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Jane D’Arista: Democratize or replace The Fed

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We’re in Hadlyme, Connecticut, with Jane D’Arista. We’re talking about banking and money and the Federal Reserve. Thanks for joining us again.


JAY: So before we get into the fiat money question, let’s talk just a little bit about the whole issue of the Fed. And you had said in an earlier segment that Rich Trumka, who’s the new head of the AFL-CIO, told Barney Frank, “Before we’re going to support any of your new regulation, you’ve got to democratize the Fed,” which I think you agree with. So what would democratizing the Fed look like?

D’ARISTA: A new piece of legislation has come out from Marcy Kaptur, who is a congresswoman from Ohio. And it is a sort of first shot at what we need to do. First of all, she says, let’s bring the terms down from 14 years to 7 years. These people should not be there for life, as it were. And they don’t stay, anyway. Occasionally a member will stay that long. And the second piece of her legislation is let’s have the requirement that the chairman and vice chairman of the Fed will have had to serve on the board already two years before they’re appointed. The reason for that is really to upgrade the Fed board. I mean, there are just—especially during the Bush administration, people were just appointed to the board, and the assumption was, well, there’s really only one person that matters, and that’s the chairman. So you don’t have deliberation, you don’t have different voices. And, of course, the chairman—that was true. That was how the Fed was operated. It ran the staff, and the staff was very limited and narrow in their point of view. I heard one important person say on the staff of the Fed—was reported to have said, “Why didn’t the press push us more?” In other words, we were captive. They didn’t come at us. The world didn’t come at us and challenge us.

JAY: Should there not be some kind of regulation that prevents people from working for Goldman one day and run the Fed the next? I mean, I think it’s just beyond me that there isn’t a conflict-of-interest window that you have to be three, five years removed–

D’ARISTA: Exactly.

JAY: from working from one institution to the next.

D’ARISTA: Exactly. I think that’s another part of democratizing that would be critical.

JAY: Well, there’s another piece you hear from a lot of critics of the Fed is you can’t democratize the Fed. What there should be is a central bank that’s appointed publicly that private banks don’t run [inaudible]

D’ARISTA: Oh, that’s a critical piece. That is absolutely the piece that has to change. The concern there was that the head of Goldman Sachs was in the room at the time that they were discussing some of these issues, I mean, because he was on the board of the Fed. I mean, this is—.

JAY: And Goldman’s getting to decide whether Lehman lives or dies.

D’ARISTA: Yeah, exactly, exactly, and cut your competitor out it, if you will. But, you know, also the decision of are you going to give money here or not, and who’s going to get bailed out, and what’s the strategy.

JAY: So if the Obama administration is serious about financial reform, don’t they have to take on the Fed, which means, essentially, get rid of this Fed and have a legitimate, publicly run central bank? I mean, anything short of that seems to be smoke and mirrors.

D’ARISTA: Right. And it was attempted back in the 1930s as well, and it didn’t go forward at that time, either. I mean, the vested interests were very strong then, and they are now. The voices, they want to have their say.

JAY: We don’t hear almost a word of this in the media. There’s practically no conversation in mainstream media about—.

D’ARISTA: No, no. No. The Fed is off limits. I mean, they simply—it’s bewildering, it doesn’t seem important, and yet it’s terribly important, because monetary policy determines everything. I mean, you don’t get a strong dollar unless the Fed is willing to actually keep interest rates in the US slightly higher than in Europe and Japan. That will bring the money to the US, and that will give you the strong dollar. And if that’s your policy, because you want to help Wall Street, why, that’s what you’re going to do. And that’s exactly what Greenspan did, except when he decided to keep it at 1 percent to get out of the bust that he had been in, the bubble that burst, and that got us into the second bubble.

JAY: And am I understanding it correctly that the Fed right now is making money available to the banks at virtually zero percent, some of which they actually go buy T-bills with and make money? But as you were saying earlier, they can take it abroad and make even more money.

D’ARISTA: Yes. Yes.

JAY: Then the Fed is essentially—I think it’s more than a couple of trillion dollars.


JAY: So the Fed is establishing its entire economic agenda independent from any kind of elected representative.

D’ARISTA: That is true. The other thing about the Fed is it gave away its own powers. It’s not just that it deregulated the financial sector; it deregulated itself. It essentially made reserve requirements, which concerns the supply of money, irrelevant. Why? Because the system was growing. Banks were shrinking. Banks used to be 65 percent of the total credit market. They’re down below 25 percent. They carry the burden of monetary policy. Reserve requirements are a cost. If you have to have a reserve requirement that is 10 percent, then it means that of the [$100] deposit you just took in, you can only lend $90. A mutual fund can take in $100 and then $100. They can lend $100 in Europe in the Euro markets; the same branch of the same bank can do that. So what the Fed gave up was control of the supply of money, and it therefore has to depend upon demand, in other words, the interest rate. It has to say—and even Greenspan in 1993 admitted it means, well, interest rates have to be a little higher than they were, or a little lower, to get the job done. So the volatility in interest rates, which plays havoc with investors, the normal investor, and is absolutely ambrosia to the speculator.

JAY: So in the next segment of our interview, let’s do what I said we were going to do in this segment of the interview. Let’s talk about fiat money and just what is the significance of it. 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.