The Federal Reserve is ripe for critique. In fact, the Federal Reserve is a system in desperate need of reform. Occupy Wall Street seems perfectly positioned to apply the pressure needed to mend this hugely important, but little understood institution. Unfortunately, the movement is home to a more reactionary strain of monetary policy analysis too.
In Philadelphia, the first edition of the Occupy Philadelphia Inquirer had “End The Fed, End The Wars” displayed prominently on its front page (“Forget Wall St. as a whole…End the Fed….End the economic slavery”). Several similarly exasperating videos posted to the Facebook page were met with approving comments, while the Occupy Philly website was briefly dominated by a Federal Reserve-bashing activist.
Many people involved with Occupy Wall Street and its spin-offs would denounce such posturing, and rightly so. This variety of fed-bashing is espoused by Ron Paul, a Republican candidate for president who wants to “Abolish the Welfare State,” repeal Roe v. Wade, scrap the EPA, and end most forms of taxation. Most importantly, eliminating the Federal Reserve, adopting the gold standard and having a tight monetary policy are directly opposed to the occupiers’ key goals: reducing unemployment, easing debt and stemming the foreclosure flood.
Here are four things the Occupy Wall Street movement should know about monetary policy and the Federal Reserve.
1. “Ending the Fed” is a Terrible Idea
First, a quick primer on what the Fed is and what it does. The Federal Reserve is America’s central bank, which means that it supervises the banking system and controls the supply of money. The financial regulatory aspect of the Fed’s mission is a huge mess and the “Audit the Fed” provision of the Dodd-Frank law is only the first step in sorting it out. But the institution’s other role should be equally, if not more important to Occupy Wall Street. When it comes to monetary policy, the Fed has a dual mandate “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
There are many legitimate reasons to critique the Fed and how it fulfills its mandate. But the “End the Fed” movement isn’t interested in reform. As one popular Youtube occupier/ranter puts it, “this is all because our government prints too much money…that’s fake money that they printed out of thin air…there’s not going to be a middle class in ten years, end the federal reserve…get corporations out of our politics!”
There is no evidence that getting rid of the Federal Reserve would ameliorate any of the problems named above, or any of the other issues the Occupy movement is organizing against. In fact, it would probably make everything worse.
“If tomorrow we closed the Fed and started using a gold standard, it would be so chaotic nobody would know what to do,” Ron Paul said in a recent interview. And remember that the United States dollar is the most popular reserve currency in the world. As a general rule, throwing the global economy into economic turmoil isn’t a good idea.
“Countries generally don’t ever eliminate their central banks, but they do sometimes eliminate their monetary policy independence,” says Matthew Yglesias, a blogger for the Center for American Progress, who frequently writes about the Fed. “The United States used to have a gold standard instead of discretionary monetary policy. That meant that the value of a dollar would ebb and flow with the discovery of gold mines. The problem with [this] kind of setup…is that you can’t respond to economic shocks, and when depressions happen they’re really severe.”
2. The Gold Standard is an Awful Idea
For much of our history, America subscribed to the gold standard. Dollars were backed by actual gold and could be exchanged for fixed quantities of the stuff. Ron Paul and the “End the Fed” movement are nostalgic for this era. But in actuality, a return to the gold standard is not only a bad idea, it’s probably unworkable too.
We left the gold standard in the 1930s because it greatly exacerbated the Great Depression. As deficits ballooned, people feared the dollar would be worthless and began exchanging their cash for gold, which the government had to provide under the rules of the gold standard. The nation’s dwindling gold supply became policymakers’ first concern—instead of, say, unemployment levels of over 20 percent—and they decided to balance the budget to restore confidence. Taxes were raised, spending slashed, and the depression grew even worse. The dollar wasn’t able to react to the needs of the economy: It could only be responsive to the whims of the gold supply.
Even in boom times, a gold standard can be a huge liability. The gold supply grows by 2 percent every year, while the global economy grows at four percent, leading to deflation and constrained economic progress. In short, we’d be putting our monetary policy at the mercy of random fluctuations in the supply and price of gold, instead of having a monetary policy that can adapt to actual economic conditions.
