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Careful What You Wish For

Is the Federal Reserve nothing but a tool for big banks? According to an op-ed by Sen Bernie Sanders (I-VT), it sure looks that way. The presidential candidate and hero to millions of progressives made the case for an audit, tighter controls, and other measures to rein in the nation’s central banking system.

There are clearly problems with the Fed and it’s very mixed charters to tame inflation, encourage full employment, maintain the value of the US Dollar, and regulate banks. The more presence and power the Fed gains the more this is an important issue. But today’s “progressives” aren’t in a mood for just reform – many are in a mood to “End the Fed!”

While that position is understandable it’s horribly misguided. But it’s a great highlight for the tension inherent in not-that-subtle difference between a “liberal” and a “progressive”.  And it’s ultimately a rather irresponsible position that Sanders is taking.

Feel the Bern?

Feel the Bern?

The op-ed had three major criticisms of the Federal Reserve as we know it:

  1. We must end the cozy relationship with the banks they are supposed to regulate,
  2. Banks should not be paid interest on the $2.4T in idle money on deposit at the Fed,
  3. Now is not the time to raise the Fed Funds Rate,
  4. The Fed should be audited, and
  5. A new Glass-Steagall separation needs to be passed.

That’s quite a list, and it adds up to a Fed in need of wholesale reform. But the Senator is off base to the point of demagoguery on many of these points.

Banking has turned upside down.

Banking has turned upside down.

Certainly, the cozy relationship between the Fed and the banks they regulate is a serious problem – serious enough that it warrants looking into whether or not this enforcement should be returned to an agency within the Treasury Department, leaving the Fed with the roles of a traditional central bank. That point should not be in dispute among anyone serious about reform.

The other points, however, are much less black and white. Paying interest on deposits may not be palatable, but Congress passed a law requiring it in 2006. It would be good to repeal this law and send the idle money forth into the economy, yes.

The Chinese Yuan (Renminbi).

The Chinese Yuan (Renminbi).

As for raising the Fed Funds Rate, it’s a good idea for many reasons – starting with the repatriation of money that left our shores when rates came down. It’s also a good idea to raise rates to get us out of the “liquidity trap”, which is a situation where money is so cheap that investors are nervous about taking a risk with it because the reward is so thin. It does indeed directly relate to the money on deposit at the Fed as “idle money”.

The other points, auditing the Fed and reinstating Glass-Steagall, have been covered here before. In the absence of wholesale reform they both seem like empty things to worry about, given much bigger problems.

A logo for "ALL oNE", a left-libertarian group. The wobblie-ness of it is a key feature.

A logo for “ALL oNE”, a left-libertarian group. The wobblie-ness of it is a key feature.

This criticism is one thing, but the way the message is being received by young progressives is a different problem altogether. Progressivism, as a movement, has always been populist by nature – and highly skeptical of big government. Those two elements, closely related, are what separates it from Liberalism – generally expressed as a belief that strong government is a necessary counter-balance to big business.

The battle over the Fed stands out in this tension between factions and generations of the left for two good reasons – history and power.

Today’s progressives are even more skeptical of government than the movement was a century ago as the movement began to assume real power. It is often better to refer to them as “left libertarian”, a phrase that doesn’t roll of of anyone’ tongue. In essence, they are more anarchist in nature.

They also tend to be believe in conspiracy theories, seeing the march of history as an epic power struggle with nothing left to chance. It’s a degenerate form of the old “Great Man” view of history as the march of great leaders doing great things. In the conspiratorial version, intents are much darker and power always corrupts.

The headquarters of the Federal Reserve. Imposing, yes?

The headquarters of the Federal Reserve. Imposing, yes?

Today’s Fed is a lightening rod for this group because it does wield an awful lot of power and influence. Sanders feeds into this by starting with the far-too-cozy relationship with big banks before going into the litany of other issues as if they are related. In other words, raising interest rates is part of a great conspiracy.

If that sounds crazy to you, here is an article that goes off in that exact direction. Nevermind that the person who wrote it is nearly quoting from “The Creature from Jekyll Island”, a book by John Bircher and general crankshaft G. Edward Griffin. Today’s conspiracy theorists often blend far left and far right.

Which leads us to the “End the Fed!” movement of Ron Paul, prominent not-so-left libertarian and former Congressman. When so-called “progressives” start entertaining ideas like this we have a very serious problem on our hands. The creation of the Federal was an early victory of the Progressive Movement, championed by Carter Glass (of Glass-Steagall, no less) for the purpose of breaking the monopolies enjoyed by private New York banks. Loose credit, as championed by WJ Bryan (among others) was the main goal.

That’s the real problem with this piece by Sanders, in the end. It feeds into a dangerous serious of beliefs that are utterly wrong historically, financially, politically, and rhetorically. While it may be great red meat for his base, this laundry list and the ideologies it fuels are not exactly progressive in many key ways.

