Rescuing capitalism

The role of the Federal Reserve System

THE FEDERAL Reserve System is one of the most powerful economic forces in the world, yet most people have little idea what it has been doing to save U.S. capitalism from collapse in the ongoing economic crisis. Along with the Treasury Department, the Fed has temporarily rescued gigantic financial institutions and restored the flow of credit that is necessary for the daily functioning of the economy. But its ultimate purpose is the maintenance of the global dominance of American capitalism, a purpose it has served above all else.

Despite its origins as a political compromise with limited power, the Fed is ideally suited to serve the interests of the entire U.S. ruling class, because it is independent from all three branches of government. In the current crisis of world capitalism it has expanded its powers and taken new gambles outside the view of most of the public. The media and public debate have skipped over the political implications and economic risks of the Fed’s expanding reach.

Origin of the Fed
The Federal Reserve was the outcome of a political struggle initiated in the 1890s when the new corporate capitalists came together to seek social acceptance, political power, and supportive financial institutions, including a national central bank.1 The larger scale of investment and output gave the rising capitalists a longer-term perspective and an increasing desire for control over the workings of markets to interrupt the pattern of panics and lengthy depressions.

The creation of the Federal Reserve System as the central bank of the United States came about only as the new corporate capitalists displaced the dominant late nineteenth century populist alliance of small farmers, small business owners, and unionized skilled workers. Because of their control over machine production, skilled workers were able to win rising real wages despite slowly rising productivity from 1873 to 1894.2 The political culture of Jeffersonian republicanism called for a weak central government to allow the new middle class to amass wealth and develop “the self-determining personality of free citizens.”3

But industrial capitalism was spreading regionally and nationally, firms were growing through vertical integration, and manufacturers increasingly adopted the corporate form of organization to obtain the large pools of funds needed to buy the machinery of mass production. After repeated economic collapses and depressions, the largest capitalists saw the need for an independent, centralized banking system that would provide a steady flow of money with a consistent value for their long-term investments. After the panic of 1907, leading financiers began to push for a central clearinghouse to manage the amount of money in circulation and bank reserves and provide short-term business loans through a market in commercial paper (business debts).4 The result in 1913 was the Federal Reserve System—the central bank of the United States.

In capitalist economies a central bank serves the interests of both capital and government, illustrating their fundamentally shared goals. As the sole supplier of the national currency, it regulates the amount of money in circulation (the money supply), seeking to provide sufficient liquidity (cash flow) for everyday transactions, savings, and lending without causing inflation. This is why capitalists prefer an independent central bank over a government agency—because excess money won’t be “printed” and put in circulation simply to increase government spending.

By varying the money supply, a central bank exerts control over interest rates, either encouraging or discouraging borrowing, spending, and production. It is also usually the government’s banker and financial agent. And in addition to providing short-term loans to member banks, it is the lender of last resort, responsible for maintaining the stability of the entire financial system.5 In all these tasks its fundamental duty is the maintenance of the national economy.

While the push for a centralized banking system came from the large banks and the corporations they served, middle-class reformers fought for a body independent of the banks designed to regulate them. But the bankers ultimately won with the creation of an independent powerful body whose ultimate purpose was to sustain the banking system. While the divided structure of the Federal Reserve System reflected the struggle between small and large capitalists, in practice it has served the needs of the largest businesses and banks. Their economic dominance has been implicitly recognized in the composition of the Fed from its start.

Structure of the Fed
Fear of a strong central government led to the creation of twelve independent district banks with primary supervisory responsibility over local bank holding companies, with an eye toward regional business needs. Each is a private non-profit corporation owned by the regional member bank holding companies, which elect six of nine members of the board of directors (three of whom directly represent the commercial banks they serve). The New York Fed board of directors includes the chairmen of General Electric and PepsiCo and the presidents of the New York State AFL-CIO and Columbia University, while the San Francisco Fed board includes directors from Chevron, Nordstrom, Levi Strauss, and local real estate investment and financial firms.6 These directors then elect their own bank presidents. So the banks choose their own supervisors.