3. The Good and Bad of Modest Inflation
Ron Paul and those who think like him hope the gold standard would serve as a hedge against inflation, which they consider one of the great evils of our time. Inflation can be a huge problem, as anyone who lived through the 1970s will tell you. It can be spurred by government spending to stimulate an economy that has already reached its productive capacity. But right now America is suffering from the opposite problem. The problem isn’t inflation, it’s unemployment, crushing debt and stagnant growth: issues that can be assuaged through monetary stimulus.
In fact, core inflation levels—the kind that exclude food and energy—are currently at record lows and have been for quite some time (now with charts). In fact, one of the easiest ways to achieve the Occupy movement’s goals of lower unemployment and household debt would be to use monetary stimulus to mildly increase this measure inflation.
“The Fed can target higher rates of inflation which would be very effective in lowering the real interest rate and reducing people’s debt burden,” says Dean Baker, co-director of the Center for Economic and Policy Research, a progressive think tank. “We should talk about deflating the debt. If we had wage and price inflation of four percent every year for two or three years that reduces the debt burden by eight, 10, or 12 percent relative to their wages.”
American corporations are currently sitting on massive cash reserves. If the Fed announced a higher inflation target those horded assets would soon be worth less, thus incentivizing spending. Perhaps more importantly, mild inflation would ease the debt loads crushing many Americans.
Look at the “We Are the 99 Percent” Tumblr. Almost every entry names debt—from student loans, credit cards, medical, or housing—as a principal concern. Household debt is currently 90 percent of GDP. As nominal wages and incomes rise, debt amounts would remain stable (and drop in real value), easing the path to solvency for many and freeing up money for spending, and growth.
These goals dovetail nicely with Occupy Wall Street. As Chris Hayes wrote in a prescient 2009 policy paper on the need for higher inflation, “the central tug of war over inflation is between creditors and debtors: inflation is good for debtors and bad for creditors.” The people who are hit hardest by mild inflation are the rich, who own most financial securities, and the banks, who want to keep squeezing as much from their debtors as possible. It would also be significantly simpler to achieve debt relief through inflation, and far more likely to be enacted than the “jubilee” policy associated with OWS. (Nothing like that is going to get through a House of Representatives controlled by this guy.)
4. Don’t End the Fed, Make it Accountable to the Needs of the 99 Percent
The Federal Reserve needs a wakeup call. Perhaps an Occupy Wall Street-shaped wakeup call. Instead of waving nonsensical “End the Fed” signs and aping the talking points of a reactionary Republican, occupiers should demand that the Fed be made more democratically accountable and that policymakers seriously execute its dual mandate to maintain stable prices and full employment.
One significant step toward these goals would be the democratizing of the Fed’s Open Market Committee (OPM), which controls interest rates, the nation’s money supply—the monetary policy side of the institution. There are 12 seats on the OPM: one for the Fed chairman, one for the vice-chairman, and five for the other Fed governors selected by the president and approved by Congress. Then there is the president of the New York Fed and a rotating cast of four of the 11 other regional Federal Reserves. Regional fed presidents are appointed, in large part, by representatives of the banking industry who want to keep inflation low to preserve the value of the debt it holds. True to form, many of the mostreactionary voices on the OPM are regional Fed presidents.
Barney Frank is working on legislation to remove the regional Fed presidents from the OPM and replace them with presidential appointees who would be more democratically accountable. “It’s like having Merck and Pfizer appointing people to the FDA,” Baker says. “I can’t think of any other industry where you directly give the regulated industry a voice in its regulator.”
Part of the reason the Fed has been so subdued in its pursuit of monetary stimulus is that the right has been so fierce in fighting against it. (Remember when Rick Perry called Bernanke’s policies “almost treasonous”?) It is long past time that the left started taking an interest in the Federal Reserve and pushing for monetary stimulus to ease unemployment and the debt burden. Ignore the siren song of Ron Paul and other “End the Fed” types. Occupy Wall Street should fight to ensure that the Federal Reserve works for the many, not the few.
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