Exposing the Secrets of the Temple: How the Federal Reserve Makes Money Out of Thin Air
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For some, the Federal Reserve is the right place to house any new regulatory powers contained in financial reform legislation. For others, the Fed is at the center of all that ails us. In fact, over 95,000 have signed a petition at auditthefed.com.
"In a major victory for transparency at the Federal Reserve, the Senate passed on Tuesday an amendment by Sen. Bernie Sanders that directs the Government Accountability Office to conduct a top-to-bottom audit of all emergency actions by the Fed since the start of the financial crisis in 2007. In addition to the audit, the Fed for the first time would have to reveal by Dec.1, 2010, the identities of banks and other financial institutions that took more than $2 trillion in nearly zero-interest loans." -- from the office of Sen. Sanders, 05/11/10
William Greider, author of Secrets of the Temple, perhaps the finest book on the Federal Reserve, termed the Sanders-Paul audit bill the "first breach in the wall," adding, "it promises to keep alive popular demands for more fundamental reforms." Greider challenged Greenspan and Paulson long before it was fashionable, and has written lately about restructuring the Fed. Now national affairs correspondent for the Nation, Greider was for 17 years the national affairs editor at Rolling Stone, and spent 15 years at the Washington Post. His latest book is Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country, and he wrote the introduction to Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover, by the editors of the Nation.
Terrence McNally:Your latest book, Come Home, America, is a bit of a departure for you, isn't it?
William Greider: I hope It's a gentle and helpful description for people of how deep a hole we are in, and that the country that emerges from this ditch -- I'm talking more broadly than the financial crisis -- is going to be different from the country we knew for so many years. That passage is going to be painful, but I stick to my optimism and insist that we can be a better country on the other side of the ditch
I wrote it just as the financial crisis was blossoming (if you can use that word) and I think I was a little premature in how quickly the public at large, never mind the governing types, could grasp the reality of what was happening to us.
The book is now out in paperback, but I almost wish it were published for the first time right now or even next year, because this is a really hard blow Americans have taken. I think many people are still in denial, which I understand.
McNally:I assume the book says things you've stored up for years, but America wasn't ready yet to recognize the depth of our problems and thus the possibility of change. What do you make of that?
Greider: I've always tried to take a longer frame historical view of things, which gives me sympathy for people trying to cope with what's new. In the book I suggest that this country is at the end of a long and mostly glorious run that started with victory in World War II. There were some very dark passages as well, we know, but American prosperity became not just fabulous, but also widely shared.
McNally:That was the great era of the American middle class.
Greider: And my message is that the good times that we knew are not coming back. This is not just about when do we get out of the grand recession or start creating jobs again and so forth. It's deeper than that. The business model for American prosperity that more or less worked for most of the last 50 years is gone.
I urge you to test this. Talk to young people, 18 to 30. Ask them what their reality is. I guarantee they will bring you up to date, because that prosperity model has been busted for them for years. California is experiencing a lot of the symptoms now. As the bubble of prosperity shrinks, they're piling more of the costs on young people.
McNally:And since California had a bigger share of the bubble....
Greider: Let's be fair, California also did more for young people in its good years than almost anybody else. It built a fabulous education system, but that's coming down now. For some years, even generous California has pushed costs off on young people. Not just at UC Berkeley, but at all the state schools, the community colleges and down the line.
Young people might not have read my books, but they know their own reality. They will tell you in fairly blunt terms that what they're told by their elders -- people like you and me -- is bunk, and it has been bunk for years.
The standard -- and California again is the model -- is go to school, get more education, get a good job, and if you do all the right things, in a few years you'll have a family and you'll own your own home, etc.
And what happens to people who do? No piece of that turns out to be true anymore. I'm not stating anything that hasn't been reported before, but I don't think those of us who are a little bit older have quite absorbed the profound difference that has emerged. The financial crisis makes it worse, because the country has lost trillions of dollars in wealth.