Populist-leaning Democratic president Woodrow Wilson forced the banking interests to accept a coordinating public component—the Board of Governors, who are nominated by the president and approved by the Senate for fourteen-year terms. The president nominates one board member to a four-year term as chairman—currently former Princeton economics professor Ben Bernanke, who replaced Alan Greenspan in 2006. The board appoints the remaining three members of each district bank’s board of directors. The Board of Governors took most decision-making power from the district banks in reforms in 19357 and 1980 and makes fundamental policy today about money and credit in consultation with the twelve district bank presidents through the Federal Open Market Committee.

Most board members have backgrounds in financial economics or banking, and many worked for the Fed itself. With all relying on research by the senior staff, serious differences of opinion are unusual.8 All board members esteem their roles and will use all available tools during their long governing terms to maintain the power and independent status of the Fed.

As William Greider pointed out in his lengthy study, Secrets of the Temple: How the Federal Reserve Runs the Country, the Fed has successfully balanced its political challengers with supporters from Congress or the executive branch, Republicans or Democrats.9 The Fed chairman usually pursues the same goals as the current administration, and both Greenspan and Bernanke have held weekly meetings with the current president. However, Federal Reserve chairman Paul Volcker first discussed one of the Fed’s biggest policy changes ever, the imposition of a monetarist approach, with an advisory council of bankers, warning the Carter administration shortly before starting to raise interest rates in October 1979.10

The structure of the Fed indicates its primary constituency: the commercial banks it theoretically regulates. As the servant to Wall Street, the Fed must maintain a stable financial system of profit-seeking institutions duty-bound to serve their shareholders. After repeated deregulation, particularly by Democratic presidents Jimmy Carter and Bill Clinton in 1980 and 1999, these banks have become gigantic, complex financial institutions that provide a wide variety of financial services, from insurance to financial management to issuance of securities (stock, bonds, and complex financial instruments).

The Fed proudly describes its status as “independent within government”:

As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it funds itself through fees for its services, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.11

The only oversight requirement is for the chairman of the Fed to report to Congress twice a year. Its structure alone disproves the American myth of government by representative democratic institutions. The Fed’s unique status makes it potentially an even better servant for the overall maintenance of capitalism than representative government. In its private deliberations the Fed literally serves as “a committee for managing the common affairs of the whole bourgeoisie,”12 the way Marx and Engels characterized the executive of the modern state. Serving the interests of the entire ruling class in practice means maintaining financial institutions and capital, because they are fundamental to the functioning of capitalism. As a member of the Chicago Fed acknowledged in a 2002 history of Fed operations, the Fed has always designed its policies “to influence the growth of financial markets in ways it deemed useful for the public interest.”13

At times the Fed’s services to the banking system can override its duty to maintain the entire economy. This has occurred in the current economic crisis, as the Fed’s bold actions to rescue some of the largest financial institutions have created additional costs for the economy as a whole. This is why mainstream Fed historian and Carnegie Mellon University professor Allan Meltzer said the Fed has lost its independence by being “too much under the thumb” of Wall Street and politicians.14

For this reason, Charlie Cray, director of the liberal Center for Corporate Policy, points out that assigning the Fed to regulate Wall Street in pursuit of broad economic health makes no sense because it was designed only to protect the interests of the big commercial banks and bank holding companies—“not consumers, homeowners or even shareholders.”15 Economic critic Dean Baker points out how this narrowness of vision affects its economic caretaking abilities:

The problem is that the Federal Reserve Board and the economics profession as a whole functions more like a fraternity than a real forum for debate and truth seeking. Those whose views are taken seriously mimic the views of those with status and power within the profession, they do not think independently.16

Expansion of the Fed’s power
Since August 2007, the Fed has taken increasingly strong actions in response to the crisis. Not surprisingly, it greatly expanded the use of its traditional tools of lending to banks and lowering interest rates, bringing rates down to the historic level of 0–0.25 percent in December 2008. Instead of overnight loans of a few billion dollars each to major banks, it loaned as much as $100 billion for months at a time.17 And instead of safe U.S. Treasury bills (“Treasuries”), it began accepting “toxic debt” (mortgage-backed securities and similar debt of unknown value) as collateral for its loans. As economist Paul Krugman put it, these funds are maintaining the solvency of “zombie banks” while shareholders cling to the hope of a government rescue.18

Economic blogger James I. Hymas noted that the role of a central bank as lender of last resort is to “make credit available against good assets when nobody else will.”19 But recently the Fed has made many loans in exchange for questionable assets, perhaps only postponing further collapse of the underlying bubble and exposure of the insolvency of the entire banking system.20

