance of the cycle is still: spend then replenish. Debating that would seem highly philosophical, and would miss the practical aspects of the flows.)

In any case, the treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.

(I even try to avoid using the expression “borrow” when the treasury issues securities; the treasury is providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries.)[1]

The precise operating procedures used have actually changed substantially over the years, and there is no reason to suppose that these changes were not made to facilitate fiscal operations. Generally speaking, the Treasury receives payments (mostly taxes) in its deposit accounts held at private banks, then shifts them to the Fed in order to spend. The Fed debits the reserves of the private banks when the deposits are shifted. Treasury spending reverses that as reserves are credited to banks receiving deposits (recipients of Treasury spending). If all of this were accomplished instantaneously, it is obvious that the operations net-out if Treasury’s spending equals its tax receipts. In that case, there is no impact on private bank reserves or deposits. If however tax receipts are less than government spending, bank deposits and reserves would be net credited. When tax receipts are greater than government spending, there need not be any net impact on private bank reserves and deposits so long as the Treasury does not move its extra receipts to the Fed. In practice, the Treasury attempts to maintain a constant (small) positive account balance at the Fed, which ensures that fiscal operations do not affect private bank and reserve balances.

According to MacLaury,

When the balance between spending and taxation results in government deficits, the Treasury   has to issue additional public debt. In a monetary sense, the failure to tax adequately to cover the expenditures of the Federal government is an invitation for “printing money” through the issuance of federal debt. Depending on the phase of the business cycle, this tends to increase the money supply and, without offsetting action by the central bank, can result in an inflationary rise in prices. The result is “hidden taxation”— which takes away from taxpayers in the form of lower purchasing power (higher prices) what they would have paid in additional taxes had the expended funds been obtained through that source. Thus there is an important linkage between the taxing and spending powers of Congress and the monetary powers as delegated to the Federal Reserve System. In principle, it is the job of Congress and the executive branch jointly to define the economic policy objectives of our national government, and to support those objectives with appropriate fiscal measures. Then the central bank can coordinate monetary policy in a manner which serves those national objectives. When fiscal policy does not match spending appropriately to tax revenues, then the monetary authority is faced with a difficult choice: (a) how severely should it restrain the inflationary forces that may develop, and (b) to what extent should it permit inflationary forces to have their effect in higher prices? When the   failure to provide appropriate tax revenues generates acute forces of inflation, then even the best compromise may require severe monetary restraint. This has the effect of appearing to be at cross-purposes with congressional intent and can also produce severe disruptions in some areas of the private sector such as housing. (p. 8 )

Note that MacLaury does not imply that the Fed might try to prevent the Treasury from deficit spending; rather the Fed’s “independence” is strictly limited to its decision over whether to tighten monetary policy to fight any inflationary pressures that the deficits might fuel. While MacLaury was writing in a time in which it was believed that tight policy means slowing money growth, we now associate policy tightening with raising the interest rate target. Still, the important point is that when read together with the previous quotes from MacLaury and Newman, we presume that the Fed is to cooperate with the Treasury so that the fiscal operations proceed smoothly. The Fed’s choice is not to refuse to “cut checks” so that the Treasury can spend funds allocated by Congress, but rather to tighten policy if it believes fiscal policy is too expansive.

How do the Treasury and Fed ensure that budget deficits over a time period (spending greater than receipts) do not affect bank reserves and deposits? The key is “debt management”: new issues of Treasuries by the Treasury and/or open market sales by the Fed. As mentioned, there have been significant operational changes over the years, but conceptually, it is not difficult to understand the balance sheet operations that need to take place. To spend more than tax receipts, the Treasury needs additional deposits in its accounts at private banks—to be shifted to the Fed before spending. That can be accomplished by selling new Treasuries to banks, which would credit the Treasury’s deposits. However, when the Treasury shifts deposits, the Fed needs to debit bank reserves. Since in normal times banks do not operate with excess reserves (today of course they have massive excess reserves as a result of three phases of Quantitative Easing), they do not have the extra reserves needed. The Fed can either lend the reserves or it can buy Treasuries in open market operations.

Note that if it were to buy Treasuries, it would need to buy the quantity of Treasuries the Treasury had just sold! While the Fed would not have violated the “independence” provided by the prohibition on direct purchases of Treasury debt, it would end up with the Treasury’s debt anyway. While the Fed can choose whether to use open market operations or the discount window, it really cannot refuse to supply the reserves. First, that would cause bank reserves to go below desired or required reserves (assuming they were operating without excess reserve positions). But more importantly, it would cause the fed funds rate to rise above target. If a central bank targets overnight rates, it must accommodate demand for reserves. In other words, the central bank’s “independent” interest rate setting conflicts with its “independence” from fiscal operations in the sense that it must provide the reserves banks will need when the Treasury moves the proceeds from a bond sale to its account at the Fed in order to make payments.

When the Treasury does spend these proceeds, the deposits and reserves of banks are restored. At this point, the Fed will need to reverse its previous operation: banks will now have excess reserves that can be drained either through an open market sale of Treasuries by the Fed (that is, the Fed sells the Treasuries it just bought) or the Fed and banks wind down discount window loans. (Note the Fed for some time has used repos and reverse repos rather than outright sales and purchases—which ensures actions can be quickly reversed to minimize Treasury’s operational impacts on bank reserves.)

At the end of this process we find that deficit spending by the Treasury results in higher private bank deposits as well as greater Treasury holdings. (Note it does not matter whether banks sell the Treasuries to households—in that case, bank holdings of treasuries as well as bank liabilities to households are reduced by the amount of the sale; the treasuries will be in household portfolios rather than in bank portfolios.) All of this is just a logical explication of the balance sheet operations that would need to occur given the twin constraints that treasury cannot sell bonds directly to the central bank and that it needs to move deposits from private banks to the central bank before spending.

A final point to note is that so long as the central bank targets interest rates, its options are limited no matter which procedures are adopted, in the sense that it must operate to minimize fiscal policy effects on reserves and hence on overnight rates.  Conforming to the FRA, the Treasury needs to sell Treasuries to private banks when its deposit account at the Fed is insufficient, but banks need reserves to allow the Treasury to shift its deposits. If the Fed provides those in an open market sale, it will need to reverse that once the Treasury does spend. The result of deficit spending by Treasury will normally lead to a nearly equivalent increase of bank holdings of bonds when all is said is done. This will be true no matter what operating procedures the Fed adopts and regardless of the prohibitions written into the FRA.

Political Independence

That brings us to the final category, political independence, which is linked to operational independence. The question is whether the (limited) operational independence—the “non-consolidation” of treasury and central bank—allows the central bank to “just say no” to the treasury. That is, could a resolute Fed prevent the Treasury from spending (up to the budgeted amount authorized by Congress)? That would seem to be the only argument that the critics have against consolidation (since the end result in terms of balance sheets is the same).