McNally: What brought you to write about the Fed at a point when -- aside from those folks who have always opposed it -- the Fed was hardly on people's radar? You wrote Secrets of the Temple in 1987. What sparked your interest?
Greider: I was the assistant managing editor at the Washington Post running the national coverage in 1981, the dawn of the Reagan era. I had an arrangement with budget director David Stockman, where we met privately every other week or so, and talked about the advance of the Reagan agenda. That turned into a piece I wrote for Atlantic magazine called "The Education of David Stockman," in which he basically revealed that he had lost faith in Reaganomics.
But it dawned on me after a few months that Reagan wasn't actually the most important story. The really fundamental story happening to the American economy involved Paul Volcker at the Federal Reserve. As soon as he was appointed by Jimmy Carter in late '79, he took interest rates way up and induced a long and deep recession. And I said to myself, "I've been in Washington for 20 years, I know a lot about the federal government but, beyond the usual cliches, I don't know anything about the Fed."
I'd had a glimpse of how powerful it is, and yet it's excluded from political discourse. Except for a few crackpots, nobody can talk about it. What's this about? I emphasize my innocence because the deeper I got into it, the more I realized that I wasn't just looking at a political institution, I was looking at the bloody core of American capitalism.
McNally: When did the Federal Reserve come into existence? What was the argument for it at the time? And what was it charged to do once it was brought into existence?
Greider: The events of the financial crisis tore away the mask, destroying the mystique of intimidating, superior expertise that protected the Central Bank from real scrutiny and political discussion. People in the governing elites would blame that on a lazy public that doesn't pay attention, but the truth is that general ignorance was in the design when Congress approved the creation of a central bank in 1913.
They wanted to do that because at the time the country was in very serious political conflict surrounding issues of money, the currency, the banks, the power of the banking system, who had access to credit, and who was denied access.
When the banking system, led by JP Morgan and other famous players, decided that for their own sake they had to create a central bank Washington had to help. It was too big for even JP Morgan. So they design this beast, patterned after the Bank of England, as a semi-secret institution that can decide these large questions in privacy. They were quite deliberately cutting out the public. And it worked. The "money question" gradually disappeared from American politics.
So 60 years later, even though I'm intensely interested in government, I don't know much of anything about this institution. And I wasn't alone, was I? When the Fed started bailing out big banks in such a miserable way, pumping out trillions of dollars, average Americans finally said, "What's that? Why was I not told about this?" And to me, that was quite exciting; exhilarating even.
McNally:Where did that money come from? Who's in charge here?
Greider: I would say the Fed created it, that's what central banks do. What do I mean, "created it"? They type keyboard numbers, the money comes into existence, and ends up at a bank.
I literally think this is the watershed where Ben Bernanke reminds me of the Wizard of Oz, when little Toto pulls back the curtain, and you see Frank Morgan in the control booth frantically turning dials and pulling levers. His voice comes ringing out from the screen, "Silence, the great Oz has spoken," and Dorothy says, "Nonsense, you're only a man pretending to be a wizard." That's what happened at the Fed. To my delight, it offers a moment where we have a chance -- only a chance -- to reopen the question of democracy.
I know quite a lot about the Federal Reserve, I've followed it over 30 years, and I make this provocative argument: democracy could have saved us from this collapse -- which naturally all so-called responsible people deny.
I'm convinced if the Federal Reserve was subjected to the normal give-and-take of politics, with people taking different positions and arguing over the Fed's policy-making -- we wouldn't have had this Wall Street catastrophe. The Fed -- instead of being worshiped -- would have been embattled, and a normal kind of politics would flow from that.
McNally: But more "democratic" or more "transparent" institutions such as Congress haven't done such a good job themselves. Why do you say that the shift from complete mystery to debate and conversation might have saved us?
