On the Populist Capture of the Central Bank(s) in the United States

Marla Singer's picture

One of the central tenants of central bank politics is that these venerable institutions must be insulated from political influence and intimidation.  It was not so long ago that the obscure and enigmatic central banker was considered the most adept.  The "independence" of central banks is intended partly to service their unenviable burdens.  In particular, the need to put the breaks on the economy here and there- a decidedly unpopular mandate politically, indeed, one that can topple administrations.  Further, to resist the many calls to spur short-term growth (paid back with interest in later years) via monetary policy.  In this context, and given the recent calls for total transparency (read: total political accountability) of the Federal Reserve System how is one to look at "The Great Moderation?"  In the case of this article, as an opportunity to offer a pair of novel and contrarian theories:

1.  It was the presence of political accountability in monetary policy, not its absence that sewed the seeds of the present crisis.

2.  The natural conclusion can only be that Monetary Policy Institutions require less political accountability, not more.

To begin with, it will be useful to be particular about what is meant by "Monetary Policy Institutions."  Obviously, central banks officially charged with the management of monetary policy apply.  Officially, (that is, according to the Federal Reserve Act) the goal of monetary policy is to:

...maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. (12 USC § 225(a))

Conventional wisdom would hold this role as one limited to the Federal Reserve System- since that's what the Federal Reserve Act says.  Practically speaking, the Federal Reserve System is merely one of several Monetary Policy Institutions in the United States- that is, institutions with the ability and the indirect (if not direct) mandate to influence prices, employment and long-term interest rates on a large scale.

Some introductory facts:

In 2008 some $6 trillion in interest bearing, marketable public debt issued by the Treasury was outstanding.  Nearly $9 trillion in "Mortgage Related" debt was floating about at the same time.  Of this, some $5 trillion was either securitized or guaranteed by Government Sponsored Entities ("GSEs") like Fannie Mae and Freddie Mac or other government entities.  The Federal Reserve's balance sheet today, near its most bloated state, sits at a mere $2.1 trillion, and this is more than double its size before the recent, world-saving expansion.

True, GSEs and other mortgage related entities do not have the Discount Window as a tool to influence rates.  But given their central role in setting mortgage rates for the country (an $8 trillion dollar economic experiment) and the ability to permit market actors to offload risk to them with impunity, it is difficult not to regard these institutions as powerful monetary policy tools, tools that have been used shamelessly since the 1980s to artificially push mortgage rates below their equilibrium state even given an already loose monetary policy pursued by crisis pariah Alan Greenspan.  Recognizing the "multi-tiered" nature of monetary policy is critical to understanding both the current crisis, and the nature of the problem.

Put simply: Not content with permitting the Federal Reserve System to run monetary policy, that is, believing that, in its wisdom, it knew better what mortgage rates should look like, Congress, with the acquiescence of a number of successive executive administrations, elected to usurp a wide swath of monetary policy for itself via mortgage lending.  The result: Real estate became joe-sixpack's bank, 401(k) portfolio, job creation machine, unemployment check, and, finally, lender of last resort.

It is easy to forget that during Greenspan's tenure, Congress often chided (even outright savaged) the Chairman for not doing enough to spur levels of economic growth they thought appropriate.  In hindsight this is illustrative of the concept that the "green is always greener on the other side" (of monetary policy) even during boom times.

Greenspan's contemporary bemusement that he might be blamed for the crisis given his belief that "short term" rates shouldn't influence mortgages fell on deaf ears- but probably shouldn't have.  The reality is that through a series of political lackeys appointed based on the merits of their political acumen and either totally out of their depth or at the end of their careers, the GSEs effectuated rampantly loose monetary policy for years, totally unopposed by Democrats (who were graciously ushered into office by the millions of beneficiaries of glossy "low-income loans," "first time buyer" incentives and the like) or Republicans (who were lulled into hypnotic trances by prose containing the phrase "The American Dream of Home Ownership.")

