Central Bankers At the End of Their Rope


Review by David R. Baker

bookJack Rasmus has written a series of important books about the global economy; the critical question is, Important or not? Why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky, who tells us that we face two existential threats, nuclear holocaust, and climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing real democracy back from from the shadows of the empty political theater which we currently endure. We need to understand that what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus’s book, Central Bankers on the Ropes, which examines the fundamental role of central banks in our current savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen, et al, but it accurately describes neoliberalism’s impact on the world; the lower 90 percent are collateral damage in the service of the 1%. Central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial  industry which in turn have been used to prop up the stock and bond markets worldwide, offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are a conduit straight to the 1%; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Rasmus is excellent at peeling away the layers of economic deceit by examining each of the central banks, in turn—the Fed, the Bank of Japan, the EU Central Bank, and the Central Bank of China, and determining which, if any, is actually achieving their publicly announced goals. These goals include inflation at 2 percent; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns;  and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are. The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non-conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals ancial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.”

reviewexHistorically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the 1% were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in worldwide debt through the extension of credit then the inevitable collapse becomes greater. But if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising with oceans of debt (over $20 trillion) and central banks having no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the U.S. out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend.” For a progressive, you tax based on ability and spend based on need; and, during the 1950s and 1960s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy. Monetary policy is economic policy driven by the central banks who, in turn, serve the 1%. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low, or interest free loans, as well as direct buys of stocks and bonds, and raising and lowering interest rates. What Rasmus provides is the insight that the 1% are not willing to wait for prosperity to “trickle up” from the lower 90 percent; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90 percent can wait, apparently forever. Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the U.S. during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme, as they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Rasmus concludes with a proposed U.S. constitutional amendment that would place the Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of the Fed raising household disposable incomes. There is a body of scholarly work that demonstrates that the U.S. Constitution was designed to protect investor rights (see e.g. An Economic Interpretation of the US Constitution) so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

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David R. Baker is an attorney in what was a small, thriving working-class community in the San Francisco area, Pinole California. Pinole has been devastated, along with much of the bay area, by the economic machinery called Neoliberalism. Hence his interest in the books by Jack Rasmus.