The Fed has also helped to rescue the global economy in this crisis. Despite increasing global interdependence the U.S. still dominates world capitalism, and it is expected to “play its imperial role” responsibly.21 When a shortage of dollars overseas threatened global financial markets, it swapped a total of $314 billion for foreign currencies through March, in effect serving as the world’s central bank and confirming “the American state’s central role in terms of global crisis management.”22 As Canadian socialists Leo Panitch and Sam Gindin point out, “The American state’s central role in terms of global crisis management—from currency swaps to provide other states with much needed dollars to overseeing policy cooperation among central banks and finance ministries—has also been confirmed in this crisis.”23

In the worsening recession the Fed has stepped without fanfare further and further outside the banking arena. Following votes by the Board of Governors, it began making loans based on toxic debt collateral at below-market interest rates to securities dealers in March 2008. In the July rescue of investment bank Bear Stearns it gave purchaser JPMorgan Chase Treasuries in exchange for Bear’s toxic mortgage-backed debt. In September, when a withdrawal run began, it offered insurance on all money market funds, and in October it began making short-term, low-interest loans to businesses by purchasing their commercial paper through their new Commercial Paper Funding Facility (CPFF). 

In December the Fed began purchasing mortgage-backed securities issued by government-sponsored entities Fannie Mae and Freddie Mac to reduce the mortgage lending rate. In March it initiated a similar $1 trillion program, the Term Asset-Backed Securities Loan Facility (TALF), to buy up securities funding the student, auto, credit card, and small business loan markets.24 As Financial Times columnist Willem Buiter points out, by taking on these unsalable securities the Fed is actually creating a market for them—acting as “market maker of last resort.”25 And most unusual of all, last September the Federal Reserve bailed out American International Group (AIG), the largest U.S. insurance company, in exchange for 80 percent ownership of the firm, now shared with the Treasury Department, at a cost so far of $180 billion to cover AIG’s debts (starting with $12.9 billion owed to Goldman Sachs).26 None of these entities is within the Fed’s designated sphere of supervision—the banking industry.

As a “quasi-public” institution the Fed has always been known for its secrecy, although Fed chairman Bernanke has reduced the delay in release of minutes of its deliberations. But some of its recent transactions have been kept secret, causing additional fears about the riskiness of the debt it has taken on. It created a new entity, Maiden Lane III, to supply $15 billion toward paying off bank holders in full for AIG’s toxic debt. And a November $20 billion loan to a group of U.S. and European banks was kept secret to avoid stigmatizing the borrowers.27

The Fed’s special lending totaled over $1 trillion as of February 25, providing borrowers with a taxpayer subsidy through its below-market interest rates.28 The Fed claimed to be protecting itself from losses by devaluing the collateral toxic debt (commonly called a “haircut”), but only time will tell if it has set these prices low enough, since few have been offered for sale so far.29 But Hymas argues, “If you won’t allow the central bank to make decisions regarding what constitutes a ‘good asset’ (inclusive of haircut), then what are they being paid for? If they’re to have no discretion, you might as well replace them with a couple of clerks sharing a pocket calculator (or a team of gold assayers!).”30

In March, the Fed signed on to supply funding through the TALF toward the Treasury Department’s new “public-private” investment financing program, which will co-invest and loan money to private investors (primarily very large hedge funds31) to buy up both mortgages and securities from banks. As part of the deal, the Treasury and Fed will cover up to 85 percent of any losses by the investors, encouraging inflated bids for doubtful assets.32

The legal authority for all these new actions is a small 1932 addition to the original Federal Reserve Act permitting the Board of Governors to make overnight loans to individuals and businesses “in unusual and exigent circumstances.” This authority was expanded to direct, long-term loans in 1991 after the savings and loan crisis.33

However, former Fed chair and current Obama economic adviser Paul Volcker questioned the legal basis for actions like the Fed’s Bear Stearns rescue last April, saying, “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices.”34

In these actions the Fed has clearly shifted from its role as supposedly unbiased sustainer of financial institutions. By choosing which financial institutions to rescue—and which, like Lehman Bros., to allow to die—the Fed is violating a fundamental principle of capitalism: unprofitable institutions have earned their death sentences. The Fed has also taken on new roles where it lacks experience, including management of its mortgage-backed securities and financial monitoring in industries such as insurance and investment banking.

