Federal Reserve system drives economic debacles
Glenwood Springs, CO Colorado
“There’s an awful lot of power there held by unelected people … with darn little accountability.”
– Republican presidential advisor James Baker speaking of the Federal Reserve Board
Not only is the Federal Reserve Board unaccountable, it has been a dismal failure. And the reasons it has been a failure are not mysterious or too complicated for the average voter to understand.
The Federal Reserve system was created in 1913 to manage the money supply and regulate commercial banks in order to accommodate the needs of commerce and industry. But it has always accommodated the needs and desires of big banks, even at the expense of the needs of commerce and industry.
All commercial banks that accept deposits must maintain reserves with the Federal Reserve system. Also, the ultimate power to enlarge or diminish the nation’s money supply resides entirely with the Fed.
The system is run by a governing board appointed by the president for staggered 14-year terms. But it is supposed to operate independently of politics and elected officials have never dared to give the board marching orders.
James Baker is only one of a number of politicians and economists who have said that the Fed’s independence should be ended and the board placed under the immediate control of the president. This would make the Fed like the central banks in other industrialized countries.
That such a reform would make the Fed more accountable assumes that the president is accountable to the people rather than to Wall Street money. And that, unfortunately is increasingly not the case, whether the president is a Democrat or Republican. Without campaign finance reform, nothing else can be reformed.
But back to the Fed as it is.
The Fed’s worst failure is that it has never invoked its full authority as a bank regulator. The boards have either lacked the will or, as they have insisted, the political weight to impose genuine restraint on the largest and most aggressive banks when those banks embarked on their lending binges.
Examples of this include the commercial banks’ irresponsible lending to the Hunts when they tried to corner the silver market; their irresponsible loans to third world countries in the 1980s; the wildly excessive lending of Continental Illinois and other banks; and, of course,the crazy speculation of recent years that crashed our economy.
In all these cases, the Fed uttered mild admonitions to its member banks from time to time, but never used its regulatory powers to stop things before they got out of control. But once the bubbles created by the banks’ irresponsible actions burst and threatened the banks’ solvency, then the Fed was all action.
The Fed would stop at nothing to protect the big banks. Not the small banks, mind you; Fed governors righteously let them suffer the consequences of their actions. But the big ones were protected at any cost to the rest of us. And while recent costs have by far been the most ruinous, the bailouts required by the credit binges I mentioned earlier were also very costly.
The Fed is just another regulatory agency captured by the industry it is supposed to regulate. Presidents appoint to the Federal Reserve’s Governing Board people recommended by Wall Street who have made their careers in commercial banking. These people are mainly responsive to the interests of important commercial banks, and often return to that world after their “public service.”
The other problem with the Fed’s so-called independence from politics is that too often the government’s fiscal policy and the Fed’s monetary policy have been contradictory. In the ’80s, for example, the Fed tried to compensate for the inflationary effect of the Reagan deficits by tightening the money supply to the level that interest rates became ruinously usurious.
Those high interest rates ruined family farms, many small and medium businesses, and caused a crash in raw materials prices that virtually destroyed American timber and other extractive industries and whole third world economies.
In addition, a tremendous flow of foreign capital into the U.S. to take advantage of the high rates caused the U.S. dollar to be bid up very high in relation to other currencies. The effect was to make our exports too expensive abroad so that agricultural and other foreign markets were lost.
It has been argued that the U.S. economy has never recovered from that debacle. But the big banks were making a killing from the high interest rates and the Fed seemed to care little about the needs of commerce and industry.
For a fuller analysis of the Federal Reserve System, read “Secrets of the Temple,” by William Greider, available from our library system. The book is long, but well written, easy to understand and fascinating.
“What Do We Really Want?” appears on the second and fourth Thursdays of the month. Mary Boland is a retired teacher and journalist, a proud grandmother, and a longtime resident of Carbondale. Follow her on twitter @grannyboland.
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