Greider: I wrote 20 years ago in Secrets of the Temple and I'm writing again now, that the effect of introducing the Central Bank in the terms that our country chose, not only reduced average citizens to ignorant children, but also reduced members of Congress to a similar role -- cranky, powerless children. The Federal Reserve was the father figure, wise, remote and stern. It would make decisions behind closed doors, and wouldn't bother to explain them to the public, because it knew the public wouldn't understand them.
This is more than psychology; this is a power relationship built into our society. And it means that the governing elites with technocratic expertise and the powerful interests have a kind of top-tier democracy where they debate among themselves. Some of it's public, a lot of it happens at nice dinners, but the rest of us are down below and we are quite purposely kept in the dark.
McNally:The argument is repeated over and over again: it would imperil our economy if people knew which banks are talking to the Fed about infusions, etc. They still hold to the notion that we will all be better off if the mysterious wizards take care of us while we mind our own business.
Greider: That conceit goes much more broadly than the Federal Reserve. It is built into what I call technocratic governance present in a lot of levels of government, not just Washington.
I offer the gleaming or most tarnished example, which is Central Intelligence. It's very similar, isn't it? They know things we don't, and we have to trust their judgment because they can't make this information available to us, it's classified, you wouldn't want to share it with the enemy. The CIA literally has the ability to stampede this nation into war. And it's done so, hasn't it, in recent memory?
McNally: How is the U.S. system similar or different from other central banks?
Greider: It's similar to the central banks in other leading countries. The functioning reality of the European Union or the European monetary system isn't all that different from the U.S., but it's a very different history. They have a very hard conservative view of currency values and how they must be maintained. That grows out of a lot of bloody history -- most dramatically Germany's devastating inflation after they lost World War I, which essentially led to the collapse of civil government and the rise of Hitler. Those societies have a very different understanding of social equity than we do, and spend public capital on a lot of enterprises which this country does not yet accept as necessary. So I think it's an unfair comparison to say they're not that different; they're profoundly different.
McNally: What is the role of our 12 regional privately owned federal reserve banks?
Greider: The Fed was set up in an era before telephones were trans-Atlantic or trans-continental. They had the telegraph, but gold moved by ship and train. As the country expanded, reserves of banks were mal-distributed across the country, and they believed the banks would fail because you couldn't get the reserves there fast enough. So they set up 12 regional banks holding reserves all over the geographic country. That is utterly irrelevant today.
Nevertheless, these institutions have some prestige and, above all, they are part of the Fed's political base. You put the movers and shakers on the local board, you put the leading bankers on the local boards, and all of them become a claque of the Federal Reserve and its privileges. Leave the politics aside, I think it was a dubious hybrid at the beginning, but now it is an absolutely corrupt hybrid. The regional banks are not as powerful as many presume. Thanks to New Deal reforms, decision-making is now centralized in Washington. Basically the chairman and the seven-member board of governors control policy.
McNally:Let me read from your article in August 2009: "Bankers are the shareholders who ostensibly own the 12 regional Federal Reserve banks; bankers sit on the boards of directors proposing interest rate changes for Fed governors; and bankers also have a special advisory council that meets privately with governors to critique monetary policy and the management of the economy, so the bankers have all this power."
Greider: Let me take a step further. This is an accusation I laid out in broad form in the book 20 years ago, but the subsequent 20 years have really confirmed my judgment. For the last 30 years, starting in 1980, the Federal Reserve chose sides. It chose sides in ways that benefited capital and punished labor, that favored stock market and financial investments over wage earners and industry.
The Federal Reserve underwent an unusually harsh ideological shift trying to tamp out inflation but then went on to favor deregulation of banks and very stern control of the real economy which would keep wages from rising.
McNally: During the period when Alan Greenspan was being venerated as the maestro, you were writing articles explaining that he was was taking sides. Can you describe a specific example of the way the Fed handled interest rates that favored finance and hurt working people?
