In our November/December 2015 issue of the magazine, we brought back our colleague and former web editor, Ryan Cooper, to do a review of a new book on the history of the Federal Reserve. As far back as our March/April/May 2014 issue, Cooper has been wrestling with the proper role of Federal Reserve and best ways to boost employment and get the economy into a robust recovery.
Roger Lowenstein’s America’s Bank: The Epic Struggle to Create the Federal Reserve is primarily a history of the events leading up to and the battle to enact the law that authorized the Federal Reserve system.
The account of the intrigues and political horse trading is where the book shines. The looseness of political ideology at the time is particularly striking in today’s hyper-polarized days. [Rhode Island Senator Nelson] Aldrich was an arch-conservative Republican and sworn enemy of progressivism, yet his plan was passed with only a few substantive changes by a progressive Democratic president and Congress, backed by William Jennings Bryan himself.
As Cooper notes in his opening observations, “When the financial crisis of 2008 was quickly followed by the deepest recession in eighty years, central banking suddenly became important“, yet, understanding it is “a particularly difficult task in the United States, because of the bizarre structure of our central bank, the Federal Reserve.”
America’s Bank is an excellent primer for understanding why the Federal Reserve system was necessary and how it was created, but Cooper was left wanting more.
On the structure and function of the Fed, however, Lowenstein is less convincing. He’s fairly clear on what it’s supposed to do but is a little too enthusiastic about the quality of the institution produced…
Of course, this is nominally a book about a single bill, and I don’t fault Lowenstein for mostly ignoring the later history of the Fed in the main body of his text, which is well worth reading. However, there is altogether too much sense that the Fed was a destined star in the American firmament, and the epilogue, which chronicles the later careers of the era’s protagonists, is a missed opportunity to discuss the Fed’s later trajectory—most critically, whether the institution handed down from 1913 needs an overhaul.
To see what Cooper recommends by way of an overhaul, make sure to read the whole thing.
Don’t insider appointments bear a lot of blame for its lopsided behavior? Warren seems to think so.
The majority of the regional boards of directors are elected by the banks. Insider control is part of the design.
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Short answer is “yes”.
I do have to point out that the Fed has had to act without any Keynesian support from Congress.
I think the Fed’s issues are more in its personnel (largely infected neolibs) than its structure. The main issue is the lack of congressional stimulous. Then again, I wonder whether any amount would be enough if the US has to stimulate the gloval economy on its own.
When the banks negotiate their bailout with Timothy, who got his job on their votes, there is a structural problem.
I think the article simplifies the Fed’s role in the Depression as somehow an explanation that makes Keynesian economics wrong.
That really is misleading. Christine Rhomer, herself a historian on the Depression (and who suggested an economic stimulus double what was enacted), and a Keynesian, in her discussion of the Fed mentions the decision in ’30 to tighten as wrong headed, and notes that one of the reasons the US exited the depression in ’40 was that the Fed loosened.
Modern economics tends to view monetary and fiscal policy as complementary in way this article misses.
The assumption of endless growth the article operates under makes me itch.
They are expected to raise rates in December–our overheating labor market, you know…
If you look at the numbers, removing fuel, there has pretty much been a flat 3% inflation over last year, matched by a 9% drop in fuel. Three percent is above the 2% target rate.
I may write a diary Wednesday posting up the BLS’s own figures (with links for the skeptical). No time tomorrow.
Am seeing deflation and stagnation and hyperinflation of credit charges with this move.
That’s my reading of the move as well. Inflation of capital and deflation of labor. What the intentions are for land and natural resources is unclear to me.
Commodities are generally down. IMHO that is due to the slowdown in China, the world’s largest consumer of commodities.
Look at food, medical care and rent, the essentials for life.
Fuel is another special case, being the handmaiden of international politics. The low oil prices we see today are as artificial as the OPEC prices of the ’70s.
The last year ended in October the CPI increased 1.9% excluding food and energy and .2% including all items. (Seasonally adjusted)
I don’t exclude food and ignore seasonal adjustments. More on Wednesday.
Excluding seasonal adjustments is not valid – the BLS has long said those comparisons are not valid. Food is included in CPI.
The CPI BLS number is almost identical to the MIT prices paid project numbers.
Comparing October 2015 to October 2014 should be the same regardless of seasonal adjustments. I’m wary of opaque “adjustments”. Salaries aren’t subject to seasonal adjustments.
You are saying in essence that “Yes you are paying more at the store, but if you adjust the figures, you are paying less”.
Seasonal adjustments are useful for explaining changes, such as “It’s summer, demand for gasoline always goes up”. With enough adjustments you can make the CPI do whatever you want.
The Federal Reserve is a reserve bank that lends money to other banks. That presumes that those other banks are subject to panics because of economic times or “loss of customer confidence”. We haven’t seen a good bank run in a long time, mostly because most of us are under the FDIC maximum account limits.
It is the relationship between the FDIC and the Treasury that needs examining. There is no reason that Treasury could not issue money directly and tax it back, with the Treasury and not the Fed managing the money supply. Of course, the illusion that politics was not involved in money supply decisions would be broken. Politics is involved, but it is the politics of the Fed and Wall Street instead of the politics of the country.
Of course, controlling the money supply from Treasury would require rejiggering the tax code to allow the Treasury to use taxes as a means of control. That’s no worse than using unemployment to control the money flow, which effectively is what is happening now.
It’s an especially germane argument because the Fed seems to be hidebound and determined to trigger another recession in the name of fighting inflation when unemployment is still high and wages and salaries are clearly not inflating.
I was going to post that under the Constitution the powers of the Fed belong to the central government, with policy set by Congress and administered by the executive branch. That would be in line with modern central banks. For instance the Bank of England is no longer independent but wholly owned by the Crown. In essence, the Fed should be the Third Bank of the United States.
But, as usual, you have said it far more eloquently than I.
I agree with that. The fed should be part of the Treasury. And there does not need to be any private bankers involved. Maybe then we can stop the nonsense about tying employment to interest rates. Who knows maybe we can settle on ZIRP forever for short term savings. If the treasury had some discretionary authority to spend or increase taxes (within bounds) we could improve control of both unemployment and inflation.
I doubt though that congress will give up its authority to control spending. That might even require a constitutional amendment.
It would – the non-delegation clause would prevent it (see the case on Grahm-Rudman).
Here’s the overview I wrote for this site last year on how the Fed works:
http://www.boomantribune.com/story/2014/10/10/25335/918