Fantastic piece from Jesse and fantastic article from Simon Johnson. In case you were wondering, the Federal Reserve is not looking out for your best interests.
30 March 2012
The Fed is not the only problem here, but a key enabler. White collar crimes and fraud flourished amongst the robber barons even in the days of the gold standard. It just was not as convenient, as easy, to defraud the people en masse through the debasement of the currency.
The Fed has merely proven to be as vulnerable as the regulators and the Congress to the power of the monied interests. If the political campaign process had not been corrupted by money, if the fairness doctrine in the media and Glass-Steagall in banking had not been overturned by the mindless impulse to cast aside the best of the laws, many of the problems we have today would not be so great.
These fellows creates crises, and then ‘save us’ from them, while lining their own pockets and perpetuating the swindle for their less publicly visible puppet masters.
There is little doubt in my own mind that Greenspan knew exactly what he was doing, and made his fateful decision after a meeting with Robert Rubin in the 1990′s shortly after his famous ‘irrational exuberance’ speech. What was said, what was promised or threatened, I cannot say. But the change in direction became clear. It became open season on the voices of reason and restraint in Washington.
What Clinton hatched, Bush brought to full fruition, particularly with his tax cuts, stock bubble, and unfunded wars. And when the Great Reformer came to Washington in the midst of the collapse, he brought back the very advisors who had helped to create the problem in the first place and betrayed the mandate of those who had elected him, prosecuting no one.
And in the aftermath of the financial collapse, the first popular reform movement that rose up in anger against the bailouts, The Tea Party, was quickly turned into a corps of willing tools that turned on the weak and the least among us, the very victims of a corrupt system, in their petulant pride and misdirected anger.
I only fear that the Fed, and some of the perpetual outsiders of history, will be made the scapegoats by the real culprits when the time of reckoning comes, and that genuine reform will be thwarted once again as it has been so many times in the past. Their hypocrisy and shamelessness knows no bounds.
Who Captured the Fed?
By DARON ACEMOGLU and SIMON JOHNSON
March 29, 2012, 5:00 am
…But in the light of the crisis of 2008 and its aftermath, we have to ask: Has our central bank fallen back under the influence of special interests?
…At the dawn of the republic, Thomas Jefferson railed against the risks posed by government backing for concentrated power in the financial sector. President Andrew Jackson fought to abolish the Second Bank of the United States in the 1830s, the leading private bank of his day, which helped manage public finances and the banking system. Consequently, there was nothing resembling a central bank in the United States for much of the 19th century.
The Federal Reserve System, created in 1913, was a uniquely American compromise, trying to balance public and private interests. Banks controlled the boards of the 12 regional Feds – with big Wall Street firms holding great sway over the New York Fed, which had a disproportionate influence within the system as a whole — and still does.
This version of the system presided over a crazed and highly leveraged stock market boom in the 1920s and the catastrophic collapse of credit in the early 1930s, while protecting the big Wall Street firms.
…Unfortunately, as the United States and other countries learned after 1945, clever politicians can use central banks to manipulate the business cycle, boosting output growth and cutting unemployment ahead of elections. Richard Nixon, for example, famously pushed the Fed to ease monetary policy when it suited him.
…Increasingly, however, it seems that technocratic policy-making is just a myth. We have come full circle, and the Wall Street banks are calling the shots again.
Crucially, the idea that politics is just about electioneering misses the point. Politics is about getting what you want, not just through the ballot box but by persuading people in public office to take actions that help you. So declaring the central bank independent doesn’t move it outside the orbit of politics.
Monetary policy has an impact on inflation, output and employment. But it also has a major impact on stock market prices. Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives.
Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse.
In principle, the Fed could stand up to the bankers, pushing back against all specious arguments. In practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector “experts.” Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers.
We have lost track of the number of research notes from major banks pleading for easier credit, lower capital requirements, delay in implementing financial reforms or all of the above.
In recent decades the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear – for example, over deregulating finance, keeping interest rates low in the middle of a boom after 2003, providing unconditional bailouts in 2007-8 and subsequently resisting attempts to raise capital requirements by enough to make a difference.
As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen.
This time will not be different.”
Read the entire article here.