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James K. Galbraith: A few questions I would ask at the Head of the Fed’s rare press conference Wednesday

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PAUL JAY: Welcome to The Real News Network. I’m Paul Jay in Washington. And in Washington, Wednesday morning, Ben Bernanke of the Fed will give a press conference. Now joining us to let us know what he might ask Mr. Bernanke if he were to be at that press conference is Professor James Galbraith. Professor Galbraith is professor at the University of Texas. He’s also the author of The Predator State. Thanks for joining us, James.


JAY: So you’re–imagine you’re sitting there, Ben Bernanke is there, and you’re given several questions. That’s very unusual. He actually calls on Professor Galbraith one question after the other. So fire away.

GALBRAITH: Well, I have to say first that I’ve actually been in that situation only slightly indirectly, because for many years I was the staff person responsible for the hearings, the Federal Reserve oversight hearings before the Banking Committee. So we had the opportunity to ask many questions of the chairman of the Federal Reserve at the time, provided we could find a congressman or congresswoman to ask them. In this case, I think–I don’t know exactly what the Federal Reserve is trying to achieve by holding a press conference. It’s potentially a much more chaotic environment than the congressional hearings are, and it will be very interesting to see whether the press is able to present to chairman Bernanke, you know, truly incisive questions and to get the followups that members of Congress can get. If they could, I think one area that the press should explore are the results so far of the audit of Federal Reserve practices and lending practices in the crisis that have, for example, been explored today in a press release by Senator Bernie Sanders of Vermont. Senator Sanders showed, for example, that throughout this period, in ’08 and ’09, the major banks were in the business, basically, of borrowing from the Federal Reserve at practically nothing, practically zero interest rate, and lending the funds back to the Treasury at a long-term bond rate that could be, let’s say, 2 or 3 percent. And so they were making money hand-over-fist on activities that required them to take no risk at all.

JAY: And you could also add to that some of that money also winds up in Brazil and other hot market countries with what they call the carry trade.

GALBRAITH: Well, let’s not worry so much about Brazil. But Senator Sanders asked whether the Federal Reserve had really compelling reasons to lend to a bank that was, I believe, majority controlled by the Bank of Libya, a very interesting policy choice in many ways. And so it’ll be interesting to have chairman Bernanke respond to that question. I’m sure he’ll be prepared to respond to it, because he’s obviously been forewarned by the Sanders press releases that these kinds of questions are possible. So this should be a very interesting exercise.

JAY: What else would you like to ask?

GALBRAITH: I would like to ask him–there was a report on Bloomberg today that Federal Reserve leaders–Dr. Yellin, Mr. Plosser–are basically planning to rely on paying interest on reserves held by the banking system as a way of controlling the growth of lending. So there are two questions here. Why does the Federal Reserve think it useful right now to plan for restraining the growth of lending, when I think most Americans think that encouraging the growth of lending, lending to small businesses, lending to promote real economic activity, would be the right policy choice? And secondly, why do this if it were necessary in a way that will directly cost the United States Treasury and add to the budget deficit? Why not do it by having the old-fashioned route of reserve requirements, that is to say, requiring banks to hold idle balances against their risky or less desirable loans, and not paying interest on those required reserves? In other words, what’s the point of this mechanism which basically involves a very substantial transfer from the Federal Reserve to the private banks?

JAY: Now, what about the effect of quantitative easing? There’s been a lot of discussion that it hasn’t been as effective as Bernanke thought it would be. And what’s your take [crosstalk]

GALBRAITH: I think it would be very hard to get a candid reflection from chairman Bernanke on that issue. He put a lot of store into quantitative easing. I was always a sceptic of that. I think that the thing to recognize here is that quantitative easing was really nothing more than a financial transaction [in] which the Federal Reserve took some US Treasury bonds off the market and replaced them with cash. It could have caused some funds to become available for speculation in gold and other commodities. It may have helped to destabilize the oil price. It may have helped to drive down the dollar to a certain degree. The dollar has fallen somewhat. None of those, I don’t think, are objectives that the Federal Reserve would actually acknowledge as having been something that it intended. And quantitative easing should never have been expected to provide anything like a strong support to underlying economic activity. It was not ever going to be a source of funds, for example, for the housing market that would help stabilize the price of residential housing. And as you can see from the evidence of a continuing, very sharp fall in house prices, it’s had no such effect.

JAY: Standard & Poor’s, when they issued their–I guess you can call it a warning–

GALBRAITH: It’s a downgrade warning.

JAY: –a few days ago, where they said maybe in two years we might lower the AAA rate, and they’ve focused–or the media mostly focused on long-term debt as S&P’s concern, one of their main issues they actually raise further down in their actual statement was they raised their pessimistic scenario–not only is there a double-dip recession in 2012, but they also talk about a real possibility of another massive bailout of the finance sector, the possibility of a repeat of what we saw in ’08. First of all, how real do you think that threat is? And what might you ask Mr. Bernanke about that?