Let us go through the steps of the process. On current requirements, if the Treasury does not have sufficient deposits in the private banks (tax and loan accounts) to transfer to cover mandated spending, it must first sell bonds. The question is this: will the banks buy them? The answer is pretty simple. We know that even if the banking system has no excess reserves, the Fed will respond to any pressure on interest rates that might be created by banks trying to buy the bonds. If banks are short desired reserves, the Fed supplies them to keep the rate on target. With an interest rate target the Fed always accommodates. That is the macro level answer.

At the micro level, special banks—dealers—stand ready to buy bonds. To maintain their relationship with the Treasury, they will not refuse. (In the US there are 21 primary dealers obligated to bid at U.S. government debt auctions—there is literally no chance that the US Treasury could fail to sell bonds.) The dealers would then try to place the bonds into markets. For a sovereign currency issuer that will make interest payments as they come due, there is no fear of involuntary default. It is conceivable that the Treasury has offered maturities that do not match the market’s desires. In that case, prices need to adjust to place the Treasuries—or the dealers will get stuck with the bonds.

In any case, this mismatch is easily resolved if the Treasury offers only very short maturities. This might not seem obvious unless one realizes that short maturity Treasuries are operationally equivalent to bank reserves that pay a slightly higher interest. As the Fed (like most central banks) targets the overnight rate, reserves can be obtained at that rate. Assuming the central bank is not running an “operation twist” policy (buying longer maturities to target longer term interest rates), it lets the “market” determine rates on longer maturities. (Do not be misled by use of the term “market” as banks can and do collude to set interest rates—remember the LIBOR scandal. The point is that central banks normally set the shortest term interest rates “exogenously” in the policy sense while other rates are determined “endogenously” although perhaps not competitively.) The Treasury can always issue short term bonds at a small market-determined mark-up above the overnight target.

The question is not really “will the banks buy Treasuries”, but “at what price”. Very short-term Treasury debt is a nearly perfect substitute for reserves on which the Fed (now) pays interest. Hence, a slight advantage given to Treasury debt will ensure that (non-dealer) banks will exchange reserves for Treasuries. If the Treasury is obstinate, insisting on selling only long maturities, then portfolio preferences can increase rates—perhaps beyond what Treasury wants to pay. The solution, of course, is to offer maturities the market prefers—or to pay rates necessary to induce the market to take what the Treasury prefers to issue. Clearly this is a very easy “coordination problem” to resolve.

The second step requires that the Treasury move deposits from private banks to the Fed. At the same time, the private bank reserves are debited. The Fed does not and will not prevent this from occurring. If the transfer should leave banks short of reserves, the Fed accommodates—either through a temporary bond purchase or by lending at the discount window. In practice the Treasury coordinates with the Fed so that the Fed is ready to provide reserves as needed. Again, operating with an overnight target rate requires accommodation of the demand for reserves—it is not a choice if the central bank wants to hit its target.

In the third step the Treasury writes a check (or tells the Fed to credit the reserves of the recipient’s bank, which credits the recipient’s account). Again, the Fed does not and will not prevent this. Note that this will add to banking system reserves and hence normally create excess reserves in the system.

In the fourth step, the Fed removes the excess reserves through an open market sale (or by winding down discount window loans). Of course, this simply reverses the second step. A central bank that is targeting overnight interest rates cannot (normally) leave excess reserves in the system (unless the target is ZIRP—zero—or the central bank already pays interest rates on reserves). In a ZIRP environment (or where the central bank pays the target rate on reserves), excess reserves can remain in the system with the result that interest rates fall to the rate paid on reserves.

In conclusion, we see that there is no place in the current operating procedures for the Fed to prevent the Treasury from spending budgeted amounts. Presumably even if the Treasury tried to spend beyond budgeted amounts—perhaps in an attempt to replicate the experience of the Weimar Republic or Zimbabwe—the Fed would actually be powerless to prevent it (although the Fed could react by raising interest rates—which would actually increase the Treasury’s spending on interest, and hence increase the budget deficit). While the current operating procedures—some guided by the FRA of 1913—are believed to have been created to ensure that a run-away Treasury could not finance spending by “running the printing presses”, there is actually nothing in those procedures to prevent it.

During WWII the Fed agreed to keep interest rates low on Treasuries. It subjugated monetary policy to the war effort—keeping rates low meant that even as the outstanding stock of federal government debt grew quickly, government spending on interest rates did not explode. That is the main fear of deficit worriers: government can get stuck in a debt trap whereby budget deficits increase the outstanding debt on which interest must be paid; as interest payments grow, the deficit itself increases. Even if other spending were not growing fast enough to cause the debt-to-GDP ratio to grow, if interest rates on debt exceed the growth rate of GDP, the debt ratio will generally grow (unless the rest of the budget is in surplus). Fed policy in WWII and through to 1951 ensured that would not happen. The Treasury Accord released the Fed from that commitment, although the Fed’s interest rate policy kept the short-term rates very low for another decade. As GDP continued to grow, the federal government debt-to-GDP ratio fell quickly in the postwar period.

What do we learn from that experience? Even with budget deficits of 25% of GDP, a central bank can keep interest rates very low across the maturity structure. As a creature of Congress, this policy could be mandated if it became necessary. Alternatively, the Treasury can restrict its new issues to short-term maturities. In that case, the rate on Treasury bills will closely track the Fed’s policy rate. So long as the policy rate is kept below the GDP growth rate, the “debt trap” dynamics can be controlled by Congressional budgeting that would reign-in non-interest spending or raise tax rates. (To be sure, a Zimbabwe-bound Congress could try to keep debt growing faster than GDP by accelerating the growth of budget allocations, and the Fed would not be able to prevent that as raising rates higher would just hasten the explosive growth of the debt ratio.) If the Fed insisted on keeping interest rates above GDP growth, it not only would cause government debt ratios to grow, but would also cause private debt ratios to grow. Sooner or later the economy would probably crash, causing the Fed to relent.

Bad policy—whether monetary or fiscal—is always possible and painful. Fortunately, there is nothing in the post-Great Depression experience to warrant unduly pessimistic views of the motives of either Congress or the Fed. Even the extremes of the Volcker years—short term rates driven above 20%–were eventually reversed and, one hopes, lessons were learned from the experience. And there is nothing approaching a Congressional consensus that the US government ought to budget to produce hyperinflation.

If anything, all the budgeting errors are on the other side: insufficient fiscal stimulus in the GFC, Partisan silliness over expanding the debt limits, tying compromises to sequestration, and an unhealthy fear of budget deficits. While the Fed has a great deal of independence in setting its interest rate target, it appears unlikely that in a crisis (whether induced by excessively high rates on private debt or high rates on public debt that create an exploding debt ratio or a major war that requires cooperation between the Fed and Treasury) the Fed would resolutely pursue dangerous policy. And if it did, Congress can intervene.

