Things are looking worse and worse for the liberal advocates of legalism and reform as direct action continues to win over and over and over again while doing things through the proper channels continues to fail. The latest blow is the resignation of Federal Reserve Board Governor Daniel K. Tarullo. Mr. Tarullo’s term was supposed to continue until 2022 but, for undisclosed reasons, he has left prior to that expiration. Know for his rigorous (or haphazard, at least according to the bankers) stress tests that he conducted against the banks to test how they would weather various economic emergencies, Mr. Tarullo was the closest thing to a public advocate on the Fed. Admittedly not a high bar, but nevertheless with his departure things will likely get worse for the working class.
Needless to say, the majority of the finance industry and other capitalists are not shedding tears over his early departure. Such egos do not take kindly to being told how to run their companies, even when the regulations are to prevent their companies from ending up like Lehman Brothers or AIG. But nevertheless, most of the finance industry (aside from the always nihilistic hedge funds) is not exactly gleeful about Mr. Tarullo’s departure either. While they have gotten President Trump to generally jump on board with deregulating as many consumer protections as they can, his stance on the Fed is ambiguous to say the least.
One of these worrywarts is Abby Joseph Cohen, who coincidentally is also retiring from her position at Goldman Sachs (albeit staying on as an advisor and Lorde knows how much money she’ll make from that). Yesterday Cohen strongly advocated for the “independence” of the Fed. And by “independence,” she means freedom from the glare of Kentucky Senator Rand Paul.
What libertarians lack in basic understanding of economics they make up for in tenacity, and Sen. Paul is one of the pluckiest. But unlike his more intense counterparts, Sen. Paul is a bit more strategic, and he wasted no time reintroducing the Federal Reserve Transparency Act at the beginning of the year. The bill is actually pretty simple and is aptly described by its nickname, the Audit the Fed Act. But while the bill enjoyed some support, including from Sen. Bernie Sanders, the Democrats have consistently blocked it. However, with a president who supposedly would support it and members of Congress eager to make easy gestures to shore up their “populist” cred, there is a decent chance that the bill could pass sometime in the next four years. So the obvious question is this – why are Goldman Sachs bigwigs and Democrats so against the Fed being audited?
To answer that we need a quick refresher on what the Federal Reserve actually is, why it came about, and where its authority begins and ends. The Federal Reserve system was created by the enactment of the Federal Reserve Act in 1913, a response to the panic of 1907 and the alleged rescue from that panic by JP Morgan acting as an unofficial central bank. While the Fed has been granted a plethora of regulatory obligations and powers since then, its central (pardon the pun) role remains the same: to regulate the money supply. You may have heard that the Fed creates money from thin air: but what it does is much more impressive. It creates an infrastructure for the continuous growth of credit, and thus of debt as well.
Credit was a clever way for capitalists to speed up and enlarge their accumulation of capital – the only problem was that it was unstable and kept generating “runs on the bank” where everyone would try to “cash in” at the same time and quite the simply the money did not exist. The Fed’s purpose is to keep the system always one step ahead of its fiction catching up with it, and if done perfectly facilitates perpetual accumulation subject only to the most fundamental contradictions of capitalism.
In addition to the fractional reserve creation of additional money supply described in the infographic above, the Fed also has the power to: (1) generally regulating and supervising the commercial banks in its system, (2) setting the interest rates of overnight loans of federal funds, called the federal funds rate, (3) creating secured short-term loans called repurchase agreements, (4) setting requirements for fractional reserves, (5) injecting money, treasury securities, and credit through a number of not-so-temporary powers granted in response to the Great Recession, (6) the infamous “quantitative easing,” purchasing corporate bonds and mortgage backed securities like the equally infamous collaterized debt obligations (CDOs), and perhaps most importantly (7) collecting and publishing for public use more data than any other institution.
And with that last power of the Fed lies the reason why the institutional actors do not want it to be audited. As anti-Fed Austrian school economist Lawrence H. White argued, the massive amounts of data that the Fed puts out gives it control of its own narrative. And this narrative construction reinforces the legal ideology of the Fed’s authority – not to, as White and Sen. Paul would argue, interfere with some righteous market but to perpetuate and protect that market. The assumption of capitalism as the natural state of the world compels the Fed’s existence, to temper its volatility rather than to look for solutions outside of capitalism.
And to temper that volatility it must have nearly unlimited and unquestioned public authority, what Evgeny Pashukanis called authority placed above all and addressed to all. And as Pashukanis wrote, this ideology necessitates a disconnect from reality, a formal sense of equality in the market created by the third party state regulator. “[S]ome third person is required,” wrote Pashukanis, “Who embodies the mutual guarantee which the commodity owners as owners give to one another, and who is accordingly the personified rule of exchange between commodity owners.” As court enforcement of contracts is the personified rule of exchange, so is the Fed the personified rule of money and credit.
The libertarian and “free banking” alternatives, from the gold standard to frozen supply, are just as fictional and lack the abstract personhood, and thus stability, that a state actor provides. To abolish the Fed under their terms would invariably mean a return to the kind of panics seen in 1907, though likely even worse given the complexity, quantity, and speed of modern financial transactions. But their lack of a real Plan B does not mean that Sen. Rand Paul’s audit is not a serious threat to the Fed. To outline its actual material contours with even an audit by another branch of the state undermines its ability to play this mythic role, in turn undermining the market itself. Just as central intelligence, law enforcement, and the military all need secrecy to perpetuate the notion that they are all-powerful, the Fed operates best by keeping people in the dark. As the ordinarily smug and all-knowing Wall Street Journal wrote about central banking’s use of quantitative easing, “If there is one thing that quantitative easing reliably generates, it is questions about how it works.”
So, with one of the few Governors who would challenge the banks retiring and the challenge to the Fed’s power coming from someone who thinks gold is magic, where does the Left stand in modern banking policy? Well, as usual, the real Left is mostly absent whereas the Democrats are firmly on the side of the Federal Reserve, taking the economic system it props up as the only way. So where should the Left be? At this stage, getting behind Sen. Paul’s audit of the Fed could be beneficial. While holding opposite views on the remedy, the Left would also benefit from exposing the system for what it really is. During her presidential campaign Dr. Jill Stein, albeit somewhat clumsily, took this kind of stance by questioning how the government could afford to buy trillions in corporate bonds and MBSs while not being able to afford to forgive every student loan.
Assuming that an audit did happen and we learned, to some extent, the answer to Dr. Stein’s question, where would we go from there? There are many answers, but they should all move in one direction: the end of fractional reserve banking and the seizure of investment decisions by democratic central planning. J.W. Mason had a good list of transitional goals such as the creation of a public payment system, postal banking, democratizing the Fed, and artificially limiting the movement of capital. Juan Kornblihtt wrote a scathing rebuke of calls for increased “autonomy” (similar to the “independence” mentioned earlier) of the Central Bank of the Republic of Argentina and instead advocating for its reserves to be used in social investment (including wage increases).
It is easy in this time of daily controversy (some sensationalized by the media, others legitimately disruptive), it can be easy to lose sight of something as abstracted from humanity as the Federal Reserve. But as Marx once asked of us, “If money is the bond binding me to human life, binding society to me, connecting me with nature and man, is not money the bond of all bonds? Can it not dissolve and bind all ties? Is it not, therefore, also the universal agent of separation?” Taking a strong stance against this perverse undemocratic form of investment is more important now than ever before. Because if we do not, that decision will be left up to the gold standard wingnuts and the bankers.