Occupy Wall Street, Monetary Policy and the Federal Reserve

Matt Yglesias echos a reader’s concern about Occupy Wall Street lining up with “End the Fed” rhetoric driven by the Paul camp (“Occupy Gainesville Facebook page is currently full of posts about the evil of fractional reserve banking, the danger of inflation, & other such Ron-Paulishness”), and wonders what can be recommended to get people interested in monetary policy and the Fed.

I’d really like this audience’s reactions, particularly when it comes to blog posts, videos, online materials or other general thoughts.  My friend Andrew Bossie is doing some teach-ins on monetary policy at the Occupy Wall Street New York, and we have been thinking of ways to formalize it for the audience – there’s a huge demand from people who want to learn.

For online stuff that comes to mind, there’s Matt’s article and Paul Krugman on the babysitters’ co-op.  I really like Chris Hayes’ paper from early on, The Case for Inflation, which places it against the Washington Consensus of the past 30 years and the changing battle of ideas over economics.  At one of the Federal Reserve panels we did, Josh Bivens of EPI outlined Five Ways to Determine a Strong Liberal Member of the Federal Reserve, which I thought was very helpful.

One thing I’ve noticed after talking with people on this topic is that it is important to split the Federal Reserve as financial regulator from the Federal Reserve’s role in monetary policy.  For some people trying to figure it out, they hear Federal Reserve and they immediately think financial sector bailouts.  They think “monetary policy” is some version of AIG bonuses, the New York Fed hand-waiving bad books, Alan Greenspan ignoring FBI investigations and consumer reporter on fraud in the subprime market, and TARP.  They think regulatory capture, etc.  And they are right to be pissed about all these things in the financial markets.

But it is important to explain that this is very different from monetary policy.  Indeed, paying interest on reserves, opportunistic disinflation and an indifference to high unemployment – the things that the left-liberals concerned about monetary policy bring up as major problems – are things that Wall Street likes, or at least doesn’t mind at all.

In fact, the biggest attacks from left-liberal spaces against expansive monetary policy has been to collapse this distinction, and make it seem that monetary policy is only about goosing banker bonuses.  From Matt Taibbi (“big banks and Wall Street speculators are real, immediate beneficiaries of [QE2]”) to Shahien Nasiripour  (“When it comes to helping Wall Street and corporate America, the Federal Reserve spares no expense,” with Ryan Avent response), many criticism of QE2 have gone along these lines.  The idea that tight money hurts creditors and rentiers and loose money helps them is a new, incorrect, one.  Nobody seemed to report that the AFL-CIO supported QE2 and additional monetary expansion.

It is entirely consistent to support “Audit the Fed” legislation and expansive monetary policy like QE2 and beyond (Dean Baker, for one, does).  And the transparency argument over the bailouts should carry over to transparency on monetary policy.  The biggest question mark I have right now is whether or not the Federal Reserve will kill any recovery – especially if driven by new fiscal stimulus – if inflation goes above 2%.  How much do they emphasize their obligation to maximum employment versus inflation?  These are incredibly important considerations.

More generally, James Kwak’s friend wondered “about the Tea Party: when has there been a populist movement that wanted to make money harder?” Indeed up until the Tea Party, all populists movements wanted looser money.  Here’s Father Coughlin, the Glen Beck of the Great Depression, who was a monster but was right on monetary policy:

Many factors had conspired to create the Great Depression, Coughlin explained, but one loomed larger than all the others: a “cursed famine of currency money” . . . . Denouncing America’s rigid adherence to the gold standard (“Wedded to the false philosophy that gold is the value and not the measure; that it is the master and not the servant . . . we have been overwhelmed by catastrophe”), he urged immediate revaluation – a doubling of the price of gold per ounce from the present level of $20.67 to $41.34. The government would thus be able to issue twice as much currency on the basis of its existing gold supply. Revaluation would encourage, indeed, almost force the wealthy to put their “hoarded dollars” back into circulation; it would enable debtors to bear mortgages and other loans more easily; it would promote peace by making America’s allies better able to repay their wartime debts; and, most important of all, it would stimulate the economy sufficient to restore jobs and create prosperity for all.

Who has a very clear argument for a general audience (key on general audience) on why the Gold Standard is a bad idea?  There’s a Breakdown episode with Liaquat Ahamed about it that was good, Yglesias had a post, Josh Barro had an article and David Frum has several keeping their right flank in check.

What else would you emphasize?

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49 Responses to Occupy Wall Street, Monetary Policy and the Federal Reserve

  1. cs702 says:

    My preliminary attempt to explain basic macroeconomic facts in language that my mom — who is smart but knows nothing about the subject — could understand: http://cs702.wordpress.com/2011/09/29/on-the-economic-situation-of-the-u-s/

    Note: I’m trying to explain only facts, not theories.

    Feedback, suggestions, and corrections would be appreciated.

  2. Gordon Nash says:

    Strangely enough of of the best explanations of what money is and how the gold standard is a chimera is a fantasy book, “Making Money” by Terry Pratchett.

  3. Peter K. says:

    I’d recommend William Greider’s Secrets of the Temple. Not the easiest of reads, but coming from the right place. He used to write for Rolling Stone and writes for The Nation. Liaquat Ahamed’s Lords of Finance is good too.

  4. tarynhart says:

    Yes, there’s an “end the fed” influence particularly with Anonymous. However, the Gainsville thing – it could be the group, but as a person in a small occupation, my guess is it’s probably just a couple of people who happen to be in charge of the blog at the moment.

    This type of a movement obviously does attract a lot of different groups and because nothing has yet been decided in terms of the group’s direction, no one has left on the grounds that this movement is not in line with their particular goals. At this point, in particular, this movement shouldn’t identified with one person giving a speech or one website – Ron Paul is a Republican, but no one thinks the Republican Party wants a return to the gold standard. I highly doubt anyone will convince the die-hard gold bugs.

    This kind of post – though well-meaning – identifies our movement with a particular fringe economic philosophy (thereby discouraging the type of person we need from participating) and is not likely to convince anyone.

    • tarynhart says:

      Also, while there are no good numbers on who is who among the participants, I think the people who have spoken are indicative – Michael Moore, Chris Hedges, Joseph Stiglitz, Jeff Madrick, you, Naomi Klein, etc. Thus far, I haven’t heard of anyone from the Von Mises Institute showing up.

      That being said, there are conspiracy theorists and gold bugs in the mix.

      My personal hope is that the Left will put their energies into having our ideas on the ready – there is something to be said about Milton Friedman’s notion of “the ideas that happen to be lying around.” When I spoke two days ago with Jeff Madrick, I specifically asked if he agreed with your policy priorities: Cancel the debt, Wall Street accountability and FTT. He actually had slightly different priorities, starting with “spend our way out of this crisis.” I would love to see THIS conversation continue. If we really wanted to fix these problems and our political system wasn’t completely broken, what would we do. If this thing has some success, at some point we’ll have to answer those questions, in detail. It would be nice if people were working on them in detail in advance.

      • tarynhart says:

        OK, last comment – I would also point out that those of us who would be in line with Krugman (right in the middle of your Wenn (liquidity trap folks), which includes loose money) aren’t necessarily those prone to speech-making and/or marching.

        Speaking of which, why were your 3 concrete demands different than your Wenn?

  5. Here is Roubini. He takes on the Austrians in their home turf but talking about the frequently spasmadic business cycles during the gold standard era

    Megan McArdle does a really simple breakdown on 7 reasons it’s crazy

    Greider’s book mentioned my Peter is also a good progressive-leaning critique of the Fed, but focused on the Reagan era, when the Fed was targeting wages

  6. Ebenezer Scrooge says:

    Not true that the Tea Party is the first populist hard-money movement. The Jacksonians–an indubitably populist movement–had a fairly strong hard-money component, at least ideologically. (Operationally, this might not have been so–Bray Hammond’s book is still the go-to on Jacksonian banking policy.) Arguably, the free banking movement was both populist and hard money.

  7. Pingback: rethinking Graeber (against progressive monetary policy (against myself)) |

  8. Ken Houghton says:

    And the Jacksonians effort worked out so well…most especially for its most ardent supporters.

  9. Dan Kervick says:

    I believe one way to get progressive activists engaged in monetary policy, and to counter the seductions of the libertarian right, the free-bankers and the like, is to get people to start thinking seriously not about ending the Fed, but about major reforms of the Fed. More specifically, progressives should be exploring proposals for re-drawing the bureaucratic borders in our government to produce a more efficient, effective and seamless integration of monetary and fiscal policy.

    For example, suppose we instituted a Macroeconomic Policy Board. As part of our annual budget process the board would analyze general economic conditions and then make recommendations on the most optimal overall budgetary stance to take in the upcoming year – deficit or surplus, and to what degree – and what percentages of overall spending should be financed by (i) taxing, (ii) borrowing, and (iii) pure monetization. This board would help set and define overall macroeconomic target, for the year, and also quarterly targets, subject however to ultimate democratic control, i.e. approval by Congress and the President, of the budgetary target. So we are talking about a deliberative process with an explicit political component. The budgetary targets would be decided by Congress in the end. But these target must be decided and approved before the deliberation on actual taxing and spending plans. Congress first sets a position on the overall levels of fiscal and monetary expansion or contraction for the upcoming year. Then it gets down to details.

    The board would then meet quarterly to gauge progress on meeting the targets, and then make recommendations to the Treasury Department, the Congress and the Fed on readjustments needed to get us back on target if we have drifted off the annual target.

    The Fed would then play a more subsidiary role. It’s main job would be to regulate and stabilize the banking system, including the payments system. It’s policy mandate, however, would be to provide whatever support is necessary from the monetary point of view to help the government hit the goals laid out in the approved macroeconomic policy recommendation, not to target some particular macroeconomic indicator like the inflation rate or the unemployment rate – targets the Fed is not best equipped to hit anyway. Part of its mandate would be to work with the Treasury in deciding on the appropriate mix of debt issuance and direct monetization. By “direct monetization”, what i mean is that the Fed would have it within its power after these reforms to directly credit Treasury accounts with new money, rather than be limited only to open market purchases as a means of monetization. The Fed would also be permitted to allow overdrafts of Treasury accounts on an emergency short-term basis, if these overdrafts are consistent with the overall budgetary targets and existing authorizations, and result from revenue shortfalls.

    The best approach to unemployment and inflation is through the fiscal side, not the monetary side. If inflation heats up, Congress should either cut spending or raise taxes. If unemployment is too high, the government should either hire directly, or spend money on projects that will cause additional hiring to take place. Let’s get the Fed out of that business. Congress could institute a special category of revenues and spending programs that allow for streamlined votes and adjustments on the fly to meet macroeconomic targets, some of these adjustments might be set up just kick in automatically, unless Congress votes to turn them off.

    A result here is that we put Congress in charge of settling strategic budgetary and macroeconomic targets in advance each year, not just voting up or down on packages of taxing and spending proposals, unconstrained by any disciplined macroeconomic plan.

    This is only one way to approach the issue of monetary policy reform and Fed reform. But it’s an ambitious and politically challenging agenda, which will take years of work to sell to the public and enact. Progressives have to realize that the conservative revolution of three decades ago killed activist government, and that we have been on the losing side since then. Inequality has grown since then. Corporate power and government corruption have grown since then. The American dream has dimmed since then. The primary question for progressives shouldn’t be, “How do we get progressives to take more interest in monetary operations” The main question ought to be, “How do progressives return those government jobs that are by right and economic logic fiscal jobs, which ought to be in the hands of the elected political branches of government, back where they belong on the fiscal side of the policy agenda? The Fed doesn’t need to be fired. But it needs a demotion.

    Some people fear the democratization of monetary policy, and prefer an elite, bureaucratic and insulated approach. At the same time, they decry the lack of public interest in, and informed public discussion of, monetary policy. But the two things are connected. The only way we can expect stepped-up public attention and debate in the area of monetary policy is to turn that policy into something that is up for grabs politically, and that then passes into the sphere of wide-open democratic debate. Yes, democratically elected officials will screw up. Democracies always screw things up. But there is no reason to think that they will screw up worse than elite and protected decision-makers. These elites are the ones who fell asleep at the switch, let recklessness and corruption run rampant, and crashed our economy.

  10. Tim says:

    I’m not sure there’s any good economic literature/commentary that breaks down the problems of gold to a lay audience without complicating it too much. The best I can think of is that Krugman pointed out lately that beliefs that fractional reserve banking is evil (and legislation made on that basis) only serves to make banking essentially illegal and push it into unregulated informal markets.

    As far as talking to protesters, I’ve talked to some folk at the Occupy DC and this is the approach I’ve used.

    First, gold. We all understand that there is a finite supply of gold, but human economic activity has expanded (with temporary ups and downs, but still continually) throughout history. We’ve already hit points where the supply of gold is too small for the amount of economic activity (directly after the American revolution for example). What does this mean for people? It means in-kind payments for work, difficulty or inability to buy and purchase assets, and contraction of economic activity until it matches the available pool of money.

    What does gold backing provide us that we cannot do today? I’ve never heard of a benefit that wasn’t erroneous or misattributed or just wrong.

    As for central banking, and the fed, emotions are always pent up in this that do not reflect reality (when was the last time you heard someone being upset on the street because they did not sufficiently follow the full employment mandate?) and the best way to address this is to ask people (either rhetorically or directly) what they absolutely know the fed does. What it’s responsibilities and actions are. Most…have no clue.

    From there, you build. Explain the mandates. Explain the duties of the fed and its actual powers. The single most important part in my experience is explaining that a lack of a central bank does not remove the evils associated with dangerous financial behavior. It simply removes our ability to make certain actions that may restrict or ameliorate those practices. In other words, not making these decisions, by destroying our central bank, is making a decision to let the economy go where it may, good or bad.

    I wish anyone who tries to elevate the rhetoric about the fed good luck.

  11. What if we proposed something totally radically out of left field, like allowing anyone access to the discount window for almost anything? Bring your factory equipment to the window, Fed gives you cash! Bring your expensive suit, Fed give your cash for it! One of the reasons many people on the hard money right (and even some on the populist left) have a serious problem with the Fed is because an exclusive cartel of banks (the primary dealers) get privileged access. It’s not so much the false fear of “money printing”, but the “money printing going to a shadowy elite”. What if we opened it up so that all citizens could get access to their friendly neighborhood Fed? Could setup shop at the those empty Post Offices ( and mitigate the need to close post offices!) with a little discount window on the side?
    Have it be retail fiscal policy on the not so stealth !

    OK, i know, this is a ridiculous idea, but figured we needed something crazy to “move the overton window” away from hard money cultishness

    • Dan Kervick says:

      I believe Bernie Sanders has in fact proposed something like this – low-interest loans directly from the Fed.

      • I figured that. Kucinich has a bill to move it inside the Treasury, but I believe the bill also ends fractional reserve banking as well

        Why not? Get rid of the “middle man”! Maybe a type of “public option” for utility-style “boring” banking utilized counter-cyclically, especially when the credit channel’s traditional transmission mechanisms are clogged

      • Nathanael says:

        Absolutely. Both Dan Kervick and Economic Maverick have hit the nail on the head. And I’m not surprised that Bernie Sanders and Dennis Kucinich are the only members of Congress even proposing anything this sensible.

        The thing is, these ideas aren’t that far out — they’ve been *done*. The UK (also Canada and many other countries) set up “Post Office Banks” owned and operated by the government in order to provide a secure place for savers to deposit money. People *loved* having the “public option”, until the Tories (or was it New Labour?) privatized it (because they hated to see the government making a profit).

        FDR established something like 15 wholly-government-owned, wholly-government-controlled banks to lend to all sectors of the economy (one for farmers, one for manufacturers, one for homebuilders, etc.). People *loved* those banks. Until both Democrats and Republicans privatized all of them. Note that they had to renationalize FNMA… privatizing didn’t work out so well.

        (I hate privatization. It’s just a form of looting, stealing our public services so that private monopolists can get rich off of us.)

        The government directly issuing the money supply, rather than “borrowing” from the Federal Reserve? We had that! Starting in the Civil War, and pushed heavily by the “Greenback” Party. The “US Notes” weren’t retired for a very long time, though the private money interests fought against them continuously.

  12. ZeroInMyOnes says:

    A few weekends ago my youngest child and I were in DC for the wonderful SolarDecathalon. Normally when I rise up out of the Smithsonian Metro stop onto the Mall, particularly when we are with our kids, I am overwhelmed by a sense of patriotic ownership. But this last visit was different. Oh, we made our way down to the Solar Decathalon and talked to the positive, well-educated students and professors who had designed the amazing solar homes. And we stood on long lines to see the homes with many other interested visitors, so many visitors that the food service ran out of food. But this time In DC I thought about another group of people, an even bigger group, that was in the city at the same time, and not just visiting, but working. Working hard, even on a weekend. Getting paid lots. Lots. For lobbying. To get government money and tax breaks to move in their corporation’s direction. To block. To stymie. To obfuscate. To write out entire corporate-favorable bills and hand deliver them to politicians, complete with talking points for the talk shows. Pre-written bills to arrange for corporate tax breaks and bailouts. Which they deliver at a fancy breakfast, lunch or dinner. Which they use as a tax write-off so the rest of us have to pay for part of it. So they can lobby. To stall. To distract. To confuse. To get more bailout money and tax-favors for their corporation. So they can pay more lobbyists. To lobby for more money and favors.

    Yes this time in DC I thought about all those corporate lobbyists.

    And then I didn’t feel so optimistic about the positive goals of the group of us people down by the Potomic River teaching and learning about solar houses. By I did not mention it to my child.

    • I know one of the teams that participated in the Solar Decathlon – what a wonderful experience for the students! Their work to develop sustainable energy for the home will reap dividends for our country. And with so many of the teams from public universities, this competition showcases how valuable our investment in public education can be.

      However, it is unfortunate that the wonderful accomplishments of the Solar Decathlon happened concurrently as the Solyndra scandal blew up…

  13. Bob Roddis says:

    For what it’s worth (to “progressives“, probably nothing), this past February, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

    Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic
    Review, 35(4): 519–30.


    Of course, all of you “progressives” understand how hard money solves the “problem of knowledge in society“, right? And you all knew that this is the core concept of Austrian Economics, right? And you all knew that Hayek won the Nobel Prize for his work on the Austrian Business Cycle Theory which holds that it is Keynesian-style money dilution policies that are the cause of the boom-bust cycle. Right?

    Actually, I don’t think you guys have the slightest familiarity with Austrian School concepts. Good luck refuting us without any comprehension of even our basic concepts.

  14. Dan Kervick says:

    More generally, James Kwak’s friend wondered “about the Tea Party: when has there been a populist movement that wanted to make money harder?”

    Well, I don’t think it should be puzzling at all that all kinds of people, on both the left and the right, are suspicious of what seem to many to be misguided efforts to engineer a recovery by blowing up another credit bubble. They blame the collapse of 2008 on a reckless and criminal and ridiculous expansion of financial balance sheets, and they don’t think we need one of those again. And they not irrationally think that the ease with which those balance sheets were blown up has something to do with a too easy availability of money on credit.

    The idea that our current stagnation has something to do with money being “too tight”, and that our current situation is analogous in any way to the populist era and the gold standard days, strikes me as very dubious. Every kind of measure that people have traditionally used to measure the tightness or looseness of money – interest rates, the quantities of various monetary aggregates – suggests to the contrary that money is extraordinary “loose”. The quasi-monetarists, nonplussed by the poor fit between empirical observations and their precious monetarist theories, now seem to have their own special, secret account of money. Money is an occult quantity that cannot be observed. But everything hangs on it and the Fed controls it. They start with the goal they want to achieve, a higher NGDP growth rate, and then say that because that goal has not been actualized, that proves money is too tight! Asked to point to some specific and measurable thing that might provide evidence that the NGDP growth rate is both (i) a consequence of the tightness of money, rather than some other problem, and (ii) something that lies within the Fed’s power to control, they can point to nothing.

    Sometimes they just redefine the “degree of tightness/looseness of money” as the rate of NGDP growth. So much for the idea that one can cause a higher rate of NGDP growth by loosening up money! So at this point their proposal comes down to the claim that the Fed should raise the NGDP growth rate somehow. And how? It’s not with interest rates. It’s not with more QE. So I guess the Fed is just supposed to dial up their NGDP growth knobs on the NGDP console? But no, it’s this: They are supposed to proclaim to all the land, “Let there be more NGDP!” and make it clear that they are really committed to what they say. Surely that will persuade everyone. And we will then all go busily to work on brewing the hardy new stone soup of the economy because we are so convinced and moved by the Fed’s earnest commitments to work its mysterious magic in that je ne sais quoi way we don’t understand.

    Only the psychological distortions caused by the pathetic and dispiriting display of an incompetent presidency and congress could lead people to overlook the rank desperation and forlorn emptiness of this policy proposal.

    Maybe people think that the sheer fact that there are some entrepreneurs and small businesspeople who can’t get loans proves that money is too tight. Well, I could go into a bank tomorrow and beg for a loan to start my new startup business: selling blogospheric comments and tiny plastic tokens to people on the internet. But if the banker says, “Can you give me some evidence that I will recoup my investment, let alone make money, if I loan you this money?” I will be hard pressed to present such evidence. Is the problem here that money is too “tight”? Or is the problem an absence of real economic opportunity in an economically pulverized landscape that can turn an idea into a serious investment oprtunity?

    The strange attraction of yet more monetary and supply side Hail Marys in this situation comes in part from the unwillingness of mainstream, moderately progressive pundits to address the fundamental problem here. All of those would-be entrpreneurs and new small businesspeople live in a world of people who don’t have as much income as they once did, and whose remaining income is less secure and reliable than it once was. So there is in fact little business opportunity. America has been ripped off, and now needs to start clawing back income from those who ripped them off. To fix that problem, we need to get these people more income – not just a stimulus, but a permanent increase in income and income security.

    This seems to be an insight which the #OccupyWallStreet movement and the 99% movement have not the slightest difficulty in grasping, unlike so many of the established pundits and mainstream economists whose unimaginative brains have been stewed for decades in conservative broths.

    • Peter K. says:

      Dan, you really don’t understand what proponents of more monetary policy like Yglesias and Chicago Fed President Charles Evans are arguing. You mischaracterize what they are saying. You wrongly assert that Bernanke agrees with you.

      “They blame the collapse of 2008 on a reckless and criminal and ridiculous expansion of financial balance sheets, and they don’t think we need one of those again. ”

      What happened was a housing boom which turned into a bubble. This happened in Spain, etc. Mortgage rates were low in part b/c of China and the global savings glut.

      There was a lot of bad debt which was securitized. There was a lack of regulation. There was the rise of the shadow banking system which was susceptible to a bank run. The housing bubble was deflating but then there was a financial panic which caused an old-fashioned bank run on the shadow-banking system. There’s a question of how zombified the banks are. They did pay back TARP.

      There’s still a lot of debt BUT WHAT YOU MISS is that they owe debt to a lot of creditors. A lot of people don’t have debt and they are just sitting on their money.

      I believe the issues you sketch out are long term issues that need to be addressed. But if in 2009 Obama had a bigger stimulus and kept having stimuli and had the Fed done more and ran up a little inflation and had they nationalized the banks and sorted out the bad debt we’d have lower unemployment levels right now.

      • Dan Kervick says:

        What happened was a housing boom which turned into a bubble. This happened in Spain, etc. Mortgage rates were low in part b/c of China and the global savings glut.

        We don’t entirely disagree here, but I think you mislocate the driving factors behind the credit bubble. There was a rampant criminogenic environment in the financial sector; a woeful lack of government oversight; a proliferation of fly-by-night, fast-buck, flim-flam operations; a breakdown of the internal corporate disciplines that are supposed to tie the behavior of lenders in established institutions to the long-run health of their companies; a culture that permitted financial firms to bet on and prey on the failures of their own clients; a fraudulent and inadequate system for pricing risk and passing the buck of risk that was made up on the fly; and a greedy “I’ll be gone; you’ll be gone” ethos.

        Lenders in modern credit markets don’t require some stock of “loanable funds” to advance credit, so whether or not there was a glut of savings is irrelevant. I think history shows that if you permit people to advance credit at will without adequate regulation, they will do so in great promiscuous abundance, advancing funds they don’t even have by borrowing them elsewhere, and quickly drive the system into strata of speculative and Ponzi lending. You don’t need a glut of savings. You just need to remove the shackles of oversight and regulation in a jungle of potential predators, and then watch the vices of human nature take over.

        I understand very well that that a lot of people are just sitting on their money. One reason they are sitting on it is because there is so little opportunity in the real economy for the productive investment of that money. The monetarist solution – vaguely defined as it is – is to somehow give those monied people more money. The monetarists want to give the entities with surplus savings even more money, so that the money somehow transforms in due course into a “hot potato” and the money possessors eventually start spending and lending it, even on projects with poor prospects for generating a healthy rate of return.

        I think this is a crazily upside-down, top-down approach based entirely on the financial supply side which completely neglects to repair the problems in the real economy of work, production and the exchange of goods and services. There is a very straightforward way of directing hoarded surplus savings into consumer spending and investment: tax the hoarded savings away so that they go into the US treasury, and then either spend those funds directly on public investments, or transfer those funds to needy consumers with pent-up demand who will then spend them with alacrity.

      • Peter K. says:


        “I understand very well that that a lot of people are just sitting on their money. One reason they are sitting on it is because there is so little opportunity in the real economy for the productive investment of that money. ”

        “I think this is a crazily upside-down, top-down approach based entirely on the financial supply side which completely neglects to repair the problems in the real economy of work, production and the exchange of goods and services.”

        So would you say the Fed lowering the Federal Fund rate from 6 percent to 5 percent is a “crazy upside-down” approach? Since it’s at zero the Fed can’t do that so the Fed needs to use unconventional methods to achieve the same results. This is not an argument against fiscal policy. You get more bang for the buck with fiscal policy at the zero bound obviously. The stimulus worked. QE 1 and 2 worked but weren’t enough.

        What you fail to understand is doing something is better than doing nothing.

        Calling for “repairs” Is arguing for the perfect against the good. There was a boom and then bubble and then a financial panic. A financial panic. The credit markets froze. During the boom people were reckless. Now the pendulum has swung too far to the overly cautionary side. Yes businesses are waiting on demand but the Fed could take unconventional steps to prod spending and investment. To say it can’t is like the quasi-monetarists asserting that fiscal stimulus won’t work and hasn’t worked.

  15. I was only able to watch about 2 minutes of the young man’s speech against the Fed, which was just long enough to know that he’s echoing the Jeffersonian belief in the destructive quality of a central bank. From monticello.org, here’s the man who wrote the Declaration of Independence on the issue of the central bank:

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    We’ve been squabbling about the role of the central bank from our earliest days as a nation.

    We don’t necessarily need to get rid of the Fed. But what economists need to understand is WHY people today are becoming active supporters of the Ron Paul anti-Fed stance. The Fed, as personified by Greenspan and Bernanke, have been vocal and unstinting supporters of our (failed) banking system. Have either one of them actively sought reform of a system that dragged our economy off a cliff? If either man has any reformist tendencies, they’ve been hidden from view, perhaps obscured by the Greenspanian desire for obfuscation.

    Greenspan’s vocal support for Ayn Randian “objectivism” made him absolutely blind to the flaws of an unregulated financial sector. And now too many Americans are paying the price for such blindness. And when the government fails to act in a way to rein in the excesses of a sector that blew up the economy, people are going to want to rein in the government, in this case, the Fed. What economists and others need to understand is this opposition to the Fed has grown from the Fed’s own failures to regulate a sector that made enormous amounts of money gaming the system, and then got propped up and supported by all levels of the federal government, Congress, the White House, Treasury and the Fed. The Fed’s own failures are coming back to haunt them.

    Books economists may want to consider reading to get a flavor of just what’s pissing off the vocal portion of the 99% are “Enough” by Jon Vogle, and “Liar’s Poker,” by Michael Lewis (which came out in 1989!) And Greenspan’s own book is excellent in helping to understand the former Fed chair’s brilliance and blindness. So to ask for literature to explain the value of the Fed to those enraged by its serious and crippling failures is not really the way to go.

    (And by the way, that babysitter co-op parable is just awful. An economist who wants to use that parable to explain the current situation is overlooking the enormous fraud that led to the crash. The co-op’s “recession” was not the fault of a crazed scrip lender, handing out scrips to those who would never be able to pay them back, as we saw with the housing market. And the idea that the ONLY resource available to help cure the problem is this “central bank” of babysitter co-op scrips is pathetic. The co-op couples COULD look outside the co-op and discover a free market of students and other babysitters ready and willing to work for cash. But I suppose looking to “the market” – and using cash – to answer a need is problematic in this new age of American capitalism.)

    • Nathanael says:

      There’s an important point in Jefferson’s attack there: *private* banks.

      The control of the money supply should be done by the Treasury Department. At least then if the population is impoverished by incompetent monetary management, it will be because we ELECTED incompetent people.

      “The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

      Indeed. This is why I’m a Greenbacker. The Greenback Party had it right all along. They almost won, but a devil’s bargain with the Money Party created the Federal Reserve. This was better than barely-restricted money issuance by private banks, but not what we actually needed, which was direct Treasury control of the money supply with the elected government benefitting from the seignorage. Bring back US Notes!

      Incidentally, the hopeless Office of the Comptroller of the Currency was established when totally-private banks had control of currency issuance — it became apparent very quickly that it really, really needed regulation. It was nearly toothless from the start because the private banks didn’t WANT to be regulated.

  16. Pingback: Economist's View: links for 2011-10-14

  17. jmg says:

    Take a look at (it’s written in the seventies, but good)
    “The intelligent citizen’s guide to inflation”

  18. G.L. Piggy says:

    Mike, I await your column on other inane policy goals of the #owsers – student debt eradication, debt forgiveness, etc.

    You pick on the anti-Fed guys here who are what percentage of the movement?

    • Nathanael says:

      Debt forgiveness is one of only two ways to get out of a consumer-debt-driven crash. It’s the *easy* one, and lenient bankruptcy laws are what gets most countries out of debt-driven crashes. (The evil “bankruptcy bill” of the 2000s and the conversion of student loans into not-cancellable-in-bankruptcy debt-slavery are two reasons we can’t get out of this now.)

      The other way out of a consumer-debt-driven crash is inflation combined with huge wage increases for the poorer 99%. In other words, money-printing direct-government-employment policies. We should probably try both, but the debt-forgiveness option is in many ways easier.

  19. Anonymous says:

    Inflation is not even considered to be progressive by its very supporters. Take someone like Tim Congdon. His proposal for QE-induced asset price boosts amounts to “trickle down economics”. Raise asset prices and the corporate sector will invest more, which eventually feeds through to employment and wages — except when it raises commodity prices instead. Or think about the purpose of promising low rates for extended periods: this allows shadow banks — speculators — to make rents from maturity transformation. It is supposed to raise leverage, create demand for credit, and get Aggregate Demand moving — except when it just results in profits to speculation and little increase in credit provision to the real economy.

  20. Nathanael says:

    Here’s the thing: the Fed shouldn’t exist. Its current functions should be part of the Department of the Treasury. Yes, I would be a card-carrying member of the Greenback party if it still existed.

    This wouldn’t change monetary policy except for one thing: *the US government would collect the seignorage*. Currently it doesn’t. *And that’s not appropriate.*

  21. Jeremy says:

    Surprised no one’s mentioned Doug Henwood’s take on the “End the Fed” mentality among some in OWS. Seems to be largely along the same lines: http://lbo-news.com/2011/10/13/on-ows-and-the-fed/

    I’ve noticed a bit of the mentality in the signs at Occupy Boston (as well as the fact that the Federal Reserve Building is looming over the site from across the street, so it’s pretty much the easiest thing to point out as the “enemy”). On the other hand, Alex Gourevitch was giving a decently attended talk that probably provided better information on Wednesday (I couldn’t really hear much of it). I think the Ron Paul types probably have a head start in practicing their rhetoric on the issue, as well as the ability to be really, really enthusiastic about it, but hopefully good information can drive out bad.

  22. Bob Roddis says:

    Re: Head start by “Ron Paul types”

    1. Since Mises eviscerated the entire Keynesian Hoax in 1912, 24 years prior to “The General Theory”:



    2. Hayek won the Nobel Prize in 1974 for demonstrating that it is Keynesian-style money dilution programs that cause the boom/bust cycle:



    3. Keynesians have meticulously avoided even familiarizing themselves with even basic Austrian School concepts and no scholarly refutation of the Austrian Business Cycle Theory by Keynesians even exists.

    So yes, “Ron Paul types” have had a head start.

    • studentee says:

      bob roddis, you are the worst thing that has ever happened to austrian economics

    • Bob Roddis says:

      Economic Conformist:

      Thanks for the detailed factual refutation. I’ll call Prof. Ebeling and tell him that the “lost papers” of Mises he found in Moscow were purely imaginary and that the Nazis really didn’t seize Mises’ library. Thanks again for your insight.

      In 1996, Dr. Ebeling returned to Moscow and uncovered the “lost papers” of the famous Austrian Economist, Ludwig von Mises, in a formerly secret KGB archive. Looted by the Nazis from Mises’s Vienna apartment in 1938 and captured by the Soviet Army in 1945, these papers number more than 8000 pages of material. Dr. Ebeling has been supervising the translation and serving as editor of a wide selection of Mises’s papers, monographs, articles, and essays on the economics and politics of the pre-World War I and interwar periods in Austria and Europe.

      Those anti-Austrians always base their critiques on facts. It’s simply amazing.


  23. Pingback: Jim Willie – Must Read -MONETARY SHRAPNEL | I Love London Ontario Canada

  24. Are there thoughts here on moving away from the “money as debt” system? I think it deserves consideration. There are some fairly bold and highly unorthodox proposals out there.

    Here is one: The American Monetary Act

    Click to access amacolorpamphlet.pdf

  25. This might be relevant as well:
    Levy Institute Scholars to Advice on Fed Reform.
    The Levy folks are Minsky style Post-Keynsians, as opposed to Freshwater Neo/New Keynesians that are closer to the mainstream US Center-Left. Nonetheless, I believe many folks commenting here would find their critiques of the Fed valuable.

    To me, this is the path of Fed Reform that American progressives (and others) should strongly consider.


  26. Oliver says:

    From William Jennings Bryan and the “Cross of Gold” (Via L.R. Wray at economonitor.com: http://www.economonitor.com/lrwray/2011/10/06/slogans-for-signs-to-occupy-wall-street/):
    “Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”

  27. Pingback: Jake Blumgart: Four Things Occupy Wall Street Should Know About the Federal Reserve | BNewsworld

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