This is the problem with a call for “revolution” – you never know who or what might end up under the guillotine. Reform the Fed? Sure – especially since it is gaining power and influence in other ways. End it? Well, if you’re not more suspicious of what would fill the vacuum you can propose what you want. But prudent minds are much more careful what they wish for.

15 thoughts on “Careful What You Wish For

    • Well, then. 😦 I’m not against taking a close look at the Fed, but I am very wary of politicizing it or, even worse, getting rid of it.
      We need a public agency that is ultimately responsible and we need the liquidity of a reserve system. The Fed was a key victory of Progressives and we can’t forget that.
      Far, far too many people have – and that really bothers me.

    • That should be lesson #1, yes. But this level of grandstanding from Sanders is more than a little disturbing to me. I’m afraid of how much conspiracy theorizing has penetrated the young “progressives”, really left-libertarians.
      And I really think Sanders knows quite a bit better than this article.
      Why is he throwing his supporters more red meat when he should be reaching out, BTW? Isn’t the goal to reach more voters, not just keep energizing your base?
      There’s a lot here I don’t get, but I can assure you that this op-ed was a purely political document. And yes, politicizing the Fed is damned dangerous.

  1. Am I the only one who finds this talk more than a little scary? I can see that there is a problem with large banks but to throw everything into turmoil would have devastating consequences. The people who call for an end to the fed are just nuts! What would we go to, the gold standard again?

    • You are far from the only one. The more I think about this the more frightened I am.
      I do believe, on the right at least, they are talking about a return to a rigid gold standard, yes. On the left I don’t think they have imagined anything yet – which may be worse.

  2. Even the most casual glance at the Federal Reserve boards and Chairs makes clear that the Fed IS politicized. It’s a question of: on what interests’ behalf. I think this is what Sanders is getting it.

    • On aspect of the op-ed I didn’t tackle was the assertion that banks choose the people who work there. This was interesting because the recent selection of Kashkari as the new President of the Minneapolis Fed shed a lot of light on the process. His selection came from a committee comprised of the Board members who were specifically NOT bankers.
      And they selected a person with banking experience, yes, but a lot of non-banking experience as well.
      Some of the Fed regionals are more community minded than others. In St Louis, for example, Bullard has pioneered many expansions of community banking.
      Is the Fed politicized? I say no more than it was at its founding – and there are many good examples of it being much more open since Yellen took control – a process started by Bernanke. Could it be better? Yes, and we should encourage these efforts. A greater presence demands it.
      But to conflate the areas where there are definite problems with decisions like raising the Fed Funds Rate and Glass-Steagall is just irresponsible. Further, this “audit the Fed” talk is fine enough as far as it goes but it seems very unlikely that it could produce anything given how open the Fed’s books are now for anyone to see.
      Sanders’ comments alone are fine as far as they go. Questioning the Fed’s influences is always good, yes. Removing some of their regulation power is probably called for, yes, and it will only help them be more independent.
      Where I have a problem is not as much in what Sanders said as the response I’m seeing from his supporters. And re-reading Sanders’ op-ed I have to say that the conflation of many different things appears to be deliberate demagoguery for his base that Sanders should have known would fuel some of this lingering John Bircher / Libertarian nonsense.
      That’s really disturbing to me. A world without the Fed is a world where the big banks have essentially unlimited power. As this piece is titled, be careful what you wish for.

  3. In a banking crisis some of the banks have great losses on their asset side. My own perusal of the research suggest knows really how to avert a banking crisis because when something triggers it there is a downward spiral of their asset prices.

    As far as bank size it is true many of the banks that are not colossal banks did not do irresponsible things to contribute to the great recession. But the research that the economics profession put out tends to be against limiting bank size or detailed regulation of so-called innovative financial instruments. The reason is that you are supposed to examine the risk of a financial instrument when you buy. But the buyers are kind of lazy and risk taking in an otherwise stable economic environment.

    • It is a matter of risk, not size. Properly evaluating risk is the key to ANY free-market (or even capitalist 🙂 ) enterprise and that seems to be getting more difficult these days. But it’s the cornerstone of the new regulation in place since the fall of Lehman, et al, and it has to be that way.
      I think it is favorable to have smaller banks for many reasons. We have a belief that banks should be able to fail and the rest of the world can move on. But there are other ways of handling that strange attitude, mainly through insurance. That and the requirements for quality assets that only get tougher as banks get bigger are good approaches, IMHO.
      But yes, it comes down to humans in the end. In a rush to get higher returns people who are incentivized to produce will do dumb things. Aggressive behavior is also an issue when the stakes get really high and the only employees who can handle the mad rush are young men on the make.
      There’s a lot to think about here. The more I think about it “big” isn’t necessarily the most important problem. But … the appeal of “small” is pretty obvious.

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