Bernanke defended his actions as part of the Fed’s service to banks last July, saying, “Unless I hear from Congress that I should not be responding to a crisis situation, I think that it’s a longstanding role of the central bank to use lender-of-last-resort facilities.”35 But according to the Wall Street Journal, both Republican and Democratic legislators have raised questions about allowing these unelected officials to choose which companies and industries to bail out.36

The Federal Reserve took these remarkable actions because the entire U.S. financial system was faced with possible collapse. As most people now know, securities firms built upon fast-rising housing values to create and sell speculative debt and related insurance (credit-default swaps), gathering much of the world’s financial capital into a gigantic Ponzi scheme that transferred an increasing share of surplus value to the financial sector. When falling home prices cut the desirability of the mortgage-backed securities and related derivatives, many major financial institutions were revealed to be holding unsalable assets of questionable or little value—“toxic debt.”37

In order to restore lending the Fed had to provide banks with funds, not only to lend but also simply to have positive balance sheets so they could stay in business. And as the crisis spread, the Fed began rescue efforts in new financial sectors like investment banking and money market funds to prevent further panics, sell-offs, and collapses, each bringing more losses to investors.

If this was a Ponzi scheme of overpriced swampland or tulip bulbs (the first great speculative bubble in the 1630s), a crude sort of justice would be expected to prevail—while the first investors got away with their winnings, later speculators would lose their money, many sellers would go under, and the swampland or tulip bulbs would again be commodities of limited value. But the item being traded here was credit itself, and the sellers made up much of the financial systems of many countries. Without credit, even small businesses could not operate. Many jobs would be quickly lost, and workers would be confronted with the instability of capitalist production. And the ultimate responsibility of the Federal Reserve is to maintain the financial system and capitalist production.

Many observers have said the Fed failed in its regulatory duties because banks and the broader “shadow banking system” were allowed to expand credit massively, backed only by reserves of risky exotic securities. Guided by an extreme free-market ideology, Greenspan saw the new derivative financial instruments of the 1990s as increasing efficiency, not risk.38 And U.S. financial institutions wanted to compete internationally with institutions like AIG’s unregulated London branch, the source of the credit default swap financial meltdown.39 By turning a blind eye to these new risks the Fed did what it was designed to do—facilitate the movement of money into any available sources of earnings with maximum ease and speed.

The risks of Fed actions
Since the 1980s, progressives have criticized the Fed for its insistence on fighting inflation with high interest rates that slow the economy and raise unemployment.40 Since inflation eats away the value of both principal and interest on bonds, the Fed’s focus served the wealthiest individuals and corporations who hold huge amounts of capital amassed over time. This stance has led to occasional clashes with politicians seeking faster economic growth.

Beginning in 1998, however, the Fed began taking the risk of inflation by stimulating the economy when it wasn’t in recession. Despite the obvious “dot-com” bubble, it lowered interest rates, gambling that the recessionary forces of the spreading Asian monetary crisis would prevent inflation. One cause of the housing bubble was the Fed’s very low bank lending rate from 2002–2004 and accompanying expansion of the money supply.

With the current financial crisis the Fed sped up growth of the money supply, going from a 10 percent annual growth rate for March 2007 to February 2008 to a 16.6 percent rate during September to November 2008.41 The Fed’s total assets shot up from $874 billion on August 2, 2007, and $901 billion a year later to $2.06 trillion in late March, predicted even by the Wall Street Journal to reach $4 trillion by the end of 2009.42 This expansion reflects its increased activities in response to the crisis.

In its recent lending the Fed has been taking on long-term debt instead of its traditional short-term loans. The content of its balance sheet has changed massively, as it has given up (still) “good-as-gold” Treasuries in exchange for toxic debt that is unlikely to ever be sold for its face value. Economic blogger John Elder noted, “The Fed has been assuming some credit risk in order to help maintain bank solvency and to facilitate corporate borrowing (e.g., commercial paper and money market funds).”43

Its holdings of Treasury securities fell from $791 billion (making up the majority of its assets) in August 2007 to a consistent level of about $480 billion starting a year later.44 The Fed may be expecting to hold its toxic debts for many years until they can actually be sold for their face value. But if their selling price never returns to what the Fed paid for them in Treasuries its assets will shrink—which seems likely, since Merrill Lynch sold off some toxic debt last summer for 22 cents on the dollar.45

This change in assets led NYU finance professor Roy C. Smith to say, “We have to wonder if the Fed’s balance sheet might be in danger.”46 Fed watcher Jim Bianco added, “They should tell us something that makes us comfortable that they are properly capitalized and not presenting an undue risk to the financial system. The integrity of the Fed is in play here.”47

However, the Fed’s only real “liability” is the billions of U.S. dollars (Federal Reserve notes) in circulation around the world. It is self-financing through the fees it charges for its services to banks, the U.S. Treasury, and other government agencies.48 It isn’t a business that will lose investors if it owes more than its assets.

If the Fed’s balance sheet ever becomes negative, the government can always recapitalize it by selling bonds and depositing the money it receives in its deposit account with the Fed, providing funds for the Fed to lend out again.49 Alternatively, the Fed can purchase government securities with newly issued money, although that would be inflationary. The only threat to the Fed’s integrity comes from its struggle to restore the financial system and economy.

On the other hand, two special Fed actions have created a real problem: higher interest costs for the federal government, probably leading eventually to higher taxes and/or spending cuts.50 First, beginning in September 2008, the Fed decided it wanted to raise money to loan without causing inflation or selling off more Treasuries, so it asked the Treasury Department to auction off additional bonds and deposit the funds in a special account with the Fed. The Fed used these deposited funds to purchase toxic debt from banks, providing the banks with funds for their reserve accounts, which then were returned to sit in the banks’ deposit accounts with the Fed. However, the Treasury will never have to spend any money to redeem these bonds (or pay interest on them), since the Fed will just hold them.

This multi-step process went beyond the traditional authority of the Fed and Treasury. When the Treasury raised money by selling these additional bonds for the Fed, it added to the national debt without the consent of Congress and the president. University of California-San Diego economist James Hamilton commented, “It seems to me that this decision is ultimately a matter for fiscal policy. And just as I don’t want Congress deciding how much money to print, I don’t want the Fed deciding how much taxpayer money is appropriate to pledge for purposes of promoting financial stability.”51 The cost of repaying these bonds is not currently an issue, because the U.S. government has no plans to pay down its $11 trillion national debt—it just issues new bonds whenever the existing ones come due. But these two agencies have independently added the interest costs to the annual federal budget.

Secondly, when the Federal Reserve held $800 billion in government bonds, the Treasury Department never had to pay interest on them, since the Fed automatically returns any excess income to the government. But there are now an additional $1 trillion in Treasury bonds in the hands of the public—$400 billion in Treasuries loaned or traded by the Fed into public hands, plus the additional $500 billion borrowed by the Treasury for the Fed. This means the Treasury must come up with billions of dollars in annual interest payments—either by further borrowing or raising taxes. And the Treasury will lose even more income wherever the Fed’s toxic debt is non-performing, no longer returning income to the Treasury.52

These actions shocked Clinton-era Labor Secretary Robert Reich, who pointed out, “The Fed can expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did recently when it allowed Wall Street’s major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury.”53

Hamilton said, “The bottom line is that Bernanke has made a gamble with something approaching [$]2 trillion [in toxic debt]. If the gamble wins, taxpayers owe nothing. If the gamble loses, taxpayers are committed to borrow a sum equal to any losses and start making interest payments on it.”54 Only if the Fed makes money by reselling its accumulated toxic debt and loans will it be able to provide surplus funds to the Treasury to make up for the rising interest costs.

While the changing composition of Fed assets raises problematic choices for monetary policy within the United States, it will not affect the desirability of the dollar for use in transactions worldwide. Years of trade deficits should already have decreased the international value of the dollar, but President Clinton’s treasury secretary, Robert E. Rubin, kept the dollar overvalued, stimulating the 1990s bubble economy.55 Recent very low interest rates on Treasury bonds have not reduced international demand, as investors made a “rush to quality” to dollar-denominated debt in unstable financial markets. Criticisms of the dollar’s international dominance from British Prime Minister Gordon Brown and China’s central bank governor Zhou Xiaochuan56 reflect jockeying for political and economic power.

