Imagine a Democratic Federal Reserve

Nov. 19, 2010

The Federal Reserve’s elitist power has great potential for joining strands of left and right political anger.  Right-wing critics are denouncing the recently planned $600 billion infusion from the Fed (maybe reaching $900 billion) as more evidence of government waste, irrationality and extravagance at the expense of meaningful economic prosperity and in violation of Constitutional principles.  An important resource for progressives engaging this debate is Tim Canova’s American Prospect essay, The Federal Reserve We Need, nicely discussed in andre douglas pond cummings’s recent SALT blog posting.

Canova turns to the World War II era Fed to shows us what the current policy debate can’t seem to imagine – that the Federal Reserve could use its power to directly advance the “real” economy, to the benefit of the majority of workers and consumers, not just to protect elite financial institutions.   In that time, the Federal Reserve kept interest rates low while avoiding inflation through policies supporting massive federal deficit spending on infrastructure and social welfare (remember the GI Bill)  and policies sharply controlling speculative capital.  Although the current treasury bond-buying spree may be an improvement over the Fed’s preceeding trillion-dollar-plus of toxic asset purchases, as William Greider notes in the Nation, it continues to favor elite financial institutions over the rest of the economy by limiting its role to throwing money at the private banks that not only pushed us into the crisis but also have used the previous infusions mainly to further shore up their gains and bonuses rather than to provide the credit needed to lift the broader economy.  Sarah Palin and tea party critics are not far off base when they express skepticism that this trickle-down approach will benefit average workers and consumers.  Instead of ramping up its failed supply-side approach, the Fed should pour those hundreds of billions (not to mention the previous trillion or so) directly into the demand side – establishing a federal bank that would give no-interest loans not to AIG but, for instance, to state and local government spending on infrastructure and human needs, following President Lincoln’s successful greenback program (about which Canova has also written).

In an example of how the seeming expertise of “professional confusers”[1] helps keeps such alternatives safely off the table of democratic debate, Amitai Etzioni affirms the tea party criticisms of the Fed’s antidemocratic structure, but then presents democracy as tragically in the way of economic prosperity.  Etzioni argues that Congress’s failure to enact meaningful short-term stimulus and long-term deficit reduction policies has left the Fed with no choice but to stray from its proper monetary role take over the tough job of fiscal policy – and that by taking on this role, the Fed proves the superiority of elitist expertise over populist democracy.  Etzioni concludes that if Congress could be redirected away from special-interest influences, the Fed could properly leave fiscal policy to democracy and could be cut down to a vaguely imagined size.  Etzioni naturalizes the Greenspan-era monetary policies – and its catastrophic results – as the best that could be done and as divorced from the very politicized special interests and ideology that has caused Congress to failed economic policy.  Indeed, that “normal” monetary policy fueled and supported the inequalities and lavish wealth that have contributed to an anti-democratic Congress.  That means Etzioni’s weak defense of the Fed — like the Republican criticisms —has it backwards.   Reclaiming (and redirecting) the Fed’s power to lead the real economy is vital to restoring the democracy and economic prosperity that the Fed’s so-called “independent” economic expertise has done so much to erode.

[1] Here I’m thinking of Anthony Farley’s term “professional unconfusers” to explain the job of critical legal scholars and teachers who focus on race and class.

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