Greider: I used a phrase which was a bit of a caricature, nevertheless I would argue it's accurate. I called Greenspan the one-eyed chairman. "One-eyed" because he saw price inflation in the real economy and the so-called danger of rising wages -- even when they didn't exist. So he would tap on the brake of higher interest rates and slow down the U.S. economy. Growing faster would lead to full employment, which is the right condition for generating rising wages. With full employment, workers have better bargaining power whether they're in unions or not.
Meanwhile, he was blind to the really ferocious inflation of prices in financial assets. The stock market, housing, bonds, and so other many things we've now gotten educated about, went through the roof. This didn't just start in the last few years, as the story's being told now. It really started back in the '80s, and, when Greenspan was in charge in the '90s, he made it far worse. These were his ideological convictions, but they did enormous damage to the U.S. economy and to people all over.
Here's the nut of my complaint: if this is a self-governing democracy, the American people are entitled to know these things. That doesn't mean they'll always understand them correctly or that they will even care or pay attention. But I believe it's a right of being an American, to be able to hear the contesting views and the political consequences for ourselves.
McNally: And the economic consequences.
Greider: When a government agency does this to people, it at least ought to tell the people what it's doing, but the Fed is exempt from that. The Fed isn't alone. A lot of other agencies of government get to keep secrets too. If you hear a little outrage in my voice, it's because I have considerable confidence that if Americans at large get a general picture of what government is doing, they can fight it out from there. They'll make some wrong choices, but on the whole that's better than leaving it to secret experts.
McNally:Let me read a couple of quotes from a site that calls for abolishing the Federal Reserve. There is a minority movement in this country that is more outraged than you are, and feels not merely that it should be transparent, but that it should be eliminated. I want to get your take on whether what they're saying is accurate:
"Who owns the Fed? The Rothschilds of London and Berlin, the Lazard brothers of Paris, Israel Moses of Italy, Cue and Loeb and Warburg of Germany and the Lehman Brothers, Goldman Sachs and the Rockefeller families of New York. Did you know that the Fed is the only for-profit corporation in America that is exempt from both federal and state taxes? The Fed takes in about one trillion dollars per year tax-free, the banking families listed above get all that money. Almost everybody thinks that the money they pay in taxes goes to the US treasury to pay for the expenses of the government. Do you want to know where your tax dollars really go? If you look at the back of any check made payable to the IRS, you will see that it is endorsed as pay any FRB branch or general depository for credit US treasury, this is in payment of US obligation. Yes, that's right. Every dime you pay in income tax is given to those private banking families commonly known as the Fed tax-free."
What's true and what's not true in that?
Greider: It would take me an hour and a half to sort through the juxtapositions and leaps of conspiratorial faith that you've just read. I will make it crude and simple: Basically that is a fantasy of people who have genuine fears about the power of the central bank. Some of what they are citing goes back centuries, and has some figure of anti-Semitism floating over it. I will say this issue has been litigated. The Federal Reserve system -- notwithstanding all that you've read about who owns the 12 regional banks -- is a part of the federal government.
People of good intentions don't want to believe that, partly because they can't believe that their elected government did this to them. I cut to the chase and say get over it. The Federal Reserve system was created by an act of Congress, and it chartered private organizations. Because the bankers wanted it that way, the 12 banks are chartered as stock-holding companies. Its life and death depends upon the Congress.
If people want this cleared up, go to the Constitution. Article One is about the Congress, and Section Eight gives the power to create money and regulate its value to the Congress -- not to the White House or the Treasury. It doesn't even mention a central bank.
I want to return to first principles and say, the Congress needs to reclaim its authority in the Constitution to supervise the creation and regulation of money. Now it could delegate that of course -- members of congress are not going to count the actual bills on the floor of the House. But that would necessarily restore democratic principles to the central bank function.
My point is, every advanced industrial nation that has a currency -- and most do -- will have a central bank. So I'm not against having a functioning central bank; what I'm against is setting it outside our democratic accountability and the usual principles of whom government must answer to. It's supposed to answer to the people.