The long-term problem, whenever the U.S. economy pulls out of this major recession, is the greatly enlarged total supply of dollars, which can be inflationary depending on how quickly they circulate. Once the economy starts growing again, the Fed must take these extra dollars out of circulation by selling off securities. To attract buyers it must raise interest rates, which will slow the economy and cut into working people’s living standards. The only alternative is if the Fed prefers to lower the interest rate and cause inflation—or pump up another asset bubble.57 And once again, if the Fed sells government securities, the Treasury Department will be forced to make more interest payments to the public.

Replacing the Fed?
The continuing economic crisis has brought forward proposals to strengthen, restructure, or replace the Fed. On the far right, some conspiracy theorists and gold speculators have used the financial crisis to bolster their campaigns to abolish the Fed, claiming that only money backed by gold is “real.”58

In March the Obama administration presented its plan to prevent another systemic failure with a supreme financial regulatory agency—possibly the Fed. Treasury Secretary Geithner’s statement to Congress called for “a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.”59 The administration confirmed its commitment to developing regulation and oversight of all financial institutions, instruments, and markets in the subsequent Group of 20 agreement of major nations.60 Some liberals have argued that the Fed is inappropriate for this role. Robert Kuttner said the Fed’s “hybrid status…leaves it far too accountable to commercial banks rather than to Congress, the executive branch and the public.”61

Instead of this secretive non-public agency that was “never intended to protect the interests of consumers, homeowners or even shareholders,” Charlie Cray said, “we need to come up with an alternative, like some kind of coordinating body responsible for allocating authority, smoothing interagency collaboration and preventing the kind of regulatory arbitrage witnessed in recent years by the shape-shifting financial institutions.”62

The current economic crisis and the hope for change under President Obama have inspired some liberals to develop complex plans for more democratic capitalist institutions, including the Fed. In a lengthy recent report, American Prospect co-editor Robert Kuttner proposed strengthening regulation of financial activities by the Securities and Exchange Commission rather than the Fed and drastically limiting the activities and profits of the financial services industry, creating a simpler and more transparent financial system that is “more like a public utility.”63

In the context of a broader call for “a new regulatory framework that is capable of both stabilizing markets and, correspondingly, channeling financial resources toward productive and socially useful investments and away from the speculative casino,” economist Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts, Amherst, called recently for returning to the original plan for locally accountable and empowered district banks, with direct election of district bank presidents and district-level advisory committees of bankers, businesspeople, labor, consumer, and community representatives. He proposed that the Fed target sectors of the economy for preferential access to credit in accordance with broader economic goals, including job creation, affordable housing, green investments, and the fight against global warming.64

As Pollin acknowledged in a similar proposal in 1992, achievement of such a program presupposes a broad social movement able to push the elected government to serve social interests. He saw democratization of the financial system as “a historic victory toward the construction of a democratic socialist future.”65

Both liberals and radicals today advocate immediate nationalization of the banks to replace the profit motive with job-creating, socially desirable investment.66 But liberal proposals to reduce economic inequality by restructuring major capitalist institutions overlook their inherent political ties to corporate interests. Instead of challenging workers’ exploitation and oppression, these proposals revive the populist vision of small business owners joining together with working people for a common good. While the sentimental appeal of this vision to some is understandable—especially since it evades the need to confront capitalism directly—it is both outdated and ineffective. The power of capitalism over workers’ lives cannot be displaced through the political institutions that maintain it.

Marxists understand that all the institutions of capitalism are inappropriate for serving people’s real needs. The current systemic crisis provides opportunities to expose both the specific ways financial institutions serve capital and the fundamental irrationality of capitalism as part of the broader movement towards real democracy and socialism.