Finally as we have seen above, Congress has since 1913 continually refined and restated its over-riding instruction to the Fed: policy is to be formulated with a view to supporting the national interest. Congress has also shown its willingness to modify the Federal Reserve Act and to (selectively) tighten its control over the Fed. If a growing budget deficit became necessary to support domestic demand or due to external events (such as military threats to the USA) it is reasonable to suppose that Congress would yet again expect the Fed to support the Treasury’s bond issues. And if it did not, Congress can mandate that it do so.

If all of this is correct, the Fed’s independence is limited to its insulation from political pressure and especially freedom from political interference into its rate-setting deliberations.

[1] From Stephanie Kelton, “Former Dept. Secretary of the U.S. Treasury Says Critics of MMT are ‘Reaching’”, New Economic Perspectives, October 30, 2013, http://neweconomicperspectives.org/2013/10/former-dept-secretary-u-s-treasury-says-critics-mmt-reaching.html.

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  1. j gibbs

    I have been studying this stuff for fifty years, but I don’t know what contribution the author believes he is making with this post. To me, the best way to understand the Fed is still to ask, ‘who benefits’ from all these machinations and mechanics.’ And, of course, inflation targeting is so much easier when the indexes are so conveniently jiggered, isn’t it?

    1. Sammy Maudlin

      Okay, since you’ve been studying this stuff for fifty years, I’ll ask you: “who benefits?”

        1. Sammy Maudlin

          Well, thank you for YOUR contribution to the greater understanding of the workings of the Federal Reserve!

          1. F. Beard

            The banks and the wealthy benefit, the latter because they are by definition so-called credit-worthy.

        2. Yves Smith Post author

          You’ve hardly got any basis complaining about Wray. Do you often go about professing better knowledge when you actually don’t have it?

  2. financial matters

    I think this paper cited as reference 2 in part 1 gives more insight into Wray’s views on the Fed..

    L. Randall Wray, 2013. “The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007”, Research Project Report, April http://www.levyinstitute.org/publications/?docid=1739.

    “”CHAPTER 7: Conclusions

    We remain concerned that the Fed and Treasury have used LLR (lender of last resort) as a back-door way to bail- out insolvent institutions. In our view, this was not just a liquidity crisis—or even mainly a liquidity crisis—which is why the Fed did not follow the classical LLR model. It did not restrict lending to “good collateral” and certainly did not lend at a penalty rate. Further, its lending was not temporary; indeed, troubled institutions borrowed from the Fed, literally, for years. Extremely low lending rates to troubled banks allowed them to continually finance their positions in assets at subsidized costs. We are skeptical of reported profits (that show health has returned to most of the big banks), but clearly if the Fed lends at near-zero rates for years, banks can conceivably work their way back to profitability. And if the Fed over-pays for troubled assets, that also helps to bailout insolvent institutions.

    However, such policy is not LLR by any stretch of the classical model. As we documented in our report last year, much of the Fed’s activity also appears to conflict with the scope permitted by law, even by the exceptions permitted in section 13(3) of the FRA. We will not repeat the argument here, but the Fed has at least stretched the law—if not violated it outright. We are also concerned that much of the bailout undertaken by the Fed and Treasury took place behind closed doors, without Congressional scrutiny or approval. Data were released only after a public outcry, Congressional action, and a FOIA lawsuit. Such behavior by government should not be tolerated in a democracy.

    Former FDIC head Sheila Bair recently warned of “cognitive capture” that she says still rules regulation and supervision of financial institutions. As she put it:
    It means the regulators tend to look at the world through the eyes of the banks. So they don’t look at themselves as independent of the banks. They view themselves as aligned with the banks, that their charter is not to protect the public, but to protect the banks. And this is the premise of the bailouts, that somehow if you take care of the banks, you’re going to take care of the broader economy. And it just didn’t turn out that way. They’re two very different things.””

    “”The “London Whale” fiasco brought to light by the Senate Permanent Subcommittee on Investigations’ grilling of JP Morgan’s top management showed that little has changed at the biggest banks—they are still taking on risk and hiding it behind models that are tweaked to get any results they want.

    This is precisely what one would expect after a bailout that substantially protected these institutions from serious losses. If history is any guide, financial institutions ramp up risk after bailouts.””

    “”The central bank promoted a White Paper on housing, proposing, ever so gingerly, the heretical remedy of debt forgiveness for the millions of homeowners facing foreclosure.””

    “”People ask, “Why can the Federal Reserve spend and lend trillions to save Wall Street banks but will not do the same to rescue the real economy?” That is a good question. At this troubled hour, the Federal Reserve should find the nerve to abandon “failed paradigms” and to use its broad powers to serve a broader conception of the public interest. If we are to expand the Fed’s authority, it should be done to further the public purpose.””

    “”Governor Sarah Bloom Raskin, who was appointed to the Federal Reserve Board by President Obama, delivered an unusually caustic message to bankers last year. She is pushing substantive penalties for banking-sector abuses—the regulatory diligence neglected by the Greenspan Fed. “In the housing sector, we traveled a very low road that had nothing to do with looking out for the greater good,” Raskin declared. “On the contrary, there were too many people in all of the functional component parts—mortgage brokers, loan originators, loan securitizers, subprime lenders, Wall Street investment bankers and rating agencies—who were interested only in making their own fast profits…Now it is time to pay back the American citizenry in full””

    “”Instead of pumping more money into the banking system, where much of it feeds speculation, the chairman should figure out how to get it to the sectors of commerce or industry that really need it.

    The Fed, for instance, could use its regulatory muscle to encourage the now risk-averse bankers who are unwilling to lend—the same bankers whose reckless risk-taking nearly brought down the entire system four years ago. The Fed could create special facilities for directed lending (just as it did for the imperiled banking system) that gets the banks to relax lending terms for credit-starved sectors like small business.””

    Whether or not the Fed’s recent interventions during the GFC were justified, the point here is that the central bank was willing to save certain corporate enterprises when it believed the consequences of their failure would threaten the largest banking institutions. Yet, the Fed declined to do something similar for the overall economy and help millions of indebted homeowners and unemployed workers.””

    “”The challenge now is to convince ourselves that money created by government could be used—judiciously—to finance long-term public projects, like infrastructure and high-speed rail. What about Hyman Minsky’s proposal to use government as employer of last resort? Imagine if highest-priority projects were financed with the new money created by the cooperation between the Treasury and the Federal Reserve—breaking in a single stroke the logjam in Washington created by the belief that Uncle Sam has “run out of money” as President Obama wrongly believes.””

  3. Jim Haygood

    ‘Since inflation, by itself, would not seem to be a sufficient goal of policy-making …’

    WHOA, stop! Thought you were just gonna slip this enormity past us, eh? It’s long been recognized that a dual mandate (full employment AND price stability) is unachievable when the Fed has only one tool, monetary expansion. The other tool which might affect employment — fiscal policy — is in the hands of Congress, not the Fed.

