How to Fix It: Take the Fed Public

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


While other nations have government-run central banks, the US financial system is managed by a quasi-governmental institution effectively owned and operated by the private banking industry. Often described in oxymorons—as a “public-private” system or a “decentralized central bank”—the Federal Reserve is overseen by a board of governors appointed by the president and confirmed by the Senate. But it’s the banks making up its membership that have called the shots, especially under two decades of leadership by the notorious anti-regulator Alan Greenspan.

The Fed’s role in the current economic crisis traces back to at least 1999, when the Clinton administration backed legislation—fiercely promoted by Wall Street and sponsored by then-Sen. Phil Gramm—collapsing the long-standing fire wall between traditional commercial banks (which did things like provide checking accounts) and investment banks. The Fed was designated the “umbrella supervisor” of the newly consolidated industry, but with regulatory powers so limited that they were referred to on Wall Street as “Fed lite.”

For nearly a decade, Greenspan rebuffed direct warnings about the looming credit crisis. Jane D’Arista, director of programs for the Financial Markets Center, a think tank on monetary policy, says it was the Fed’s “ideological commitment to deregulation” that made it fail to impose limits on mortgage lenders until the subprime crisis had exploded—”the proverbial closing of the barn door after the horses were out.”

What form could a Fed overhaul take—if Congress and the next president had the guts to do it? One option would be to make the bank part of the Treasury Department, a scheme that has been floated by various economists. Under such a plan, the Fed would be subject to congressional oversight and the heads of the regional Federal Reserve banks—who wield considerable power through the Federal Open Market Committee, which sets key interest rates—would become government appointees as well.

A move to Treasury, points out William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country, would place the body that functions as the fulcrum of the national economy firmly within the constitutional system of checks and balances. “The grand bargain that ought to be pursued is more leverage for more accountability,” says Financial Markets Center founder Tom Schlesinger.

yeas: House Financial Services Committee Chair Barney Frank, Barack Obama, and Treasury Secretary Henry Paulson have all outlined plans advocating broader Fed powers, including regulation of the Wild West territory of investment banks, hedge funds, and derivatives. But no national leader (with the exception of Ron Paul, who thinks the Fed is unconstitutional) envisions making the Fed itself more accountable.

nays: The finance sector fought off the threat of a publicly controlled central bank back in 1913; today (with lobbying expenditures totaling more than $3 billion over the past decade, more than any other industry), it is an equally formidable opponent.

chances? Sweeping change is unlikely, but lawmakers can demand more transparency by threatening to do the Fed’s job for it: Barney Frank, for example, has introduced legislation to make up for the Fed’s weakness in controlling predatory lending. Or the new president could form a subpoena-equipped commission (proposed by John Edwards) to regulate consumer loan practices as well as monitor pensions and 401(k)s.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate