Central Bank Independence Is a Myth. They Need to Be Democratized.

October 30, 2019

Gerald Epstein discusses his new book, a collection of essays on how central banking is shaped, how it shapes the economy, and how it can be made more responsive to people's needs.

Gerald Epstein discusses his new book, a collection of essays on how central banking is shaped, how it shapes the economy, and how it can be made more responsive to people's needs.


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Story Transcript

GREG WILPERT: Welcome to The Real News Network. I’m Greg Wilpert in Arlington, Virginia.

Central banking is not only a dry economic term, but also a highly political and controversial issue. For much of the political economic history of the United States, there has been a debate over whether the federal government should be allowed to control this country’s banking centrally and whether it should be done with a government entity or a private business. After the economic crisis of 2008, which had to do with the failure of the U.S. banking system, conspiracy videos started to crop up on YouTube discussing the Federal Reserve in terms that are normally reserved for the Illuminati and other secret cabals. But are central bankers secretly controlling the world? How are central banks power relations and interests organized and in what context do central banks formulate their policies?

These are some of the questions that are at the heart of the new book by Gerald Epstein. The book is titled The Political Economy Of Central Banking and is composed of 23 essays on the role of the central bank in the economy. Joining me now to discuss his book is Gerald Epstein. He is co-director of the Political Economy Research Institute and professor of economics at the University of Massachusetts Amherst. Thanks for joining us again Jerry.

GERALD EPSTEIN: Thanks for having me.

GREG WILPERT: So we can only cover a limited selection of issues that your book deals with. I want to address four that I think might be of greatest interest to our viewers. First of all, the economic policy under President Trump. Then who controls the Federal Reserve? The Feds competing mandates and the Fed’s role in financial crises. So let’s start with the first issue. You dedicate an essay to Trumponomics, and you list various theories on how to classify Trump’s economic policies ranging from military Keynesianism to Reaganomics. Your essay though was published two years ago, and you wrote back then that it’s too early to tell which economic school best describes Trumponomics. So now, two years later, do you have a clear idea as to how to define Trump’s economic policies and explain to us what it would mean?

GERALD EPSTEIN: Well, in my view, it’s kind of a neo fascist liberalism. It’s neo fascist because of the political coalition that supports it and because of the actions and language that Trump uses to maintain his political power. But it’s also a type of liberalism and economically, that’s in the European sense, because it promotes free market liberalization in key areas, oil and natural gas, the fossil fuel industry for one, the banking industry for another. So it’s an amalgam of pro-business kind of liberalism with a political structure of fascism and authoritarianism.

GREG WILPERT: Can you say a little bit more as to what do you mean by its economic structure and being related to the neo fascism and authoritarianism? In what way does it express itself?

GERALD EPSTEIN: Well, it expresses that, first of all in the policies and the rhetoric about xenophobia, white supremacy and nationalism. The America first ideology and policies and the anti-democratic actions that Trump and his administration has been taking against the Congress and the courts and the bureaucracy, et cetera. So all of that is an authoritarian sort of neo fascist political structure. In terms of the economics, it has the guise of being a very nationalist oriented economics and there’s some aspects where it might be seen that way in terms of the trade war with China and so forth. But most of those actions that are actually taken are in support of big business.

So a lot of the contest with China is about protecting intellectual property rights, which has very little or nothing to do with improving the living standards of working class Americans. Liberalizing the financial system has very little to do with improving households and small businesses access to credit, et cetera. So it’s fascist in the sense that its rhetoric and its policy towards minorities and foreigners, et cetera. And it’s also fascist in the sense of promoting mostly big business, but there’s a liberal tinge to it in terms of its ideology about liberal financial deregulation, et cetera.

GREG WILPERT: Now, one of the ways I think that Trump’s kind of authoritarian bent makes itself felt in the area of the Federal Reserve is in the kind of the pressure he’s tried to put on the Federal Reserve, which is kind of unheard of previously under previous presidents. They would rarely get so directly involved as far as I recall, at least, in terms of the policies of the Federal Reserve. So, that raises the next issue, actually, about to kind of who controls the reserve, the Fed, I mean. And I mean you describe it as being contested terrain and that it deals with competing interests such as commercial banks and finance. And so the question though is, who is actually wielding power in the Federal Reserve? And also if finance is the main power as you seem to indicate, what is that? And what should be the role of a Federal Reserve independence?

GERALD EPSTEIN: So the subtitle of my book is Contested Control and the Power of Finance. So the Federal Reserve, like many important government institutions, is a contested terrain. And that’s one of the arguments that runs throughout my book. And so who’s competing for power. There are big business finance workers, farmers and others, small businesspeople. And this is true of central banks generally, not only in the United States, but in other parts of the world, which I also discuss in my book. And the question is, how has this control contest waged? And who wins? And it depends on the structure of the economy, the structure of politics, et cetera. In the case of the United States, historically it’s been large finance, that won this contest and the Federal Reserve tends to make policy in the interests of banks, and the biggest banks, and finance, et cetera.

