Alex Callinicos: Don’t line up with the Federal Reserve

Donald Trump has set his sights on the Fed (Pic: Gage Skidmore on flickr)

Donald Trump is trying to complete his takeover of all the main institutions of the United States federal government. The holdout has been the central bank, the Federal Reserve Board.

Trump has denounced the chair, Jay Powell, as a “moron” and “numbskull” for not slashing interest rates to stimulate the US economy. Last week he sacked Lisa Cook, one of the seven Fed governors, for allegedly fiddling mortgage applications.

He made his motive perfectly clear. If he could replace Cook, he would have a majority of the governors, “We’ll have a majority very shortly. So that’ll be great.”
Outraged liberals have sprung to the defence of Cook, who has lawyered up and sued Trump. “We are all Lisa Cook,” proclaims the economist Paul Krugman.

This is somewhat over the top. There are far worse victims of Trump’s rule among the thousands of migrants who are being grabbed by Immigration and Customs Enforcement thugs, detained and deported.

Moreover, much of the outrage is directed at Trump’s attempt to control the Fed. At its inception in 1913 the Federal Reserve System was designed to limit destabilising competition. It aims to ensure that, in the words of the historian James Livingston, the banking system “should be the headquarters of an investment system based on cooperation among large firms”.

This required keeping elected politicians at arm’s length. Since 1951 the Fed has been legally independent of the government. Cook was appointed by Joe Biden to serve for 16 years, the equivalent of four presidential terms. In practice, Fed chairs have been bullied into doing what presidents such as Lyndon Johnson and Richard Nixon demanded.

This changed in the neoliberal era. This really began when Fed chair Paul Volcker sought in October 1979 to tame chronic inflation by imposing a brutal monetary squeeze.

The resulting rise in interest rates and in the dollar’s exchange rate precipitated a global recession. This broke the back of working class militancy in the US and bankrupted vast swathes of the Global South. But inflation fell, helping to make central bank independence a key neoliberal dogma.

The basic idea was that elected politicians were too vulnerable to voters’ fickle demands to be trusted with control over interest rates. This should be put in the hands of technical experts, central bankers institutionally protected from any kind of political accountability. During the 1990s the European Central Bank was set up on this basis and the Bank of England was given control over interest rates.

So wise were these experts, headed by Fed chair Alan Greenspan, that they allowed the US and European banks to inflate a gigantic transnational financial bubble. When it burst in 2007-8, the world economy suffered the worst slump since the Great Depression.

Paradoxically, in the aftermath of the crash, central bankers became even more powerful. They are now the main economic managers of global capitalism. Contrary to the ideological fiction of independence, their actions are closely coordinated with leading politicians and the rest of the ruling class.

True to the original plan for the Fed, the central banks concentrated on infusing the financial system with the money needed to keep afloat. This meant that the prices of financial assets—shares, bonds, real estate, and the like—continued to rise. The rich got even richer. Meanwhile ordinary people struggled with the effects of the crash and the austerity policies demanded by the banks.

And when, to the central banks’ surprise, inflation took off after the pandemic they reacted by increasing interest rates. Their aim was to defend profits by forcing unemployment up and real wages down. Trump is a monster but he’s clever at picking enemies. Public confidence in Powell has slumped to less than 40 percent compared to Greenspan’s pre-crash high of nearly 80 percent.

This helps to explain why the Democrats are so feeble in resisting Trump. They are deeply implicated in the neoliberal status quo that gave rise to the catastrophes afflicting us. Of course it’s necessary to resist Trump’s drive to centralise power.

But this can’t involve rallying to defend the pseudo‑independence of a central bank system that has inflicted so much suffering on working class people.