It is precisely because the political system creates such bi-partisian perfect storms that monetary policy should never be given over to populists.  Since this author is hard-pressed to named a non-populist in Congress today, turning over the Federal Reserve System to legislative whims suggests a quick repeat of the same crisis writ large(r).  The Federal Reserve System must have the stamina and testicular fortitude to stand firm in the face of crisis and embrace bank failure and rebirth.  Letting Lehman go, far from a sin, was quite saintly.  What followed, a total acquiescence to political cries to "do something for the love of all things capitalist," was the beginning of the end.  Oh no!  The country will not permit that sort of thing again!

While auditing the Federal Reserve System may go a long way toward exposing the dangers of the institution and the excesses of years past, there is a real danger that subjecting it to scrutiny in future years will make monetary policy even more a political animal than it is today.  One wonders, even as the Federal Housing Administration teeters towards collapse, how the many adjuncts and aides-de-camp to the GSEs have managed to avoid similar scrutiny given their central role in the crisis.

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Emmanuel Goldstein's picture

Actually Marla, it was the removal of certain regulations over the last 30 years that took a system that had been stabilized after the worst excesses of the early 20th century and  allowed the banks, investment and Fed alike, to behave as though short term profit and high risk were the way to do business.

I am all for highly regulated markets and banks, they are organizations who's entire premise is making money, not managing it and they will follow the urge for short term profit over sustained growth if not kept in check.

Cheeky Bastard's picture

Actually Marla, it was the removal of certain regulations over the last 30 years


True, but none of those regulations were repelled because CB wanted so, but because the private sector lobbied for the removal of the regulatory frame.

Cheeky Bastard's picture

of course they wont, hence there need to be a change in the requirements for entering a public service, for example

it has to be at least 5 yrs since the potential candidate held any executive position

it has to be at least 2 years since the potential candidate held any stock in a private or publicly listed company

it has to be at least 5 years since any potential candidate had any business relations with private or publicly held companies

FED chairman to be voted by the voters via elections just


these are just some examples how a problem could be solved

also, cut the bureaucracy by 50% to slash governmental spending

impose strict regulations on intervention of FED

form a independent body ( non-governmental non-private ) entity to audit the FED

write new rigorous legislation regarding that entity

etc etc. you get my idea


the problem cant be solved in 2 months. It takes yeas to accomplish all this. 


Cheeky Bastard's picture

you make it sound like that is a bad thing

Sqworl's picture

Stop stealing, the government hates competition!

tip e. canoe's picture

"FED chairman to be voted by the voters via elections"

funny i was just thinking the same thing as i read the original post.
100% citizen campaign financed elections
equal airtime given to each candidate
etc. etc. etc.

and not just the chairman, but also the governors of every branch.


Marla Singer's picture

"...they are organizations who's entire premise is making money...."

You imply that this is a bad thing, but you don't make a case for it.

Sqworl's picture

1 in 6 americans in poverty!  US has the largest GAP. case solved...:-)

Anonymous's picture

Poverty must be discussed on an absolute basis, otherwise we will ALWAYS have "poverty." Understanding a small number in our country are truly poor, many of the "one in six" poor have housing, medical care, food, TVs, cell phones, many have cars, etc. If poverty is defined as the lowest decile, then we will ALWAYS have poverty.

The vast majority of our one in six are among the richest in the world. Whose definition of poverty are we using?

Emmanuel Goldstein's picture

When profits are made to the detriment of society at large then it is a bad thing Marla.

Surely you don't require me to explain our current situation to you?

Daedal's picture

it was the removal of certain regulations over the last 30 years that took a system that had been stabilized after the worst excesses of the early 20th century and  allowed the banks, investment and Fed alike, to behave as though short term profit and high risk were the way to do business.


The solution is not necessarily more or less regulation. Rather, the solution is a set of clearly defined rules that promote transparency, fair dealings, and enforcement of contracts free from government intervention, but not free from government's obligation to see that those rules/contracts are enforced and violators punished.

By contrast, our system has severe lack of transparency in various areas, which is further clouded by governmented intervention in the dealings amongst market participants, on top of which the government fails to enforce, and at times contributes to, many of the violations and unfair dealings within the market place.