And here the idea of central bank independence, which many people promote and tout and say is such an important principle of our government, is highly misleading. Because the central bank is not independent from big banks and finance. The whole structure of the Federal Reserve is set up so it’s relatively independent from the workers and the farmers and the small businesspeople and so forth.

So when you have this sort of independence fake independence like we have in the United States, then it creates a huge dependence on the banking and finance sector. The reason is that because it’s a contested terrain, people like Donald Trump and others can come and try to get control over it. And so the federal reserve that values its power has to have a constituency that will help protect it from the Donald Trump’s of the world and others. So what they do is they curry up for favors with the banking industry and finance who will protect them from people like Donald Trump who are trying to get more control over them. And that’s what they do with cutting back on financial regulations. That’s what they do with pursuing monetary policies that help bank profits more than wages and employment, et cetera.

GREG WILPERT: Now, the U.S. Federal Reserve has what’s known as a competing mandate. That is, it is supposed to balance a concern for price stability, that is, keeping inflation low, together with a concern for full employment. However, these two concerns often tend to contradict each other. Now, what do you think of this contradictory mandate that the fed has?

GERALD EPSTEIN: It was a huge political fight to make the Federal Reserve have a dual mandate, a mandate, not just to control prices, but to also be concerned about full employment, high levels of employment. This took a political battle from unions and others who wanted to make sure that the Federal Reserve didn’t just try to control inflation. That is typically in the support of bankers and other creditors, but also as concerned about full employment and workers. And the Federal Reserve interprets this mandate in the way that it chooses and historically has usually chosen it to be mostly concerned about inflation because that’s what the creditors and the bankers want. But in the current environment, there seems to be more of an interest in also maintaining higher levels of employment and the very low interest rates the Federal Reserve has promoted in recent years, has contributed, I think, to the low unemployment rate we’re experiencing now.

So what I argue for in the book is that there be more democratic control, more accountability, more participation by workers and farmers and others in the governance of the Federal Reserve. And unfortunately, even liberals, even some people on the left say that’s a really terrible idea because the central bank should be independent, not understanding what independence really means in this context. So there is this tension between, on the one hand, having a Donald Trump or somebody like him control the Fed for his own corrupt purposes, in this case to try and get reelected and to lower the cost of borrowing, which really helps his real estate investments. On the other hand, having some real influence of control by unions and others in our economy. So the last chapter of my book really talks about how we think about central bank democracy and accountability.

GREG WILPERT: Now, I just want to briefly turn to another issue that you raise in your book, which is that to the issue of how the Federal Reserve has contributed to the financial crisis of 2008. What would you say, just give us a brief idea as to what were the main failures of the Federal Reserve back then and is there a risk that they’re going to be repeated sometime in the near future?

GERALD EPSTEIN: So, the major failures consisted of trying to feed this constituency of the bankers and finance, which also is consistent with the ideology of Alan Greenspan and others controlling the Fed. The idea that you liberalize, you deregulate, you support financial deregulation and then you turn a blind eye to the risks that are building up in the financial sector and that’s what the fed did for decades in the run up to the great financial crisis, thereby allowing fraudulent and dangerous activities by the banks, the housing market, the asset backed securities, the collateralized debt obligations, taking on an enormous amount of debt, et cetera. We know all about this and supporting the idea of a too big to fail system where the fed would have to bail out banks and bankers no matter what they did. And this was all part of the ideology and the practice of bankers first, which relates to what I was talking about before about who controls the Fed.

Are we in danger of that again? Yes and no. The no is: I think the Federal Reserve and others learned about the dangers of this kind of policy and there were some regulations and changes in policies at the Fed that were put in place to try to reduce these problems. On the other hand, as I argued before, the Fed is really dependent on these banks for political support, especially now when it’s being so much attacked by Trump and in order to curry the favor of its banker constituents to then try to protect its independence, it’s loosening the regulations. It’s no longer fighting as hard as it did in the last 10 years to maintain these financial regulations. So I am fearful that given some very dangerous practices, particularly in respect to corporate loans and so forth, that we perhaps do run the risk of more chances of a big financial crisis. Again, it’s hard to predict when.

GREG WILPERT: Okay. Well, we’re going to have to leave it there for now. But I’m sure we’ll come back to you again as those kinds of things develop, which, as you mentioned, are definitely a possibility. I was speaking to Gerald Epstein, co-director of the Political Economy Research Institute at UMass Amherst. Thanks again, Jerry, for having joined us today.

GERALD EPSTEIN: Thanks for having me.

GREG WILPERT: And thank you for joining The Real News Network.

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