  1. James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890­–1913 (Ithaca: Cornell University Press, 1986), 71.
  2. Ibid., 38–39.
  3. Ibid., 45.
  4. Ibid., 180.
  5. Meir Kohn, Financial Institutions and Markets, second edition (New York: Oxford University Press, 2004), 60.
  6. “Board of Directors,” Federal Reserve Bank of New York, “About the Fed: 2009 Directors’ Listing,” Federal Reserve Bank of San Francisco,
  7. Ronnie J. Phillips, “The “Chicago Plan” and New Deal banking reform,” Working Paper No. 76 (June 1992: The Jerome Levy Economics Institute of Bard College),
  8. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987), 73.
  9. Ibid., 279.
  10. Ibid., 114ff.
  11. Federal Reserve System, “FRB: Frequently Asked Questions,”
  12. Karl Marx and Friedrich Engels, The Communist Manifesto,  Chapter 1.
  13. David Marshall, “Origins of the Use of Treasury Debt in Open Market Operations: Lessons for the Present,” Economic Perspectives, Federal Reserve Bank of Chicago (1Q 2002).
  14. Sudeep Reddy, “The Outlook: Fed Could Suffer if New Role Clashes With Policy-Petting,” Wall Street Journal, September 22, 2008.
  15. Charlie Cray, “Obama is Tinkering With Changes to the Banking System While Big Finance Collapses,” Alternet, January 14, 2009.
  16. Dean Baker, “Citing the Biggest Losers: Post Shows Why Fed Missed the Bubble,” Beat the Press, October 24, 2008.
  17. Board of Governors of the Federal Reserve System, “Term Auction Facility,” updated March 6, 2009.
  18. Paul Krugman, “Wall Street Voodoo,” New York Times, January 18, 2009.
  19. James I. Hymas, “Bernanke on the Fed’s Balance Sheet,” Econbrowser, January 14, 2009.
  20. See editor’s note in Fred Moseley, “The U.S. Economic Crisis: Causes and Solutions,” International Socialist Review 64 (March–April 2009), 33.
  21. Leo Panitch and Sam Gindin, “The Current Crisis: A Socialist Perspective,” The Bullet, e-bulletin 142, September 30, 2008.
  22. Panitch and Gindin, “From Global Finance to the Nationalization of the Banks: Eight Theses on the Economic Crisis,” The Bullet, e-bulletin 189, February 25, 2009,
  23. Panitch and Gindin, 2009.
  24. “Joint Press Release,” Board of Governors of the Federal Reserve System and Department of the Treasury, March 3, 2009.
  25. Willem Buiter, “Willem Buiter’s Maverecon blog: The Fed as Market Maker of Last Resort: Better Late Than Never,” Financial Times, March 12, 2008.
  26. Mary Williams Walsh, “A.I.G. Lists Banks it Paid with U.S. Bailout Funds,” New York Times, March 15, 2009.
  27. David Henry and Matthew Goldstein, “Bernanke’s Backdoor Bailouts,” Business Week, December 29, 2008.
  28. Dean Baker and Matt Sherman, “Investment bank Welfare? The Implicit Bank Subsidies in the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF), Center for Economic and Policy Research, March 2009, 4.
  29. James Hamilton, “Bernanke on the Fed’s Balance Sheet,” Econbrowser blog post, January 13, 2009.
  30. James I. Hymas, “Bernanke on the Fed’s Balance Sheet” (comment), Econbrowser, January 14, 2009.
  31. A Wall Street Journal editorial decried the Treasury Department’s limitation of eligible investors to those already managing at least $10 billion in toxic securities, which includes only a few hedge funds, private equity investors, or sovereign wealth funds. “Treasury’s Very Private Asset Fund,” Wall Street Journal, April 1, 2009.
  32. U.S. Treasury Department, “Treasury Department Releases Details on Public Private Partnership Investment Program,” March 23, 2009. For analysis of this handover of public funds see the editorial, “The Geithner Giveaway,” Socialist Worker, March 24, 2009.
  33. David Fettig, “The History of a Powerful Paragraph,” The Region, Federal Reserve Bank of Minneapolis, June 2008.
  34. John Brinsley and Anthony Massucci, “Volcker Says Fed’s Bear Loan Stretches Legal Power,” Update 4.
  35. Reddy, “The Outlook.”
  36. Ibid.
  37. Joel Geier, “Capitalism’s Worst Crisis Since the 1930s,” International Socialist Review 62, November–December 2008.