Anonymous's picture

Let's get rid of the Feds dual mandate (grow economy and stable prices) and go back to just one job -- stable prices. And then they might have more fortitude not to cave to moron politicians who govern us.

Anonymous's picture

You're in good company:


Go back to the single mandate. And audit the fed.

kevinearick's picture

maximum employment to what end?

other people's money?

illiterate, yes. unwilling, no.

mom and pop put their money in a bank for 2%. they don't know what the bank is going to do with that money, nor do they ask. Trump uses it build another casino.

natural selection is going to penalize mom and pop, but not Trump, right up until mom and pop quit putting their money in that bank.

there is no something for nothing, but that doesn't stop many people from wanting what they cannot have. government intervention creates additional penalties and interest for mom and pop.

empires require banks, and empires do not work for mom and pop. money is a storehouse of effective labor, and that labor can take it back at will, because capital is inert without it.

The devil you know is often better than the devil you do not, especially when it builds the center of gravity required for propulsion.

Bright people often find themselves in finance, confronted by an army hard-wired for efficiency, and bent on taking advantage of the next bright person to come off the line. It's a good learning experience, but quite painful.

Paulson is not going to stop being Paulson, and if he wants a big number in a computer account for building a center of gravity, he is welcome to it. Interesting show, but just a show.

Hansel's picture

The Federal Reserve took the shares of a bankrupt company as collateral without any consideration to political accountability.  It paid out AIG CDS at 100 cents/dollar without any regard for political accountability.  The Fed should be accountable to the people of the United States.

Marla Singer's picture

It was because it was too accountable that it was incentivised to intervene in the failure of a private firm.

one_fell_swoop's picture

Agreed, mixing democracy and capitalism/central banking is the issue here IMO.

Marla Singer's picture

How does wholesale statist intervention in markets equate with democracy?

Anonymous's picture

I see it as the other way around. Democracy is simply a system whereby four wolves and a sheep take a vote on what to have for lunch, it both invites and incentivizes rent seeking behavior.

The rights of the few are trampled by the collective majority, a mob all too easily controlled and manipulated by group think and the idealogy promoted by of the ruling class, such as the need to engage in warm mongering to "preserve and spread democracy" or the "everyone should own a home dream" that fueled securitization and the housing bubble.

Democracy degenerates towards centralization, statism, tyranny and societal destruction. The politicians are beholden to special interest funding and the short term demands of the people.

Democracy = huge debts, bloated public sector and unfulfillable financial promises to its people.

Daedal's picture

Liberty = A well armed sheep contesting the vote.

just.a.guy's picture

This is why the word "Democracy" does not appear in the US Constitution, but "Republic[an government]" does.

Republics work when the elected representatives balance the immediate desires of their constituency with the longer-ranging principles that got them elected by that constituency.

Of course what we have, in fact, is a set of elected representatives who are wholly owned and controlled by special interests, NOT some form of tyranny of the majority that historically has arisen in true Democracies, the dangers of which the US's Founding Fathers warned us about in the Federalist Papers.

Remember:  The majority of Americans were against the bailouts (which ostensibly saved their bacon by preventing abject financial collapse), but they happened anyway.  That's hardly mob rule.

When ranting about the problems with the current form of American government, it helps to keep these concepts straight.

Daedal's picture

(which ostensibly saved their bacon by preventing abject financial collapse)

Preventing? More like, guarenteeing financial collapse in the future, and to a higher magnitude. The Fed 'prevented' a bigger collapse in 2001, and look what we got as a result.

When refuting rantings about the problems with the current form of American government, it helps to keep these concepts straight as well.

Daedal's picture

It was because it was too accountable that it was incentivised to intervene in the failure of a private firm.

Perhaps, but the Ends don't justify the means. The Fed's 'role', as they define it, is for stability of markets. Intervening in the failure of a private firm was a simply a means to an end (legality be damned). Auditing the Fed is a step in the right direction. FNM and FRE are/were politicized -- that didn't end well; noting that, Not auditing those instutitions would've made the situation far worse down the line.