    In practice, full employment (or the vain pursuit of it) has nearly always trumped price stability, to the point that the CPI-U which began at 10 in the year 1913 has now metastasized to 233.

    That is, under the Fed’s feckless, reckless administration, the mighty elephant dollar of 1913 has morphed into a cowering, emaciated little hamster. Instead of needing a good five-cent cigar (as Woody Wilson’s veep Tommy Marshall famously quipped in 1917), now what America needs is a good five-dollar cigar. Or a stable currency, for a change.

    The Fed’s Flying Yellendas should take a clue from ol’ Tommy Marshall, who (quoting Wikipedia) ‘was known to greet citizens walking by his office on the White House tour by saying to them, “If you look on me as a wild animal, be kind enough to throw peanuts at me.”

    1. Auburn Parks

      Why do people who complain about inflation always ignore wage increases? If my basket of necessary goods purchases were $8K and my income was $10K, this is literally the same as $80K and $100K. or $800K and $1M. Almost all nominal values are meaningless without context.

      An alien asks you how much you earned last year and you tell him $100Trillion,

      So what does that mean? Are you rich or poor? what good does that number do you? What can you buy for that arbitrary number? The questions go on and on, there can be no answer without context.

    2. Sammy Maudlin

      Haygood’s not big on context. In fact, he’s not real big on citing complete sentences before going on a half-truth rant.

      So sayeth Haygood: “the Fed has only one tool, monetary expansion.” So, the Fed can only expand the monetary base? Hmmm. I believe they might also have another tool:

      The Fed’s monetary policy goals, as mandated by Congress in its 1977 amendment to the Federal Reserve Act, are twofold: price stability and maximum employment. Although the FOMC has considerable discretion in the pursuit of those goals, traditionally, monetary policy has been conducted by targeting the federal funds rate—the overnight interest rate at which depository institutions trade balances held at the Federal Reserve. Although the Committee does not set the fed funds rate directly, it conducts open market operations (trading short-term government securities with depository institutions) to keep the rate close to the Committee’s target.

      A tightening cycle typically develops as a consequence of the economy’s expansion. As unemployment decreases, if the Committee expects inflation to be substantially above target, it increases the FFR target (selling short-term government securities). Higher interest rates then slow down economic activity (but not so as to compromise the employment goal) and bring inflation down.


      How can a know-it-all only know half?

  4. from Mexico

    L. Randall Wray paints a benign portrait of the Fed. He does this by taking the Fed’s public pronouncements in the 1976 to 1994 era at face value. The result is an account of both the Fed’s history of that era and of its current operations which comes closer to fiction than fact.

    But if we peel away a few layers of the onion, and look at what the Fed really did during that tumultuous period, versus what the Fed publicly says it did, a much less flattering image of the Fed emerges. It also destroys many of the operational myths Wray is peddling of the way the Fed currently operates.

    One has to ask the question: Why did the FOMC believe its deliberations had to be done in complete and total secrecy after 1976? (Bruce MacLaury, who Wray quotes extensively in Part I of this post as well as this second part, was President of the Federal Reserve Bank of Minneapolis, thus making him a member of the Federal Open Market Committee, the Federal Reserve’s senior policy-making board, from 1971 – 1977. The 1969 to 1977 era was the Nixon-Ford era in which Richard Cheney and Donald Rumsfeld also rose to prominence, right along with MacLaury.) Not only were the FOMC’s deliberations conducted in total secrecy, but the Fed regime sought to keep its minutes from the public forever. As Jeffrey Snider writes in “The Fed is Opaque Because It’s Flying Blind,” Arthur Burns ended the Fed’s five-year tradition in 1976. Previous Fed regimes had released full and unedited written transcripts after a five-year waiting period.

    The answer to that question is of course that the Fed was saying one thing publicly, but behind doors doing something very different. And what that “something different” turns out being, almost without fail, is far less favorable to the “public interest,” and far more faovorable to the US’s oligarchical ruling class, than what was indicated by the sublime public pronouncements of the Fed.

    Also omitted from Wray’s discussion are two important policy tools available to the Fed:

    1) Regulation, and

    2) It’s relationship with the shadow banking system, the elephant in the room which is where much of the nation’s money supply actually takes place these days.

    Wray leaves no doubt of his Pollyanaish take on policymakers with his concluding remarks:

    ”Bad policy—whether monetary or fiscal—is always possible and painful. Fortunately, there is nothing in the post-Great Depression experience to warrant unduly pessimistic views of the motives of either Congress or the Fed.


    Congress has since 1913 continually refined and restated its over-riding instruction to the Fed: policy is to be formulated with a view to supporting the national interest.”

    1. F. Beard

      Fortunately, there is nothing in the post-Great Depression experience to warrant unduly pessimistic views of the motives of either Congress or the Fed. LRW via FromMexico

      I assume the motives of the Fed officials are the highest. But that’s all the more damning of the Central Bank since it is evident that no matter how smart and well intentioned they are, NO ONE can make central banking work properly and it’s been 320 years since the BoE was founded.

      What’s that definition of insanity again? Doing the same thing over and over and expecting different results?

      But it’s not quite the same thing but an oscillation between making banking more (temporarily) stable at the cost of it being less ethical and vice versa. It is truly an unresolvable dilemma.

      The solution is 100% private banks with 100% voluntary depositors and let’s find ethical means of private money creation.

      1. F. Beard

        Make that “let’s find other means of ethical private money creation” since 100% private banks with 100% voluntary depositors are ethical but, of course, are not very stable. But gambling is inherently uncertain so why should we care?

        1. backwardsevolution

          F. Beard – “I assume the motives of the Fed officials are the highest. But that’s all the more damning of the Central Bank since it is evident that no matter how smart and well intentioned they are…..”

          You lost me right there. Come on!!!!!

          1. F. Beard

            I’m just making the case stronger for the abolition of the Fed with that assumption. Surely Ben B, at least, is well-meaning. Which reminds me:

            There once was a banker Bernanke
            well-versed in all Fed hanky-panky.
            He tried many things rotten
            with linen and cotton
            but ended with nary a “Thank ye!”

    2. Jim Haygood

      ‘L. Randall Wray paints a benign portrait of the Fed.’

      Hell, the Fed paints a benign, if not outright hagiographical, portrait of itself. Case in point:

      ‘William McChesney Martin became Chairman of the Board of Governors of the Federal Reserve System at the time of the March 1951 Treasury-Fed Accord and, in effect, created the modern Federal Reserve System. The authors recount some of the early events that shaped the modern Fed. They also relate how Chairman Martin helped to create a viable, free market in government securities whose stability did not require Fed intervention and how he reinvigorated the original federal structure of the Federal Reserve System.’


      Martin also cured polio, advanced polymer chemistry, and saved millions of orphans. But those achievements were outside the scope of this paper.

