Saturday, October 1, 2016

The Federal Reserve, Wall Street and Congress on Monetary Policy

  By Rudy Barnes, Jr.

            Why does the Federal Reserve keep interest rates near 0%?  So that the mega-banks and corporations of Wall Street have an unlimited supply of cheap money to invest and to pay their top executives unreasonable salaries; and also so that the government doesn’t have to worry about interest on its $19 trillion debt.  Keynesian economists are so unconcerned with interest on the national debt that they advocate even more borrowing to stimulate a sluggish economy.

            Who are the losers in this economic scenario?  Savers, of course, and future taxpayers if interest rates rise and the national debt is not reduced.  The U.S. Treasury could create new money to pay the debt, $5 trillion of which is held by the Fed, but the downside is that when new dollars are created the value of existing dollars is reduced pro-rata.  That’s back-door inflation.

            Meanwhile, Wall Street prospers while Main Street suffers with “trickle-down” benefits.  All the while Wall Street exploits the public with its insatiable appetite for profits—from mega-banks like Wells Fargo that create new fees for unwanted services, to pharmaceuticals that extort unreasonable profits through the Affordable Care Act (Obamacare) that has no cost controls.

            If our economy is to be saved from this partnership between the Federal Reserve and Wall Street, Congress and the President must become accountable for monetary policies.  Such policies have been shrouded in mysterious debate for too long.  Conservative economists argue that the debt must be reduced and ultimately balanced, while liberal Keynesian economists argue that we don’t need to worry about the national debt since the Fed controls interest rates.

            It is an uneven playing field, with Wall Street clearly having the advantage over Main Street—and experience has taught us that mega-banks and businesses show no mercy in their pursuit of profits.  With interest rates near 0% and little prospect that they will be allowed to rise anytime soon, there is no incentive to save and every reason to spend what we have or invest it in Wall Street so long as we have artificially low interest rates and inflation discouraging savings. 

            The incentive to invest in stock rather than save obviously benefits Wall Street.  The Dow has tripled since 2008, but what happens with the next stock market crash?  It’s not a matter of if, but when.  With interest rates at or near 0%, the Fed can’t reduce them to stimulate the economy.  The remedy of liberal economists is to borrow or create more money and spend it or give it away (helicopter money), or even pay big businesses to borrow and create new jobs.

            What about productivity and new jobs?  The mega-businesses of Wall Street are flush with cash, but they aren’t investing in new jobs but instead buying back their stock or speculating on investments to generate the most profit for its shareholders.  It’s all about profits, and new jobs aren’t needed these days to make those profits.  You’re a winner if you own lots of stock, but a loser if you don’t.  Of course, everyone is a loser when the stock market crashes.

            What can we do about the incestuous relationship between the Federal Reserve and Wall Street?  The Fed is a central bank that is not part of government but an extension of the banking community.  Congress should mandate more accountability for the Fed’s monetary policy, but that’s a scary prospect for members of Congress who seek big contributions from Wall Street.  They don’t want to consider policies that could jeopardize financing their future campaigns.

            If nothing is done, we’ll likely see a repeat of 2007-2008, with another bailout of banks and businesses that are too big to fail, but that have failed due to their unrestrained greed for profits—except that next time the Fed won’t be able to reduce interest rates to stimulate a recovery since rates will already be at or near 0%.  Wall Street remains addicted to cheap money, and the Fed will continue to feed that addiction unless and until Congress acts to restrict it.

            Monetary policy is of increasing importance to the nation’s future.  Congress should require more public accountability for U.S. monetary policies that control interest rates and money supply, and reinstate Glass-Steagall restrictions on bank investment activities.  Because the Federal Reserve has virtually unrestrained control of U.S. monetary policy, it is perhaps the most powerful entity in U.S. politics, and one that should be more accountable to the public.

Notes and References:

Robert J. Samuelson is somewhere between a traditional and Keynesian economist.  For his commentary on the old Fed is dead, see Samuelson observes: “Now the Fed and other major central banks seem deeply frustrated. They’ve flooded the world with cheap money. By Moody’s estimates, the amount is $13 trillion. That was used to buy bonds and other securities. It includes purchases by the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England. For all their trouble, the central banks have got no more than a weak recovery that avoided a second Great Depression.”

On the uncertainty of monetary policy and where does the Federal Reserve go from here, see

On two contrasting views on the national debt:

The Fed has long planned to divest itself of the assets it has purchased under quantitative easing policies since 2008.  For a contrary view, see Fed should keep trillions in bonds to provide stability, at

On ending “the era of cash to enable central banks to cut interest rates into negative territory” and “free up monetary policy in ordinary recessions in a low interest rate world,” see

On the related topic of Christianity and Capitalism as Strange Bedfellows in Politics, see and references in its Notes and References to Related Blogs.

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