By John Weeks, http://jweeks.org
When in 1973 Henry Kissinger received the Nobel Prize for Peace the comedian Mort Saul quipped, “this is the end of satire”. Suggesting, much less appointing Larry Summers head of the Federal Reserve System (aka, the Fed) adds another nail to the coffin of satire, as well as suggesting several other metaphors:
– Dracula in charge of the blood bank
– Inmates take over the asylum
– perhaps most appropriate, “handing the keys to the vault to the bank robbers”.
Bill Black, a regular contributor to the Real News Network, has written a book, The Best Way to Rob a Bank is to Own One. He might write a sequel, The Best Way to Cause a Financial Catastrophe is to Appoint Larry Summers head of the Fed. A recent article in The Guardian by Dean Baker provides a thorough dissection of Summers’ consistent commitment to fostering global financial instability by dutifully serving the interests of financial capital.*
If ever there were someone born to notoriety rather than achieving it, Larry Summers is your man, nephew of two winners of the so-called Nobel Prize in economics,** Kenneth Arrow and Paul Samuelson. It is somewhat ironic that Arrow and Samuelson were, as economists go, relatively progressive, especially the former. Summers did not inherent that political tendency.
Rather than elaborating on Baker’s catalogue of Summerian offices against the 99%, I focus on the Federal Reserve System. Some progressives might say, “the Fed is just a front for finance capitalists, so why does it matter if they have one of their utensils in nominal charge of it?” I hope to convince the reader that such need not be the function of the Fed, and it matters who is in charge there.
Exactly 100 years ago, the Federal Reserve Act of 1913 created a framework for regulating the US financial and monetary system that persists to this day in slightly modified form. Some progressives (and most libertarians) cite the ownership of the Fed by commercial banks as evidence if not clinching proof that the US central bank is nothing more than the utensil of financial capital (see for example, the anti-Fed video, http://www.youtube.com/watch?v=RrwbgdtbdXE). With regard to structure the opposite is the case. The formal governance structure of the Federal Reserve System makes it perhaps the most progressive institution involved in economic policy. The problem arises in the split between structure and practice.
The map shows the 12 “districts” of the Federal Reserve System.
The legal ownership of the FRS by commercial banks (actually of the district FRS banks) reflects the insistence of the framers of the original act that private finance not the public should fund the organization that regulates them. The act ensured that the public would not assume the cost of preventing banks from acting recklessly – the banks must do that themselves. This ownership does not imply direct control. On the contrary, the Federal Reserve Act requires “fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country”, in which the stock holding commercial banks play no formal part .
In less reactionary times the district banks interpreted this commitment to include “representatives of the public”, including trade union leaders and others form civil society (in the 1950s one of my high school teachers was on the board of the 11th District). The overall head of the FRS and the heads of the Fed districts are appointed by the President and must be approved by the Senate. Further, the head of the FRS must by law report regularly to Congress to explain his (all have been men to date) decisions about monetary policy.
Equally important, the mandate of the Federal Reserve System specifies that it base its decisions on fostering employment as well as monitoring inflation: “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates”. In practice the effectiveness of the political oversight has waxed and waned, depending on the chairman and the politics of the time. The almost twenty year reign of Alan Greenspan represented the nadir of the FRS, characterized by banking deregulation, cheap loans for financial speculators and fostering cowboy finance. Larry Summers would bring all that back.
Conventional wisdom maintains that during the mis-rule of Greenspan the power of the Fed increased dramatically. Greenspan himself was frequently called an economic “czar”, pulling the strings that controlled the US economy. The truth is quite the opposite. Under Greenspan the FRS all but abandoned its core task of commercial bank oversight and regulation. A right winger even within the reactionary economics profession, Greenspan championed the privatization of Social Security, and did his best to privatize de facto the Federal Reserve.
The inherently reactionary nature of mainstream economics is manifested in a broadly held preference in the profession for the complete separation of central banking from political oversight. This predilection is justified by the argument that without independence, governments will force central banks to pursue reckless monetary expansion to fuel populist fiscal policy; that is, policies favoring the 99%. Greenspan dedicated himself to avoiding any accountability to the public, turning his appearances in Congress into spectacles of self-promotion. Few if any other Fed chairman have so blatantly maintained that monetary policy is the realm of “experts” in which public accountability is unnecessary as well as dysfunctional.
Without a central bank, financial capital controls our monetary system just as monopolies such as Microsoft control the “software” market. Without effective public oversight, financial capital controls the central bank that should regulate it. It is obvious that a chairperson of the central bank not owned by financial capital is essential to public oversight.
Larry Summers is given to calling himself a “Keynesian”. This is true in the same sense that matadors are agriculturalists. Given a straight-up choice for head of the Fed, I would prefer Dracula to Summers.
John Weeks new book comes out in October, Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy (Anthem)
**So-called because it is awarded by the central bank of Sweden, Sveriges Riksbank, and has nothing to do with the real Nobel Prizes other than the pirated name and being awarded at the same ceremony. After the Sveriges Riksbank, created the dubious award the Nobel committee forbade recognition of any additional misappropriations of the name “Nobel”. The overwhelming majority of the “prizes” have gone to the world’s most reactionary economists (i.e., those at the University of Chicago).