  38. Anthony Faiola, Ellen Nakashima and Jill Drew, “What Went Wrong,” Washington Post, October 15, 2008. This describes Commodity Futures Trading Commission head Brooksley E. Born’s losing battle with Greenspan, Treasury Secretary Robert E. Rubin, and SEC chairman Arthur Levitt Jr. to regulate derivatives in currencies and interest rates.
  39. Peter Koenig, “AIG Trail Leads to London ‘Casino,’” Telegraph, October 18, 2008.
  40. Ellen Frank, “What’s Wrong with Inflation?” Dollars and Sense, September–October 1999.
  41. The money supply measure here is M2. Federal Reserve System Board of Governors, “Federal Reserve Statistical Release H.6: Money Stock Measures,” March 6, 2009.
  42. “Federal Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances,” August 2, 2007, and August 7, 2008, and Min Zeng, “Fed’s Debt Buying Yields Early Dividend,” Wall Street Journal, March 27, 2009.
  43. John Elder, comment posted December 22, 2008, to James Hamilton, “Federal Reserve Balance Sheet,” Econbrowser, December 21, 2008.
  44. “Federal Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances,” August 2, 2007.
  45. Henry and Goldstein, 25.
  46. Ibid.
  47. Ibid.
  48. Board of Governors of the Federal Reserve System, Annual Report: Budget Review 2008, May 2008.
  49. NDK and JKH, blog posts, “Should You Care if the Fed is Broke?NDK’s Notepad, January 11, 2009.
  50. Reddy, Henry, and Goldstein.
  51. James Hamilton, “Central Bank Independence,” Econbrowser, April 13, 2008.
  52. James Hamilton, “Federal Reserve Balance Sheet,” Econbrowser, December 21, 2008.
  53. Robert Reich, “The Fed and Democracy,” Robert Reich’s blog, April 11, 2008,
  54. Hamilton, December 21, 2008.
  55. Dean Baker, “Challenging Group Thinking Economists on Budget Deficits and the Value of the Dollar,” Talking Points Memo Café, December 28, 2008,
  56. “Gordon Brown Wants New Bretton Woods, International Oversight of World’s Biggest Banks and Financial Institutions,” Wall Street Journal¸ October 16, 2008, and October 25, 2008; “EU to Push Global Oversight of Top Financial Firms,” Wall Street Journal, October 16, 2008; Sebastian Mallaby, “A 21st-Century Bretton Woods,” Wall Street Journal, October 25–26, 2008; Celestine Bohlen, “Letter from Europe: We’re Stuck with Dollar as Reserve,” New York Times, August, 2009.
  57. Dean Baker, “Challenging Group Thinking Economists on Budget Deficits and the Dollar,” Talking Points Memo Café, December 28, 2008. This viewpoint is shared by Diane Lim Rogers, chief economist with the Concord Coalition: “Once we stabilize the stock market, people will not be so enamored of clutching onto Treasurys.” Kathleen Pender, “Bailout Grows: Total Relief Package Up to $8.5 Trillion—Nobody Knows Risk to Taxpayer,” San Francisco Chronicle, November 26, 2008.
  58. A petition to abolish the Fed linked to Web site states that the Fed is a profit-making business owned by people named Rothschild, Goldman, Sachs, Lehman, and others, repeating a century-old anti-Semitic conspiracy theory.
  59. Statement by Timothy F. Geithner, U.S. secretary of the treasury, before the Committee on Financial Services, U.S. House of Representatives, March 26, 2009.
  60. “At a Glance: G20 Agreement,” BBC News, April 2, 2009.
  61. Robert Kuttner, Financial Regulation After the Fall, The Future of Regulation Report Series (Demos, 2009), 24.
  62. Cray, “Obama is Tinkering With Changes to the Banking System While Big Finance Collapses.”
  63. Kuttner, Financial Regulation After the Fall, 30.
  64. Robert Pollin, “Proposals for a Financial Regulatory System,” Tools for a New Economy series, Boston Review, January­–February 2009.
  65. Robert Pollin, “Transforming the Fed,” in Daniel Fireside et al., eds., Real World Banking and Finance: A Dollars & Sense Reader, fifth edition (Boston: Economic Affairs Bureau, Inc., 2008), 15. This publication explains the workings of financial markets clearly from a left-wing perspective.
  66. Lee Sustar, “The Geithner Giveaway”; “Why Should Bankers Get More of Our Money?” Socialist Worker, February 11, 2009.



Issue #103

Winter 2016-17

"A sense of hope and the possibility for solidarity"

Interview with Roxanne Dunbar-Ortiz
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