      As for L. Randall Wray, this does seem like awfully anodyne, cautious prose from the wild-West precincts of UMKC, where anything goes. One suspects that he’s donned a conservative tie in pursuit of some government grant … after which he can rip off the grey pinstripes and reveal his pink-latex MMT party suit underneath.

      1. JTFaraday

        Well, you have to consider that one strategy people marooned in the middle of Nowhere in the technocratic hierarchy might use to pursue their careerist ambitions beyond where they would normally be able to go, is to pound the table and self righteously yell “I know what’s going on here!!,” while demonstrating that they’re perfectly willing to talk out of both sides of their mouth and mouth the usual public relations pieties to the dummy public, (and we always hearing how dumb we are from the people around Wray et al, right?).

        The corrupt parties then buy them off, particularly if they have a public following, neutralizing them and their public following in the process.

        This is “win-win” for everyone but the MMT-bots. Grants, positions, all that sh*t that people chase so assiduously is actually cheap. It’s the free pass to loot the public again, and drown them in debt on a regular basis, that’s priceless. The MMT-bots get to hang on “hoping” for their “JG buffer stock” like the Obama-bots hope for whatever it is they still hope for, or else they wise up and disperse for greener pastures.

        So, maybe we’re looking at Act II for Randy Wray. It takes a slightly sociopathic person to do this, but this is pretty much what all our politicians do, so at some point it becomes the cultural norm and we should expect it, especially from people who cultivate ideological sects.

        1. from Mexico

          I’m not so sure the prieslty caste of MMT is driven so much by self-interest as by ideolgy. Sometimes it’s not that easy to tell the difference. Take for instance the poverty dispute, as described by Michael Allen Gillespie:

          “The medieval church understood itself as the embodiment of the Holy Spirit and thus as exercising God’s dominion or kingship on earth. Churchmen thus imagined that they should live in a manner befitting their status. The Franciscan doctrine of poverty challenged this view. [According to it the Kingdom of God] is not a literal kingdom here on earth represented by the church, but a spiritual kingdom… Taken to its extreme, such a doctrine was thus not merely an attack on prieslty wealth and power; it was also an attack on clerical hierarchy and on the church itself.”

          1. Lambert Strether

            Can we agree that dropping quotations — especially lengthy ones — into comment threads without actually relating them to the topic at hand is mere distraction?

            It’s clear enough that your intent is to insult MMT proponents, but you do nothing to show that individuals like Wray, to whom I can only assume your aspersions are directed, are anything at all like priests.

            I mean, when I was in junior high school I played with the idea that all belief systems were like religions — come to think of it, the climate denialists say the same thing of science — but and so surely your point (making an assumption of good faith) is not so simple-minded as that?

        2. F. Beard

          It’s called “selling out one’s base”, no?

          And thus the public benefit of the fear of retribution or loss of reward or honor in the next life? Actually, the loss of one’s self respect in this life might be adequate.

          But please don’t accuse Wray of deliberately selling out. Corruption is much more subtle than that and we all have to eat which is why that pressing necessity should be taken off the table permanently for all.

    3. Ben Johannson

      The topic of the paper isn’t the shadow banking system, or a comprehensive history of the Federal Reserve, or why love hurts or the utility of garden gnomes. You’ve spent two days now complaining that Wray’s work isn’t universal and is therefore somehow bad, a standard I note you hold no one else to including yourself.

      . . .the Fed was saying one thing publicly, but behind doors doing something very different.

      How would you know? You complain about secrecy yet you claim knowledge about what they’re really doing; yesterday you argued nothing can be said objectively, yet you insist that you, personally have the ability to objectively determine a speaker’s true political agenda.

      To call this incoherent would not do it justice.

  5. Malmo

    ”Bad policy—whether monetary or fiscal—is always possible and painful. Fortunately, there is nothing in the post-Great Depression experience to warrant unduly pessimistic views of the motives of either Congress or the Fed.”

    I hope he wrote that with tongue pressed firmly in cheek.

    1. backwardsevolution

      Malmo – “I hope he wrote that with tongue pressed firmly in cheek.” Sadly, I don’t think so. I think he actually believes this.

    2. diptherio

      Yeah. I tend to not assume stupidity where the personal self-interest of decision-makers is adequate to explain harmful policy decisions. It’s Occam’s Razor for political realists.

    3. washunate

      Yeah, I actually feel kind of bad for Wray. He’s been trying to battle the idiocy on the far right by taking them at face value rather than by realizing they’re just playing politics in the extended bipartisan policy of looting the public commons.

      A great tell on this was his slow uptake on fraud, almost like he didn’t want to believe things are as bad as they are.

  6. susan the other

    The Fed only has one tool and that’s setting interest rates. But not even that because in order to keep interest rates low so the banks are viable and/or can recover at the expense of the rest of the economy the Fed has to ensure that inflation does not take off. So that requires collusion from congress and the president. Every single person in Washington is a liar. I really don’t think you can call their incompetence and self interest “benign.”

    1. diptherio

      With all due respect susan, I think the Fed has considerably more tools than merely interest rate policy. All of the “emergency facilities,” or whatever they called them, that the Fed created to bail-out the financial sector from 2008-?? seem to be evidence of this.

      When they say their hands are tied, they’re lying. When they say they have the “good of the nation” at heart, they are lying. We all know this, and yet we all keep playing along. I’m just waiting for the moment when the hypocrisy and double-talk becomes so apparent that large parts of the populace just say, “oh, puh-lease!” and refuse to cooperate.

      At some point we’ll realize that we’re like a bunch of children who have elected one of our own to be the parent and tell us all what to do, but that that doesn’t make the kid in charge become more mature or capable of parenting the rest of us. At some point, the adults in this country will start acting like adults and insisting on their equality with the people who have been placed in the role of society’s parents. Accepting arbitrary injustice and doing what you’re told is the modus operandi of children in abusive families. In that situation, it’s a necessary coping mechanism for the child, but we all recognize how f—ed up it is. So why, when we grow into adults, do we continue to accept arbitrary injustice? Why do we so often just shut up and do as we’re told?

      It is because, I think, on a deep level most of us never really mature. We may eventually stand up to the abusive parent and tell them what’s what. We may refuse to simply do as we’re told in our interpersonal-lives; but when society’s “parents” are so obviously unjust and callous, we revert to abused-child mode and allow injustice to continue, tell the officer or the judge what he wants to hear, keep our heads down and try not to draw attention to ourselves…just like a child in an abusive family.

      Are we adults or are we children?!? Why do we continue to give our assent to these people to govern us? “Ssshhhhh!!!! shut up and pay your taxes…whatdaya wanna do, get everyone in trouble?”

      1. susan the other

        I agree with you completelly, Diptherio. I should have said that the Fed has only only one mandated tool. The Fed, with the collusion with the rest of our “government” can jerry rig anything it wants.