McNally:In your article, "How the Fed Prints Money Out of Thin Air,"you make a point that Congress is talking about giving the Fed more power, for instance, if they lodge the new regulatory agency within the Fed.
You said: "I ran into a retired Fed official. I said to him, we think this would be a good time to dismantle the temple. I playfully told my old friend, democratize the Fed or tear it down, create something new in its place that's accountable to the public. He did not react well to my teasing, he got a stricken look."
You then state several reasons why granting the Fed even more power is a really bad idea. How do you think it should be restructured?
Greider: People know the Fed screwed up regulating the banks by letting the big boys go crazy, but I think they do not fully appreciate that their monetary policy was also skewed drastically in one direction, to the great detriment of most of us and to the country as a whole. Why would we trust them with even more supervisory power?
The Fed is in a profound conflict of interest as to what its role is. Is it supposed to defend the public interest against the bankers? Or is it supposed to help the bankers be profitable and therefore stable?
McNally: You say that the Fed serves two masters and is kind of schizophrenic. But would it be safe to say that, when push comes to shove, stability for the banks and for finance and for Wall Street seems to always win?
Greider: Absolutely. Barack Obama basically said, "We can't fix all of the parts that are broken in the financial system, so let's turn it over to the Federal Reserve and let them clean up the mess." That's literally what the president proposed. Congress is ambivalent about that because a lot of senators and representatives are pretty pissed at the moment about the Fed and its secrecy and all the rest.
With some sympathy to the Fed governors: I say that's a dangerous idea. You're asking them to take on this powerful client, and do things that the Congress and the president don't have the nerve to do, which is change the financial system.
McNally:So you've got folks like the president and the Congress who are funded by financiers and bankers through campaign donations and lobbying, and the Fed actually includes the bankers as one of its powerful pieces. If one has trouble because of their conflict of interest, the other's conflict seems even larger.
If Congress chooses to assert its constitutional duty as you recommend, what might the restructuring of the Fed look like?
Greider: Well, it could take many different forms. I'm not wed to the exact details, but I think you could even keep the name Federal Reserve if that gives people confidence in the dollar or whatever. But basically you would re-create an accountable agency of government, and cut away all the insider banker stuff and cut away all of the secrecy rules.
It's perfectly okay for an agency of government not to reveal commercial secrets for instance, but at some point they've got to reveal the process of their decision-making, and you can do that in a pretty timely way. That would be the first rule.
Then you have to also do some serious reforms in Congress itself, so that they begin to have a genuine regulatory oversight function that actually keeps track of the Fed -- not in rhetorical propaganda terms, but the way any Fed watcher in the marketplace would look at the institution.
Reporters could do approximately the same thing I did, which is, first of all, to carefully track what these people say and do, and then go out into the financial world -- bankers, business people, investor firms, bond houses -- and talk to the participants there. They won't tell you dark secrets, but they will tell you what they see happening. Then write about it in order to demystify the institution.
And report not just once or twice a year, but regularly, "The Fed is pushing policy this way, and people say it will have the following consequences for ordinary mortals." Why should the government's actions be secret? The media would do that with other subjects, why not with monetary policy?
McNally:Do you envision the Federal Reserve as a public bank that might put public funds to better use, for investments in infrastructure, for example? And might there also be public banks in states and municipalities?
Greider: Bernanke's been widely praised for actually doing this for the last two years. He printed money in high volume, not to keep the economy going, but to save the financial system. Lincoln did something very similar to fight the Civil War -- called the Greenback currency. Orthodox monetarists always denounce the Greenbacks, people at large, however, understood that it kept the economy booming through the Civil War. It was shut down afterward to the ruination of American farmers.
If you could get responsible stewardship in Congress, you could move to something similar in the modern era. Instead of simply creating money and turning it over to the banking system, in toto, you would very publicly devote a portion of new money created to specific projects that the government builds for the broad general interest. High speed rail, for example, is something people can understand. You can harness the money power to broad public use.