The Federal Reserve Passes the Buck—and Prints a Trillion More

Facts matter: Sign up for the free Mother Jones Daily newsletter. Support our nonprofit reporting. Subscribe to our print magazine.


Financial crises have a way of exposing the real structures of economic and political power. The current “big mess”—as the White House has taken to calling the worst economic disaster since the Great Depression—has revealed, among other things, the monstrous power of the Federal Reserve.

I’ve never put much stock in conspiracy theories that posited “shadow governments” pulling the strings behind the scenes. But the Fed is as close as it gets. While we focus all our attention on our elected government—the Democrats and Republicans who fight it out over how much to spend on the stimulus package—the Federal Reserve goes on operating behind closed doors, making financial decisions that could make the stimulus look like chump change.

The Fed’s power was abundantly clear on Wednesday: While the politicians, the press, and the public remained riveted on the battle over a few hundred million in AIG bonuses (which the Fed, it turns out, knew all about months ago, and didn’t bother telling the president), the Federal Reserve decided on its own to pump $1 trillion into the economy—nearly doubling all its previous cash injections. This is accomplished, as the New York Times points out, by “creating vast sums of money out of thin air.” And that’s not just a figure of speech: The privately owned banks that more or less run the Fed are helping themselves to $1 trillion plus by printing new money.

It works like this: The Fed creates the money. It then buys long term Treasury bonds to jump start credit flowing. The Treasury issues these bonds secured, in effect, by the combined assets of the American people. This injection of cash may help out banks–although past injections, since the recession began, have been largely ineffective—but it will surely end up causing inflation and ballooning the already swollen federal debt.

All this is done in the name of supporting the economy, but it’s the American public that serves as the banking industry’s cash machine. And we have virtually nothing to say about it, even through the remote apparatus of electoral politics. The basic economic policy of our supposedly democratic nation is effectively being run by and for private industry.

Members of the Fed’s board of governors may be nominated by the president and rubber stamped by the Senate. But as I’ve written before, it’s the member banks who call the shots. This so-called public-private entity was long ago given authority to control the money supply in the United States, and it does so with little transparency, oversight, or accountability. Politicians of both parties bowed to the deregulatory will of Alan Greenspan for decades. Now we have a Treasury secretary who comes from the New York Fed, and we wonder why the banks seem to be getting everything they want. Since the recession began,  the Federal Reserve system has only grown still more powerful, and no one in the elected government seems to mind it a bit.

In The Nation this week, William Greider, who has written extensively on the Fed, argues that “to restore the broken financial system, Washington has to fix the Federal Reserve” and outlines why the Fed “has lost its ability to govern the credit system….In its present condition, the Fed may even make things worse.”  Yet the Federal Reserve seems to be catching remarkably little blame for the current economic crisis.

In a sharp piece on Huffington Post, economist Ann Pettifor expresses her astonishment at the fact that Fed chair Ben Bernanke has “dodged the bullet” when it comes to public rage and disgust, despite the fact that as a longtime Federal Reserve governor, he was supposed to be minding the store while companies like AIG built their hollow mountains of debt. (The Fed even has a seat on AIG’s board.) Pettifor parses Bernanke’s rare interview with CBS news on Sunday, in which he attacked AIG:

The interview was just an opportunity, I would argue, to deflect attention from the Fed’s negligence and whip up popular opinion against Liddy and the other buckin’ broncos of AIG. In the macho style of Rodeo, the Fed Chairman was angrily slamming the barn door shut—long after the bucking broncos had charged out of the barn, clutching bonuses.

But while Bernanke may be using one hand to slap the wrist of everyone’s favorite corporate villain, he’s using the other to hand out fistfuls of cash to institutions that behaved just as badly as AIG. It all gives a whole new meaning to passing the buck.

REAL QUICK, REAL URGENT

Minority rule, corruption, disinformation, attacks on those who dare tell the truth: There is a direct line from what's happening in Russia and Ukraine to what's happening here at home. And that's what MoJo's Monika Bauerlein writes about in "Their Fight Is Our Fight" to unpack the information war we find ourselves in and share a few examples to show why the power of independent, reader-supported journalism is such a threat to authoritarians.

Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

payment methods

REAL QUICK, REAL URGENT

Minority rule, corruption, disinformation, attacks on those who dare tell the truth: There is a direct line from what's happening in Russia and Ukraine to what's happening here at home. And that's what MoJo's Monika Bauerlein writes about in "Their Fight Is Our Fight" to unpack the information war we find ourselves in and share a few examples to show why the power of independent, reader-supported journalism is such a threat to authoritarians.

Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

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