Hansel's picture

"It was because it was too accountable..."

No way.  The Fed created the incentive for massive leverage by everyone.  They ignored all warning calls on the repercussions of their actions until the bubble burst.  The Fed should be held to account for their actions.  Additionally, after being removed from the gold standard in '71, the Fed is not constrained by anything, completely juxtaposing the need for checks and balances in government espoused in the constitution.  Are you trying to tell me that the Fed should be accountable to no one while executing QE to the tune of trillions of dollars?  The Fed should not have the right to trash the currency and set asset prices as they see fit with no oversight.

Anonymous's picture

a couple of problems with your article....the first is the claim that gses are monetary policy institutions...with such logic we could say that any entity or collection of entities which issue sufficient debt are mpi....this is absurd....

only the fed has the authority to enter omo - something which the original legislation expressly forbad for very good reasons....as you point out only the fed has the discount window, fed funds rate, and overnight loans...in addition only the fed issues currency....thus it is far too much a stretch to include other agencies as part of the mpi complex...

what these other agencies do is allocate capital - but capital allocation is not the express role of the central bank although in fact it does this whether it intends to do so or not....

fed auditing extends far beyond just monetary policy....there are activities in which it engages which are far beyond its proper role and in fact criminal such as the suppression of the gold price and extensive participation in military and foreign policy....

the framers of the consitution made no provision for a central bank because such an institution would necessarily be an enslaver of the people and thus political....they also saw the people as the source of money - not the federal government. hence the constitution provided for the free and unlimited minting of money (gold and silver)....with the money supply in the hands of the people, the necessary checks and balances between interest rates and paper money were established....that disappeared in 1913 and 1933....

insofar as any central group controls money then it rightfully belongs to the congress because money then has become a political asset - rather than an economic one - and that group should be accountable to the people even to the point of sticking a periscope up its rectum....

when the congress saddled the central bank with maximum employment during the 1970s it further politicized the fed thus the creation of this "independent" body did nothing to remove politics from the equation - further vindicating the vision of the constiutional authors....

an audit is simply an examination of books and practices without a decree of policy....so a rectal level audit should not cause any fears unless there is truly something to hide in which case the people need to know about it because it is *their* money and government exposed to risk....

the fed is essentially the 4th branch of government and as such should be subject to full scrutiny and checks and balances....finally any financial organization should be audited and extensively so - especially when the people's money is at stake - as a matter of good fiduciary accountability....

the fed is a monster and should be ended without delay...

Marla Singer's picture

"a couple of problems with your article....the first is the claim that gses are monetary policy institutions...with such logic we could say that any entity or collection of entities which issue sufficient debt are mpi....this is absurd....


"any entity or collection of entities" does not hold sway over $5 trillion in debt. Also, claiming something is "absurd" does not make it so.

"...because such an institution would necessarily be an enslaver of the people..."

[rolleyes] Ok.

Anonymous's picture

last i heard the gses could qualify as a collection
of entities and according to your article they
hold sway over at least 5t usd in debt....but that does
not make them part of the mpi complex....

when i claim something absurd i express an opinion -
not an ontological fiat as comes out of the fed....

regarding political economy, i much rather throw
in my lot with our consitutional founders than
a zh founder....i can roll my eyes too but it
doesn't make anything not so.....

Marla Singer's picture

"last i heard the gses could qualify as a collection of entities and according to your article they hold sway over at least 5t usd in debt....but that does
not make them part of the mpi complex...."


Oh?  Why not?

MsCreant's picture

Interesting perspective. I have been trying to articulate a soundbiteish message that the blogosphere could really push and I thought that it was something like "open all the books of all the financial instutions now."

Isn't there a line between what is political influence and breaking the law? Should the Fed be accountable to law? I think it is one thing to say they should not be "influenced" and it is another to say they are "breaking the law."

I guess I find it worm like that they are trying to hide under the rock of this arguement as an excuse to keep hiding their dirty laundry. No one should be exempt from accountability.

SWRichmond's picture

Reading the article I read assertions as to the inevitability of the coming complete destruction of USD: there is no political will to raise interest rates.  Washington DC is completely invested in the welfare / warfare state, fed by constantly expansionist monetary policy.  Wars are ALWAYS paid for by inflation.  We have been in a state of war since 1968: the War in Vietnam, the War on Poverty, the War on Drugs (which is being fought as a war on our civil rights), and the final apocalyptic never-ending War on Terrorism, which is in the process right now of being desperately turned inward. 

Marla, of course there is no political will to raise interest rates.  The entire structure of the government, constantly expanding, is totally dependent on a constantly "growing" economy. Raising interest rates turns that structure upside down:

  1. Crashes stocks, massively destroying wealth
  2. Crashes tax revenues still further
  3. Collapses what's left of the economy
  4. Triggers a new wave of mortgage and CRE defaults
  5. Crashes the T market, an apocalypse in itself, jacking government interest payments, (triggering the debt trap?)
  6. Throws millions more out of work, raising demand for government services 
  7. I could go on and on about the social implications

There is no political will to raise interest rates, and none is forthcoming.  The notion that a few select men and women have the knowledge and wisdom required to manage an economy of hundreds of millions of souls is totally ridiculous.  It is lunacy, or worse, it is theft.

The goal of auditing the Fed is to publicly reveal the fraud and abuse that is without a doubt occurring right now, and then let nature take its course with Wall Street and their crony central bankers.

Anonymous's picture

Tend to agree with you. Our Government is a massive problem.

But just a side note -- Obama did put an end to the War on Terrorism -- by changing the name to "overseas contingency operation." And hence the Nobel Prize. Which has certainly raised my hopes of winning a Nobel Prize -- his whole hope thing is really working.

Ned Zeppelin's picture

This role of the central bank as some aloof, a-political island, populated by brilliant technocrats, who are uninfluenced by any considerations other than those which would benefit or harm a reserve banking/fiat currency system, as a tenet of the banking system, is a complete myth and utterly unattainable. I submit to you that as an institution manned and populated by humans, it is therefore always subject to political considerations and control, just not the kind of control the banking elites have always feared. True, we have seen times such as when Volcker killed the economy (for a while) to tame runaway inflation, and that was "politically unpopular" and therefore seemingly an act of selfless altruism.  But I submit to you that this crisis has proven that the elites are a dangerous, almost pathologically self-interested group, that rule by the elites is a bad idea, and this idea of politically-remote central bank governance is nothing more than elitism and oligarchy branded differently. 

I say admit it for what it is, and think how to structure public, elected control of the Fed, if you are going to have it.  Challenging, yes, and perhaps just as dangerous, but I'll take it over what we have now.

SWRichmond's picture

this crisis has proven that the elites are a dangerous, almost pathologically self-interested group, that rule by the elites is a bad idea, and this idea of politically-remote central bank governance is nothing more than elitism and oligarchy branded differently.

Fantastic summation.

Marla Singer's picture

This sounds quite a bit like a communist revolution in the making, actually.

Cheeky Bastard's picture

If Marx was right ( and i have my suspicion he was ), than this will end in a general bloodshed. Since this whole thing began its like the general population based its guidliness in communist program, while the top 1% have based their on the exact same opposite. People in the czarist Russia must have felt the same as we do know. I hear people quoting the constitution, but the words written in The Capital come out of their mouth.

SWRichmond's picture

Only if you don't believe that small government is possible.

Ned Zeppelin's picture

I'll echo SWR and MsCreant is saying that responsible control of the Fed starts with a thorough, rectal tissue stretching audit and examinations for adherence to the law.  A sorry spectacle no doubt but the first step in an adult, non-tin hat discussion of Where Do We Go From Here? It's about time.

(fired up on this one this morning!)


Sqworl's picture

Lets start with a proctol examine to cure the fissure, then x 2 daily hot soaks and industrial size dose of preperation H.

MsCreant's picture

Someone put crazy glue in the Preparation H.