      2. MaroonBulldog

        Diptherio, regarding your paragraph about children electing a child to pretend to be the adult leader, and about the coping mechanisms of abused children, I am reminded of my of my favorite poem, “September 1, 1939” by W. H. Auden. I commend it to your reading.

        The point on which it turns, for me–recall that the scene of the poem is a dive on 52nd Street–is this:
        The faces along the bar/Cling to their average day./The lights must never go out,/The music must always play./All the conventions conspire/To make this fort assume/The furniture of home,/Lest we should see where we are,/Lost in a haunted wood,/Children afraid of the night/Who have never been happy or good.

        As far as injustice done to abused children goes, recall what happened in World History on September 1, 1939, and recall John Maynard Keynes’s “The Economic Consequences of the Peace”, if you care to reflect on this stanza:

        Accurate scholarship can/Unearth the whole offence/From Luther until now/That has driven a culture mad,/Tell what occurred at Linz/And what huge imago made/A psychopathic god./I and the public know/What all school children learn:/Those to whom evil is done/Do evil in return.

  7. washunate

    “In conclusion, we see that there is no place in the current operating procedures for the Fed to prevent the Treasury from spending budgeted amounts.”

    Professor, I heartily agree. Doesn’t that show the irrelevance of monetary policy in addressing our country’s main challenges today, from inequality to oppression to environmental devastation? The action is in fiscal policy, the political realm, the budget process, whatever we want to call that.

    I would suggest that no monetary price anchor, no buffer stock, whether gold or silver or unemployment or JG/ELR, can prevent a sovereign nation from expanding the currency supply faster than the growth in its productive output. Do you have any empirical data that suggests otherwise?

        1. F. Beard

          you know how to bop the mole: ask the mole which price anchor he wants. MMTers know you must choose one. LRWray via washunate

          Wrong Wray! The price stability of fiat can be assured by allowing genuine private currencies for private debts only.

          Or can you think past a single, government-enforced monopoly money supply for all debts? No?

          The arrogance of those folks!

          1. Dan Kervick

            We had private currencies in the 19th century – and had one depression after another. Oh yeah, and slavery. I guess privatization of the monetary system isn’t the path to justice and equality.

            1. F. Beard

              We’ve never had genuine private currencies in the US since private banks have always had a default monopoly on the storage of and transactions with fiat. And since government deposit insurance, that monopoly has grown even more powerful.

              We’ve also had the complicity of the government with regard to:

              1) Precious metals as fiat.
              2) The suspension of species redemption during panics.
              3) Borrowing by the monetary sovereign.

              Keep digging Dan, if you wish, but please remember that I’m under no obligation to warn you further.

            2. F. Beard

              I guess privatization of the monetary system isn’t the path to justice and equality. Dan K

              How many times have I said that inexpensive fiat is the ONLY ethical money form for government debts?!!

              Now apologize for that slander or I’m under no obligation as a Christian to forgive you.

        2. stf

          It’s truly remarkable how many commentators in this series can’t understand context. Washunate, you’re not at the top of the list–From Mexico takes that honor by a hundred miles–but you’re on it for sure.

          Look, the point of the JG is to at least partly replace the “natural rate of unemployment” as the price anchor. But nothing, not even gold–as kings and others demonstrated regularly via debasement or simply abandoning gold when it was thought desirable to do so–can stop a currency issuer from overspending beyond productive capacity if it decides to do so. That’s simply the nature of being the currency issuer. This is central to MMT and has been repeated hundreds of times. In fact it’s the underlying theme of Wray’s series here–the Fed is not really a “check” on the rest of the “government’s” ability to spend what it wants to, whether or not we think that’s a good thing.

          So, again, Wray and MMT would never “suggest otherwise”; obviously somewhere along the line you missed the context of JG relative to what he was arguing here and thought he/they did or would. Wrong.

          1. washunate

            If I say rotfl, can I move up the list? This is precisely why I quoted directly from Wray himself in a piece designed for a lay audience. To make this sort of response look silly.

            So in that endeavor, here’s a lengthier quote. Again, look for the words “need” and “necessarily”. They’re kinda sorta of the same meaning as the word “must” from the above quote:

            “However. And here’s the Big However. We do agree with the mainstream that you need a price anchor, or otherwise pursuit of true, full employment probably would, at least much of the time, cause inflation. So, we, too, want a price anchor. We object to the (usually implicit) claim of just about everyone outside the MMT camp that unemployment is the only possible price anchor. Other economists do not have the imagination to come up with any alternative price anchor for a fiat currency.

            In our view, that is wrong.

            Here is Warren Mosler’s response, in what is almost a Haiku in its simplicity:

            It comes down to this:
            With ‘state currency’
            There necessarily is,
            Always has been,
            Always will be,
            A buffer stock policy.
            Call that the MMT insight if you wish.
            So it comes down to ‘pick one’-
            1. Gold
            2. Foreign Exchange
            3. Unemployment
            4. Employed/JG/ELR
            5. Wheat

            1. F. Beard

              The ex-banker Mosler is, of course, wrong since he assumes that a “state currency” precludes the existence of genuine private currencies for private debts only.

              It doesn’t.

            2. F. Beard

              Call that the MMT insight if you wish. Warren Mosler

              I call it obsolete at best since there is no need to remove fiat from existence for the sake of the private economy if fiat’s value is allowed to float against genuine private currencies for private debts only.

            3. F. Beard

              Note also that the use of gold as a buffer stock gives it an artificial value above its normal value when bought by the government and below its normal value when sold by the government. So then why should government privilege gold hoarders? Or any other buffer stock owners? But if you say overpaying the unemployed is good, I ask overpaying them to do what? Waste their time with make work? Waste their morale? Waste their dignity and self-respect?

          2. F. Beard

            can stop a currency issuer from overspending beyond productive capacity if it decides to do so. That’s simply the nature of being the currency issuer. stf

            Correct. But one can limit the necessary damage to ONLY government and its payees by allowing genuine private currencies for private debts only and by eliminating all privileges for the banks.

            It’s called ethical money creation. Government is force and inexpensive fiat is the ONLY ethical money form for debts to it. Otoh, the private sector is or should be voluntary cooperation so no privileges from government wrt to money/credit creation (or much else) are ethical.

            But keep scoffing at the need for ethics in money creation, World, but you shall NOT have the last laugh.

            Btw, referring to people as “stock” is offensive and proves that slavery has not yet been abolished.

    1. Calgacus

      The JG is fiscal policy, not monetary policy. Nobody classifies it as monetary rather than fiscal. It has nothing to do with the Fed, which Wray has often enough suggested should be folded into the Treasury and done away with. The JG is to be determined by the political process and be part of the budget, just as the WPA etc were. In general, monetary price anchors of the type you mention are also fiscal policy, although they are often misclassified.

