The Fed, unlike other agencies, is able to fund itself from the proceeds of open market operations that it controls with very limited interference from the political branches…. In addition, Fed conducts monetary policy by, among other options, creating money with which it can buy government – and more recently, nongovernment – securities. These interest-bearing assets generate money that the agency can subsequently use to fund itself. The Fed thus has the ability to create money from nothing. That is how it pay its employees, fund its conferences, and renovate its buildings.
In Fed Power – How Finance Wins, Lawrence Jacobs and Desmond King argued that, the exceptionalism of Fed power stands out among the three branches of government within the United States and among democratic, capitalist countries. The deference to the Fed’s exceptionalism flows from a pervasive view among Americas ruling clique of elites. Elites accept the Fed’s unrivaled power as a practical necessity. They believe the system of accountability enshrined in the US Constitution by James Madison and his colleagues cannot the trusted to protect the country from sliding into financial and economic ruin. Congress and the president can deadlock over taxes or budgets to pay for the country’s defense an education, but any such stalemate or political negotiation over monetary policy threatens a Dantian hell. The excepionalism of Fed power and autonomy is the product of its battle for institutional position in the context of chaotic global financial markets and the extravagant dysfunction of Congress. It exercise of power consistently favors banks and investment firms not only in response to lobbying or the seduction of revolving doors, but also because thriving finance helps the Fed itself by generating revenue and easing its allies.
The result? Not surprising, but often overlooked: the Fed is an engine for generating inequality. The Fed’s reliance on on capital markets privileges one set of policy tools that favors those with a disproportionate hold on wealth and income. The American Dream of upward mobility is giving way to an ever-harder struggle just to make ends meet.
The operation of the Fed contributes to widening inequality by facilitating the abnormal swelling for the financial sector as well as by its specific policies. The Fed is handmaiden to the surge of finance to 9% of the economy (an all-time high). Finance made up 10-15 percent of profits in the 1950s and 1960s; by 2001, the proportion was close to 40 percent and probably substantially larger, after accounting for executive compensation in the financial sector and changes in corporate accounting.
With the Fed’s babysitting, the drive to earn outsized profits in finance is also crowding out more productive sectors: exchanging capital to generate interest, dividends, or capital gains pays more than the familiar production and trading of goods and services. And economic growth and job creation suffer. Imagine the choice of a scientist or a brilliant college graduate: should they invest years of their lives in curing cancer or building new forms of sustainable energy, or should they take a job in finance that pays more, and more quickly? Banks and investors are knocked off course by similar tradeoffs: would you lend to an uncertain project that requires expensive research and development, or a property development that leverages securities for high returns? That loud sucking sound you hear is Wall street inhaling talent and capital: it costs our economy 2 percent of growth each year or $320 billion – more than three times what the federal government spent on education in 2014.
The Fed’s main policy tool is buying and selling US Treasury bonds to adjust interest rates- thus manipulating financial markets to change the money supply. The Fed’s decisions to change interest rates shift economic resources between debtors and creditors. After 2008 Financial crisis, Fed went on a buying spree of US Treasury bonds and radioactive securities few wanted, piling up $4Trillion on its balance sheet. These Fed’s policies are unprecedented and unconventional in upwardly redistributive impact. Public debate? Congressional hearings? Its design and launch was the Fed’s alone, and one in private.
The Federal Reserve’s funding mechanism is located in Section 10(3) of the Federal Reserve Act grant the Board of Governors the “power to levy semiannually upon the Federal reserve banks … an assessment sufficient to pay its estimated expenses and the salaries of its members and employees for the half year succeeding the levying of such assessment.” Unquestionably, this statutory authorization exempts the fed from the congressional appropriations. On its face, however, it just looks like the Fed was given the same status as the FDIC: the ability to charge essentially private institutions for its own upkeep. The statute does not allow the Fed to create, and fund itself with, its own Federal Reserve Notes. After the remove from Gold Standard in 1971, the US dollar has been a fiat currency ever since. The result is that the Reserve Banks couldn’t print money to fund themselves (or the Federal Reserve Board) in 1913, but the Board of Governors of the Federal Reserve System could and did after 1971. To this end, time and conditions have changes dramatically that require Congress to step up erasing the loophole in Fed’s regulations.
Further more, the Reserve Banks in the Fed system – the twelve Reserve Banks included two in the state of Missouri and only one west of Dallas, is not well represented to serve the fifty state governments, reflecting the political compromised concerning an America in 1913 that no longer exist in 2019. Also, the awkwardness of reserve banks, controlled by private share holders but serve the public functions, prove to have conflict of interest. Whatever the federalist intentions of the first framers of the Federal Reserve System in 1913, time and experience have largely left behind the private model. The ambiguously public-private Reserve Banks have remained largely based on entrenched politics, not superior policy.
In sum, Fed undermined democratic accountability and became an engine of widening economic inequality. Lawrence Jacobs and Desmond King called for thoughtful elites and concerned citizens to prepare to chart a constructive new direction for central banking in America – one that works and fits with democratic values. Historical and practical experience along with the examples of such other countries as Canada leads us in a more complicated and new direction – designing an American central bank that is simultaneously effective in financial management and democratically accountable.