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Jane D’Arista: The Fed should be replaced by a central bank run in the public interest

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We are in Hadlyme, Connecticut, with Jane D’Arista, who is the author of The Evolution of US Finance. And the first volume of this is the history of and the creation of the Fed, the Federal Reserve. Thanks for joining us again.


JAY: Some people believe—and I guess one of the more outspoken about this is Ron Paul, but Dennis Kucinich on the other end of the political spectrum has made some of the same points—that the Fed is kind of the root of all evil, the fact that, number one, it’s so controlled by private banks, number two, it prints money at the whim of banks and not necessarily what’s good for the society. So tell us a little about the origins of the Fed and what you make of it now.

D’ARISTA: Well, the Fed came in after a major financial crisis in 1907. It took six years for the Federal Reserve legislation to be passed under Woodrow Wilson, and big struggles as to who was in control. I mean, the bankers obviously wanted a central bank that was run by the bankers altogether. So the compromise was part public and part private.

JAY: What was there before the Fed? Who printed—?

D’ARISTA: Nothing.

JAY: Who printed money?

D’ARISTA: The national banks themselves printed money. Banks printed money.

JAY: Private banks.

D’ARISTA: Yes, private banks. And so we had the national bank note that had actually come in in the 1860s and superseded the state bank notes, etc. And there were rules and regulations: you have to have a certain amount of capital, species, gold, etc., in relation to your note issue. Nevertheless, I mean, it was not an adequate system. It resulted in consistent panics. The idea was that you needed a reserve system, a central place to keep reserves for the system as a whole and lend them out when there was trouble around the country. So that was the rationale for 12 banks around this country to keep all the regions under some kind of access to credit and this split between public and private. So, as you probably know, the Federal Reserve banks, all 12 of them, have boards of nine members, six of which are appointed by banks. And they in turn, those boards, appoint the presidents on the Federal Reserve banks. And those presidents sit on the Federal Open Market Committee, which makes monetary policy on a rotating basis, so that you have seven votes of the Federal Reserve board and five votes from the Federal Reserve banks, 12 votes altogether, on a policy action. People feel very strongly—.

JAY: Just back up. But the president of the Fed is appointed by the president of the United States.

D’ARISTA: The chairman of the Fed, yes.

JAY: Chairman of the Fed. Chairman of the Fed.

D’ARISTA: All the seven members of the Federal Reserve board are appointed by the president and confirmed by the Senate. Now, back up again and say —and this is a very important issue for multiple sides, Paul and Kucinich—it is under the Constitution. It is Congress that has the power to make money and regulate its value. In 1913 we delegated that to an agency, the Federal Reserve system, and they do it. But there’s always been this strong push to say you’ve got to report to us. You know, we’re the guys in Congress who have this power. So the Full Employment Act, which was in the ’40s, that said to the Fed, pay attention to price stability, to unemployment, and the production of the economy—those three things we want you to pay attention to. That’s what monetary policy is all about. They sort of strayed away from this. And Humphrey Hawkins came in and reiterated the same position and said, “You’ve got to report to us twice a year. We want a full report on just exactly what you’re doing in monetary policy.” But the Fed also has very important regulatory responsibilities, which have grown over time, and the more so since we have what we could call holding companies, which are these huge conglomerates. And the Fed is the ultimate overseer there. The Federal Reserve relaxed the regulations on the financial institutions. They were a major part of doing that. In terms of the subprime situation, they could have reached out under their powers and said, “Make people put a certain amount of money down when they buy a house. Don’t do this and don’t do that. And the egregious practices of paying people bonuses the more mortgages they make, irrespective of how qualified the buyers might be—have you looked at their salaries?” No, they didn’t ask those questions. So that and the big stuff, the speculation, they didn’t stop it, and they didn’t even know until Bear Stearns went down, when they suddenly said, “Oh my God. Well, who are the counterparties here?” They didn’t know that this web was there, sitting to explode.

JAY: These counterparties you talked about in the earlier segment, where the financial institutions are all borrowing from each other to do this proprietary trading.

D’ARISTA: Exactly. And, of course, when they let Lehman go, they then found out just how strong this web was. So the Fed—.

JAY: Now there’s a piece of legislation that Ron Paul’s proposed and many others have supported to try to create some accountability. Where is that at?

D’ARISTA: It’s got 270 (I think that’s the number) sponsors, which is a very big chunk, and they’re from both sides of the aisle. What they want is the GAO, the Government Accountability Office, which is an arm of the US Congress also, to go in and look at the Fed and say, “What have you done? Tell us. To whom did you lend? We want an accountability of what’s been going on during this crisis.” And the Fed has always pushed that away and said, “Oh, they can’t get into monetary policy. We have to depoliticize monetary policy.” Congress is beginning to think maybe not. You know, “We really want to know all of this.” So that pressure is on. Where that legislation is, well, it’s not out of committee and it’s not on the floor yet, the idea being the reform provisions are more important than this piece. I’m not sure that makes people happy.

JAY: Has the Obama administration said anything about the legislation? Are they for it? Are they against it?

D’ARISTA: I don’t know that they have said anything. I don’t think that they have taken a position. I think they’ve probably been careful not to do so.

JAY: ‘Cause the Fed has played a critical role, either through its absence or through making cheap money available, as they are now, in this entire crisis.

D’ARISTA: Oh, yes.

JAY: The Fed is an enormous piece of this puzzle.

D’ARISTA: Very much so. And many people would take the view that Greenspan’s creation of the housing crisis was because he kept interest rates at 1 percent for so long a period of time, increased the liquidity in the markets by such an enormous factor. And there was a wonderful prescription, if you will, out from the International Monetary Fund, about, I would say, 2004, where they said to the Fed, “Raise interest rates. Don’t you know you’re encouraging this speculation?” With rates so low, they’ve got to borrow much more money; the positions have to be much larger. If the interest rate difference was, you know, in their favor, why, they would have to borrow less, and we’d have less speculation. So nobody thinks the Fed did a very good job, and the notion of giving it additional power at this point is not one that anybody really wants to face.

JAY: A lot of the conversation that’s coming from Ron Paul and others is about the whole issue of fiat money and what is our monetary system. So in the next segment of our interview, let’s talk about what is fiat money and is it the issue or not. Please join us for the next segment of our interview with Jane D’Arista.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.

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Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.