      There is tons of empirical data and theory that monetary price anchors can prevent nations from expanding currency faster than growth. Adherence to the gold standard did that, sometimes at great cost in many countries. But why should anyone care too much about that? The thing to do is to prevent inflation, indirectly related to currency/growth, and to do it by abolishing unemployment, thereby creating the hardest currency the world has ever seen. The JG helps your currency/growth ratio by increasing productive output at low currency “cost”, and detailed JG proposals very directly address inequality, oppression and the environment – the first two by the very definition of the JG.

      1. washunate

        I would conclude exactly the opposite. The anchor is a mirage; it doesn’t actually exist.

        One day, gold is $21. The next day, it’s $35. Then $42. One day, a half dollar coin has 90% silver. The next day, it has 40%. Then 0%. One day, the penny is 100% copper. The next day it’s 88%. Then back to 95%. Then 2.5%.

        Our country has been suffering from one of the greatest employment depressions in its entire history over the past couple decades. Yet prices for housing, medical care, higher education, transportation, national security, and so forth, have increased dramatically. I simply empirically deny the notion that a buffer stock forces price stability onto a political apparatus that desires something else.

        1. Ben Johannson

          You’re mixing up speculative pricing with the administrative pricing which dominates the real economy. Gamblers gonna’ gamble, so the overall thrust of the JG is Hyman Minsky’s idea of creating a firewall between the real and the financial while preserving real price stability.

          1. washunate

            These responses are getting hilarious.

            I propose four specific failures of the claim that price anchors are necessary and effective, and the response is a language critique redefining terms?

            I’m sorry, I didn’t know that gold, silver, copper, housing, medical care, higher education, transportation, national security, and so forth, aren’t important to the real economy. I’ll mention that to people managing facilities across the country this week where unusually cold weather has caused copper pipes to burst. Fortunately criminals don’t steal copper piping from abandoned buildings since it’s of no value to the real economy.

            I didn’t even mention areas of greater speculative excess, like fine art and high end automobiles and yachts and private islands and private jets and high quality diamonds and extravagant weddings and so forth, that shows just how extreme our concentration of wealth and power has become – despite a massive “reserve army of the unemployed”.

        2. stf

          “I simply empirically deny the notion that a buffer stock forces price stability onto a political apparatus that desires something else.”

          Nobody disagrees with this. That’s what you’re missing. And that’s Wray’s point here, too. DUH!

      2. F. Beard

        The thing to do is to prevent inflation, indirectly related to currency/growth, Calgacus

        The ethical way to control price inflation in fiat is to limit it to legal tender for government debts only and to allow genuine private currencies for private debts only. That way, government will be strongly incentivized to spend wisely and tax appropriately.

        and to do it by abolishing unemployment, Calgacus

        The resources needed for people to work were stolen from them by the counterfeiting cartel. Therefore, people should have those resources returned or at least be given an equal share if those resources have been consolidated for economies of scale

        thereby creating the hardest currency the world has ever seen. Calgacus

        Via wage slavery? Via time and morale wasting make-work? By providing pre-broken wage slaves for their oppressors? If you want the best currency the world has ever seen then let it be ethically created and provide just restitution for previous theft by the banking cartel. Or is honesty and justice NOT the best policy? Want to bet your soul on that?

        Please Wray. The God of the Bible is much more merciful and just than some -pseudo-Calvinist who has rejected the God of Calvin but kept the heresy.

        1. MyLessThanPrimeBeef

          If the cops are abusive, we need to reform the police, and not say, ‘public police to patrol government buildings and private vigilantes to patrol the community.’

          And we don’t say ‘public firefighters to fight public fires and privatized firefighters to fight private fires.’

          If we need to have a better way of managing our money supply (and remember, the manager has a fiduciary duty to separate his own account from his clients accounts, that is to say, the government is a household just like the rest of us, not entitled to print as much money for its own use – but it’s to save the poor! – such as imperial adventures and to run a police state), we don’t need to go the route of public money and private currencies.

          1. F. Beard

            that is to say, the government is a household just like the rest of us, not entitled to print as much money for its own use – but it’s to save the poor! – such as imperial adventures and to run a police state), we don’t need to go the route of public money and private currencies. Beef for a brain

            The allowance of genuine private currencies for private debts only would PREVENT the wasteful use of fiat since such waste would ONLY necessarily hurt the government itself and its payess.

            You are wrong so consistently that what you worship as God is surely leading you astray. A coin-toss is wiser than you.

          2. Ben Johannson

            The JG does give us a better system of managing money. It’s an automatic stabilizer putting more dollars in during the downswing and reducing the flow on the way up. We should know by now that having an elite group deciding these things as we do now, and as weirdo ideas like NCT/Chicago Plan would permanently enshrine, is plain bad policy.

            1. F. Beard

              The downswing is a symptom of purchasing power that is lent into existence – by a government-backed/enforced credit cartel.

              Otoh, common stock is spent, not lent, into existence so no deflation is built-in to it. Likewise, fiat is spent into existence so it need never deflate either.

              1. Ben Johannson

                No, the downswing is a symptom of over-saving, which Keynes identified 80 years ago. When the private saves the public must spend.

                1. F. Beard

                  Debt repayment counts as saving so you’re being deceptive.

                  Who needs an economy where we are in turn forced to spend and then forced to save, .i.e boom then bust?

                  But what amazes me is your stubborn defense in view of a much better alternative. It’s like engineers clinging to the reciprocating engine (boom-bust) after the turbine (smooth, steady power, lower maintenance costs, more reliable, more elegant, etc.) had been developed.

                  But what condemns you is your defense of theft from and oppression of the poor so a few have the opportunity to get filthy rich with no other “talent” than shrewdness and lack of scruples.

                  1. F. Beard

                    I suppose economics will advance like science does, with the death of old scientists who cling to the obsolete because they can’t or won’t learn the new paradigm.

                    The only question is how much unnecessary suffering will occur till that happens.

                  2. Ben Johannson

                    Debt repayment counts as saving so you’re being deceptive.

                    This makes absolutely no sense regarding the topic. Who said anything about repaying debt not being a form of saving?

                    1. F. Beard

                      Debt repayment is implicit in a money form that is lent, not spent, into existence. Therefore deflation (the bust) is built-in to our money system. Therefore downswings are built-in to our money system.


                      Otoh, common stock is an endogenous money form that is spent, not normally lent, into existence.

      3. F. Beard

        Also, the way to create MAXIMUM meaningful employment is to see that purchasing power is justly distributed. Then people will do things like get their teeth fixed, let one of the parents stay home to raise the children, send their kids to a decent private school, etc.

        So there’s no need for the creation of jobs per se but for the just distribution of income and/or income producing assets.

        Progressives like Wray are doubling down on their initial mistake which was backing the Federal Reserve Act. Haven’t you done enough harm? Isn’t humility called for now and not arrogance?