GALBRAITH: Well, I would ask Mr. Bernanke what the relevance of those comments from Standard & Poor’s would be to the capacity of the United States Treasury to make good on its debt commitments, which is the only thing Standard & Poor’s actually issues a rating on. And the reason the United States government is AAA is that there is no chance that the United States government will not meet its obligations to pay off its dollar bonds in dollars. It’s just not going to happen. And Standard & Poor’s can ruminate all it likes upon what else might happen in the world–inflation, recession, depreciation of the dollar, another bailout–but those things are comments about the general state of the economy, and logically, if it was going to issue a downgrade warning on that basis, then it should have issued the warning not just against United States government bonds, but against every dollar corporate bond, every municipal bond. Every foreign sovereign bond issued in dollars would be affected by the same phenomena. But Standard & Poor’s didn’t do that. They talked about United States government bonds on the one hand, and then go off, as you just quoted, talking about things of which, first of all, they have no particular knowledge, and secondly, which apply to the entire universe of dollar-denominated bonds. So it would be very interesting, actually, to ask for Mr. Bernanke’s opinion on that particular point, because as I say, chairman Bernanke is a well-trained economist, and he can see the logic of that argument, and therefore the complete illogic.

JAY: Standard & Poor’s seems to be recognizing that nothing yet serious has been done about too-big-to-fail. That seems to be part of their argument.

GALBRAITH: Well, okay, nothing’s been done about too-big-to-fail. And I think that that is true–well, although we will see. It’s too early to tell whether the resolution authorities which have been instituted in Dodd-Frank can and will be used. When they are used, we will know whether they are effective, and there’s just essentially no way to know about that until the day comes. I think, however, another very interesting question is the fragility of the banking system outside the borders of the United States. There’s a great deal of informed commentary on the very fragile condition of the banks in Europe, particularly as the European authorities come to grips with the untenable situation in Greece, and the effect of that, potentially, on the valuation not only of the Greek bonds but of all kinds of bonds held in the major European banks. So I think there’s an issue. If we’re going to look at the possibility of major fragility in the banking system, it’s very much in our interest to have an open eye on the European situation.

JAY: Just finally, I don’t think if you asked Mr. Bernanke this question I’m about to suggest that you’ll get too much of a serious answer, but what would you like to see in terms of reform of the Fed? A lot of people have talked about democratizing the Fed, getting the private banks essentially out of it, making it a real publicly controlled central bank. If you could, what would you like to see?

GALBRAITH: Well, there are a number of things. First of all, I think the audit was an extremely important step, and people should recognize that before the audit bill passed, the Federal Reserve and the administration were all saying that the sky would fall. They were issuing apocalyptic predictions. Well, the audit is now underway. We are learning some things that is very much in the interest of the public to know. But nobody anymore says that the sky will fall. Everybody understands that this is the ordinary process of government–working, in this case, reasonably well, at least giving us information that we should have as citizens in a democracy. The Federal Reserve is still a very curious institution. There is no good constitutional reason why the presidents of the regional Federal Reserve banks should be allowed to vote on monetary policy in the Open Market Committee. I think that’s–it’s an issue which has been raised over the years, and on which, you know, it would be nice to have action, but obviously none is going to happen. If I had one other thing, I would move toward a further opening up of the Open Market Committee’s meetings. Many years ago, let’s say now 35 years ago, the United States Congress took the very bold step of turning its committee markups, the places where–the meetings where legislation is actually drafted, into public sessions. And I think everybody agrees that that was a positive thing that the Congress continued to function as an effective legislative body in spite of the fact that it became considerably more transparent. The Open Market Committee really has no excuse for operating in the kind of secrecy in which it operates on monetary policy matters. There would be nothing, in fact, that would be extraordinary if transcripts were released immediately after the meeting, or if in fact a video tape were released after the meeting. Congressman Gonzales, the former chairman of the Banking Committee in the House, recommended this once, and I always thought it was a very good idea: FEDSPAN would be public entertainment.

JAY: But what do you make of the basic critique a lot of people make that the Fed is really–its fidelity is primarily to the finance sector? They all–people come in and come out of the private institutions of the finance sector, and much of the bank is actually directly controlled by private banks, and that they’re much more interested in the finance sector than in the economy as a whole.

GALBRAITH: This is–gets to the regulatory issues. And the problem with the regulatory structure is precisely that the major regulator within the Federal Reserve, which is the New York Federal Reserve Bank, is very, very close to the large money-center banks. And that’s–has been a structural problem since the founding of the Federal Reserve. It would be a great advance if that regulatory function were moved to an authority which was fully autonomous from the banks and where the president of the New York Fed was not in fact appointed by a board of directors chaired by members of the Wall Street fraternity, which is presently the case. And that’s the Federal Reserve’s failure as a regulator, which [incompr.] very serious matter in the run-up to the financial crisis is in part traceable to that fact. You know, it’s also in part traceable to the fact that they simply didn’t take the warnings that they received seriously. In as early as 2004, at a meeting of the Consumer Advisory Council, where chairman Bernanke was present, along with governor [incompr.] and at least one other, they were told flatly by an activist lawyer that the loans being made by Lehman Brothers and by Bear Stearns were so dangerous that they were threatening the survivability of those firms. That was in 2004. So this was at a hearing at which the leadership of the Federal Reserve was present, in which they got accurate information, and the reality is that they decided not to pay attention, that this was perhaps not a person whose views and information they simply respected as much as they respected their friends amongst the banking community and amongst perhaps the economists working on their staff. So it didn’t get the same level of attention.

JAY: Well, to see that kind of reform, we’re going to have to see some new leadership in both of these political parties, because we’re sure not hearing any of that kind of independent regulatory distance from Wall Street and the Fed. Thanks very much for joining us, James.

GALBRAITH: My pleasure.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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