TraderVix's picture

Audit the Fed? Have you really thought that through? Do you even know what an audit is? Who is going to perform the audit? What are they testing? Who/what entity determines the controls? You are trusting Congres (CONGRESS!!) to legislate a process by which (presumably) a contractor (PWC, D&T) because it won't be the CBO -  the lobbying will be too intense for an external auditor (in the name of independence) opens the Fed's books.

I think the "audit" you all are looking for is an all-encompassing FOIA request that gets filled with no redactions.

CD's picture

Could it be that Marla's goal here is the stimulation of debate as to "what comes next", rather than the implied (but not clearly stated) opposition to the transparency of the Fed (via an audit and/or other means)? Also, the article broadens the scope of inquiry: "One wonders, even as the Federal Housing Administration teeters towards collapse, how the many adjuncts andaides-de-camp to the GSEs have managed to avoid similar scrutiny given their central role in the crisis."

Marla is right that if we are attempting a review of the monetary policy, the other elements must necessarily be a part of that review -- regardless of whether they are designated by concrete law or explicit policy to be a part of "mpi" - if it looks, talks and acts like it affects/influences monetary policy, it is likely that it does. I do not have the answer as to how to solve the "populisation" of the Fed and other institutions -- nor is it likely that even if undertaken, such a review would honestly target Congress as the enablers/perpetrators of the policies "gone awry". Cheeky is right that a comprehensive review alone would take years, let alone crafting a stable and meaningful solution. Yet is this really a valid reason NOT to get started?

SWRichmond's picture

...if we are attempting a review of the monetary policy

...crafting a stable and meaningful solution.

I do not wish to review monetary policy, I wish to end it as the blatant thievery that it is.  The most stable and meaningful solution is getting government as far out of the money business as possible.  The Federal Reserve is a policy instrument of Wall Street, just like Congress. 

One cannot create overweening power and then grate at its misuse.  Such arguments support the continuation of the current unsustainable system.

CD's picture

A valid point; I did not presume to exclude such a solution - yet I wonder how it would be done, what would replace the current system, who/what would issue "money", how do you transform the current system to operate on such a fundamentally different basis? What do you do with the currently existing (fraudulent or not) accounting structures? National debt? Budgets? Wealth valuation?

jm's picture

Another aspect of populist capture is simple generational trends at odds with one another.

Baby boomers wanted big houses.  Bankers served their customers.  The labor market fat and sassy.

Now Baby boomers want a secure retirement.  Bankers left holding the bag.  The labor market morose and angry.

What's a central bank to do? 


MsCreant's picture

Poor scared bankers! No wonder we had to bail them out. It was just the right thing to do. Thanks for clearing that up for me!

jm's picture

Don't assume I'm supportive of banker largesse.  But there are different ways to view the situation, rather than heap blame on a few groups, as woeful as they've behaved.  Such certainly leaves one open to see opportunities. 

There's lots of mess to go around.  People that signed papers on an option-ARM.  Bankers that took any and all comers without credit checks.  Politicians that subsidized homes as a policy option.  Voters that kept them in office.  Central bankers that devalue currency to salve over a bleeding labor market.   


MsCreant's picture

It is a snake eating its tail, isn't it? If the banks didn't offer the loans, the people could not have taken them. If the government enforced existing regulations, the banks could not have offered the loans. If WE had INSISTED that government do their job, and gotten rid of the rats that did not enforce regulations, then the banks could not have made these loans to those of us who could not pay. Circular cluster fuck so it would seem.

Add in that bankers can afford lobbiests that you and I cannot...

Add in that the rules say that this lobbing is legal...

Add in that most congress critters are not going to vote against getting money for themselves and their campaigns this way...

Add in that we keep electing these folks that will not do lobby/campaign reform...

It all falls back on us doesn't it?

Peace JM.

jm's picture

Right on, sister.  It always falls on the prudent to cover the sins of the dumbass.  It ain't right.  But it is what it is, even with the stakes as high as they are right now. 

It is our job to make our best of this world in spite of it.