      4. thomas kondas

        There will never be adequent employment in this country unless it is done with, American slave labor. Jobs are gone, people are only commodities left to their own devices. That elusive Reagan trickle down. Now we are develping a robot force to replace more workers or cause them to take 2 or 3 part time jobs, at $8. an hour to try to feed their family. Our Gov. does not caare for its citizens or the majority of us. Its concern is the banks, Corp.s and corruption. Well, half the congress is still, not millionaries. More worrk to do for The People.

        1. F. Beard

          Well and succinctly said.

          But let’s remove all moral, intellectual and TINA excuses and the bastards will have no excuse on Judgement Day therefore leaving them the option today of learn or burn.

  8. Vedicculture

    The market runs the FED system and through it, US finances. People don’t get this.

    During times of capacity restraint like between 68-81, budget deficits have a tendency to raise real interest rates as the market refuses to finance the public deficit. Interest rates rise and stifle growth through higher inflation to bring down real costs.

    During times of capacity unrestraint like since 2001-, interest rates have a tendency to fall during the debt buildup time period to finance the debt. We saw this in 2002-03 and 2009-12. Rates fell and only when the deficit in real terms, began its fall, did real rates rise. So 2013 did indeed see a surge in economic growth and a reduction in public deficit. If that continues into 2014, the Fed will declare the recession over in 8-12 months.

    The government has to be the ultimate lagging institution. Their data has to be revised consistantly to match what happens on the street. That goes from GDP, to employment growth to income growth. Looks to me they under estimated the recovery in 2013 and have some large upward revisions to make. 2013 far out performed 2012 and there is no arguement to make otherwise. That means GDP and employment growth will have to post-mark, be revised upwards unlike 2012 when the intial reports were close.

    1. Ben Johannson

      During times of capacity restraint like between 68-81, budget deficits have a tendency to raise real interest rates as the market refuses to finance the public deficit. Interest rates rise and stifle growth through higher inflation to bring down real costs.

      During times of capacity unrestraint like since 2001-, interest rates have a tendency to fall during the debt buildup time period to finance the debt. We saw this in 2002-03 and 2009-12. Rates fell and only when the deficit in real terms, began its fall, did real rates rise. So 2013 did indeed see a surge in economic growth and a reduction in public deficit. If that continues into 2014, the Fed will declare the recession over in 8-12 months.

      Markets do not control the key interest rate, the Fed governors control it by vote. Nor do markets fund government deficit spending; the Fed funds the bond markets.

  9. MaroonBulldog

    Doesn’t the statement that “the Fed’s independence is limited to its insulation from political pressure” amount to an acknowledgement that the Fed is an undemocratic institution insulated from democratic control?

    In the undemocratic administrative state in which we now live, an “independent” agency is one made less dependent than it constitutionally should be on the president, so that it can me made more dependent than it constitutionally should be on congressional committees that oversee it. And the influence is exercised through telephone calls that are not transcribed.

    1. Ben Johannson

      Doesn’t the statement that “the Fed’s independence is limited to its insulation from political pressure” amount to an acknowledgement that the Fed is an undemocratic institution insulated from democratic control?

      I don’t think anyone, even the Fed’s cheerleaders, would deny this.

  10. Hugh

    “Congress has since 1913 continually refined and restated its over-riding instruction to the Fed: policy is to be formulated with a view to supporting the national interest.”

    I read this and wonder what drug Wray is on. In the real world, the national interest is whatever is deemed to serve the interests of the rich and elites, the rest of us be damned. The Congress and Fed are just two of the appendages of the rich and elites. They are their sockpuppets. Who seriously cares what a sockpuppet Congress communicates, or does not communicate, to a sockpuppet Fed?

    “If all of this is correct, the Fed’s independence is limited to its insulation from political pressure and especially freedom from political interference into its rate-setting deliberations.”

    Well, obviously most of this is wrong. Greenspan traded low accommodative interests rates to Clinton for his job and an otherwise hands off attitude toward how Greenspan ran the Fed. In the real world, we call this a political deal and it was over precisely interest rates. It is the basis of both the Greenspan and Bernanke puts. Where has Wray been the last 20 years?

    1. Malmo

      I grew up on the south side of Chicago. In the real world where I come from, Wray has even the south side high school drop out LOL.

    2. Yves Smith Post author

      No, the Fed was a great servant to public interest in the 1940s through 1951 and also comported itself pretty well under William McChesney Martin. It started going off the rails with Arthur Burns (an academic economist) and things have only gotten worse since then.

      You are choosing to gloss over the fact that the Congress has indeed given the Fed general marching orders that have some tensions between particular instructions. Congress has decided it’s more expedient to let conjurers like Greenspan and Bernanke take more ground rather than exercise their oversight duties.

      1. Hugh

        I think you are making my point. The Fed has not been working in the public interest for more than 40 years. It is essentially constructed not to work in our interest.

        And I do not understand the invocation of Congressional oversight at all. Aside from a few libertarians and Tea party types, no one in Congress, and certainly none of the heavy hitters on the banking committees (with all the contributions they get from the banking industry), are interested in oversight of the Fed. It is an empty gesture to call for Congressional oversight when oversight is the last thing Congress wants to do and it has had this attitude for decades. I think I was being pretty accurate when I said it was sockpuppets talking to sockpuppets.

      2. F. Beard

        The Fed CANNOT work for the public good anymore, if it ever did, because workers are increasingly NOT needed, at least not in the US. So it does no good to provide cheap credit to “job creators” since they are now net “job destroyers.”

        But I suppose the Fed did some “good” for the US in the post-WWII period; by causing and financing the destruction of its competitors, European countries, in that war.

  11. backwardsevolution

    Hugh – yeah, oversight of the Fed? Who are they kidding? LMAO. I agree, they are sock puppets for the rich.

    “The Global 1%: Exposing the Transnational Ruling Class

    “Even deeper inside the 1 percent of wealthy elites is what David Rothkopf calls the superclass. David Rothkopf, former managing director of Kissinger Associates and deputy undersecretary of commerce for international trade policies, published his book Superclass: the Global Power Elite and the World They Are Making, in 2008.[xxxii] According to Rothkopf, the superclass constitutes approximately 0.0001 percent of the world’s population, comprised of 6,000 to 7,000 people—some say 6,660. They are the Davos-attending, Gulfstream/private jet–flying, money-incrusted, megacorporation-interlocked, policy-building elites of the world, people at the absolute peak of the global power pyramid. They are 94 percent male, predominantly white, and mostly from North America and Europe. These are the people setting the agendas at the Trilateral Commission, Bilderberg Group, G-8, G-20, NATO, the World Bank, and the World Trade Organization. They are from the highest levels of finance capital, transnational corporations, the government, the military, the academy, nongovernmental organizations, spiritual leaders, and other shadow elites. Shadow elites include, for instance, the deep politics of national security organizations in connection with international drug cartels, who extract 8,000 tons of opium from US war zones annually, then launder $500 billion through transnational banks, half of which are US-based.[xxxiii]”


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